Lodging trust’s CEO and rising stars talk soft brands, new revenue models and people vs. tech.
Hospitality game-changers from the economy to travel patterns, operations and DEI were up for discussion as RLJ Lodging Trust’s president and CEO, as well as the group's rising visionaries mapped out what’s ahead for hotel investors and operators in an exclusive “Meet the Future” session at January's Americas Lodging Investment Summit (ALIS) held in Los Angeles.
Moderator Jeff Higley, president, The BHN Group, was joined by RLJ’s President and CEO Leslie Hale, Senior Vice President, Finance and Treasurer Nikhil Bhalla, and Senior Vice President Investment and Portfolio Analysis Cartarwa Jones to talk about the trends that will shape ROI and IRR in the near term.
Here are their perspectives.
Predictions from the corner office
Looking ahead, Hale sees some major shifts and important undercurrents impacting the industry from 60,000-foot strategies to Main Street revenue drivers.
Expect the markets to loosen up. “The financing market is obviously the most impacted by the uncertainty of the macro environment. Then we have the overhang of a pending recession and rising interest rates. Banks have structural issues and are looking to right-size their exposure to lodging. That’s the environment we’re in today. My general perspective on the trend signs is that interest rates will stay elevated for a longer period than we’d like but the overall markets will loosen up and capital will be flowing in the next couple of quarters.”
Hard brands will be less hard line. “COVID didn’t create trends. It accelerated the trends that were already in existence. The big hotel brands responded with soft brand concepts to meet demand for hotels with Instagramable moments and unique experiences. But they also responded with changes in their core brands. We just bought a Toy Story Hampton Inn in Atlanta with a sky lobby rooftop bar. That’s not your grandfather’s Hampton Inn. The brand community is looking at consumer trends as they evolve the assets and respond to how consumers use hotels today.” Anticipate new approaches to layout and design in existing and new hard brands.
Solve the labor problem—if possible. “The labor shortage isn’t a lodging-specific matter. It’s much broader than that. There are so many inputs associated with it—from demographics to the lifestyle changes that sort of evolved during COVID. There’s an associated wage expense when people don’t have to work two jobs anymore—which is a good thing. But it means that we have to just muddle through the near term until these changes sort themselves out. If we do go into a recession and we see a number of layoffs, that’s going to have an effect on the labor situation as well. If we can’t solve this over time with human capital, we may have to turn to technology. However, I think people are what makes hospitality hospitable.” Seek out new solutions to fulfill consumers’ heightened expectations but be find a way “to work it out” if the labor pool dries up more.
Accelerate the DEI momentum. "Lodging has done better than other industries [in terms of DEI] but there’s a lot of room to grow. It’s a topic near and dear to us; it’s in our DNA, as you can see by this panel. Lodging has the inputs to make this happen. The employment base is already largely diverse. The industry is made up of multiple players who have brands, operators and owners, which means a greater opportunity set. The hotel industry is being very intentional about giving people an opportunity to lead at different levels. That’s a distinguishing factor. It’s not just talk.” Get ready for next steps that will foster diversity across franchisee and other ownership and investment groups as well as in hospitality’s C-suites. Just be willing to wait for sweeping change—maybe a decade or so.
Financial forecast from the “resident economist"
Bhalla offered these predictions on economic and financial patterns investors should watch in 2023 and beyond.
Wait until next year, or the year after that. “Yes, there’s going to be a lot more capital out there that needs to find a home. That implies that when you have hard assets that generate cash flows, they should be valued appropriately. You have to have some level of comfort around the environment in which you’re underwriting. That doesn’t exist today. And, it make take two years before it does.” Fast forward five to 10 years and the combination of higher hotel supply, increased need for capex as properties age and date and better functioning financial markets should drive an active transactions pace.
Small groups, remote workers coming together to collaborate could be big business. “Even with the advent of all kinds of technologies over the last 30 years, people feel the need to meet face-to-face. In 2022, we saw group business come back faster than anyone expected and small group business returned much faster than big groups or groups with large, city-wide meetings. People may not be returning to offices, but they still need to meet. So they have to aggregate somewhere once a month or on some regular basis. That’s another form of business that didn’t exist a couple of years ago. Now, it’s a big part of the meetings landscape.” Barring a major shift, prepare for small groups to be a larger percentage of overall group business going forward. Technology will supplement, not replace, in-person meetings.
Trendwatch from the investment, portfolio analysis expert
Continuous changes in consumer demand are rewriting the checklist of the factors involved in reviewing and building investment portfolios, according to Jones. She’s applying new filters to building and reviewing performance for the lodging trust’s approximately 100-hotel portfolio and future investment plans.
Brace for a healthier transaction pace. “Over the next two to three years, we’ll see deal volume increase. There will be several catalysts. I see the financial markets and interest rates stabilizing so we’ll know how that will shake out. Interest rates may not be where they were pre-pandemic but there will be less volatility in the market. Inflation will be tamed and the fears of recession will be behind us. Just as there is pent-up consumer demand for travel, there is pent-up demand for transactions. There’s a lot of capital sitting on the sidelines waiting for deals.” Look for hotels faced with deferred maintenance and PIP pressures to help fuel the deal pipeline.
Anticipate big wins for soft brands. “As owners look at their existing portfolios and future acquisitions, understanding where the consumer is going is important. Hard brands will still be a major factor [in investors’ portfolios] for certain segments of demand in certain locations. But soft brands will play a bigger role as we look at future trends on how we work, how we play and how we meet—especially in seven-day-a-week markets that depend on all segments: corporate, leisure and group. From an ROI perspective, soft brands give owners more flexibility on renovations and the design of the hotel. Owners have more of a voice to reshape and reposition the hotel to drive demand.” Expect to see the hotel giants launching more experiential, locally accented soft brands and collections over the next five to 10 years.
Apply the power pricing model. “We saw some structural changes in revenue models as we came through the pandemic, and I think that changed things for the good. The pandemic decoupled occupancy and pricing, which allowed ADRs to grow. It provided courage for the operators even in a zero-demand phenomenon that we’d never seen before.” Figure on another five to 10 years of pricing power. Work with tech-empowered advances in predictive behavior to improve revenue management.