A Recap of The 33rd Annual Hunter Hotel Investment Conference

Conference Key Takeaways

• Panelists at the 33rd Annual Hunter Conference spent a fair amount of time recounting how their companies navigated the pandemic. According to panelists, pandemic-driven changes that are likely to remain include eliminating daily housekeeping unless requested or at luxury properties, increasing the investment in and use of technology, and cross-training employees to perform multiple duties.
• Speakers universally shared concerns about labor shortages and rising costs to secure labor. Managers are using tactics including various bonus structures to attract and retain employees.
• Inflation and supply chain woes prevail. Costs are up 20-30 percent across the board for hotel operators. However, as we approach a full recovery in average daily rate (ADR), the pace of gains is slowing leaving fewer offsets to cost increases.
• Extended stay (ES) is the darling of the hotel industry. ES properties outperform comparable sets of limited and selectservice properties over time and require fewer employees. After getting a boost during the pandemic from first responders and health care workers, the ES segment also benefits from issues related to the housing crisis resulting in a longer length of stay.
• Supply chain issues and increased costs have elevated the risk of completing development projects on time. Despite high acquisition prices and fierce bidding, transaction volume set a record in 2021. Investors are showing an appetite for select-service deals in a departure from history. Cap and discount rates for limited and full-service hotels are nearly equal compared with a 75-135 basis point spread in the past. 

Hunter Hotel Advisors sponsored their annual hotel investment conference March 22-24, 2022, at the Atlanta Marriott Marques, attended by 1,726 hotel industry participants. The first Hunter conference in the late 1980s attracted 100 participants from almost entirely the Southeast and Atlanta at a less elaborate airport hotel setting. This year’s event had the aura of a national conference such as NYU and ALIS but retained the intimacy of earlier conferences and a distinct regional flavor of the Southeast U.S. This was the first entirely in-person major hotel conference since the pandemic began. Attendees appreciated returning to face-to-face meetings. One speaker described the mood of the conference as optimistically hopeful. More than one speaker proclaimed that the fundamentals, such as demand and revenue per available room (RevPAR), are moving in the right direction, although admittedly not back to 2019 levels – the consensus benchmark.

Pandemic – The Headliner

The moderators of more than one panel opened discussions with questions about how members of the panel and their firms navigated the pandemic.

Of particular interest were comments about what changes instituted for adjusting to the extraordinary circumstances of the pandemic will stick. Here are some of those predictions:

• The longstanding tradition of total housekeeping each night faded prior to the pandemic as companies started limiting this service to every four days to control costs. Post-pandemic, regular service will universally disappear except (1) by request, possibly with an additional charge, and (2) at luxury properties.
• The pandemic magnified plans for more automation. One participant mentioned that his company now intends to double expenditures on cost saving technology. That amount of an increase was not anticipated in 2019. The consensus was for greater investments in mobile apps and cleaning technology. In most instances there is no going back after important technological advancements.
• Because significant percentages of the hotel labor forces at many properties were laid off during the pandemic, general managers and others were asked to perform duties not in their job descriptions. Panel members praised these employees for their dedication. Consequently, a great deal of emphasis now is placed on cross training and rewriting certain job descriptions.

Laborious

Speakers shared concerns about labor shortage and rising costs to secure labor. The hotel industry, like many others, faces an unprecedented labor supply problem with no immediate solution. One economist at Hunter said the problem is even more acute in the hotel sector. Not only is hiring difficult in this lower paying industry, but hotels are experiencing a ‘quit rate’ twice that of other industries as employees are attracted elsewhere by higher pay. An audience and panel survey (approximately 400 people) revealed labor problems are the most pressing issue in the hotel industry today, far out distancing inflation, sluggish business travel, and supply chain bottlenecks.

Hotel managers are using a combination of tactics. Bonus structures - some of which never seen before - are becoming commonplace. Another audience participation question focused on what is important to employees today versus pre-pandemic. The potential answers included a couple of compensation choices and non-compensation employee benefits. Surprisingly, the clear winner was scheduling flexibility.

Diversity also resonated with panels. An interesting discussion ensued during one panel about special incentives for women and minority employees to enter the hotel industry with no clear consensus.

The Cost of Everything

Inflation and supply chain problems were on everyone’s minds. Just to get mattresses now takes twice as long as it did before the pandemic. Foam supplies are the root cause. Panelists were asked if they are adjusting their orders for operating goods. All simply nodded their heads in agreement that orders currently are submitted six months to a year ahead of expected delivery. 

On average, the costs of many inputs to run a hotel are up 20-30 percent. Fortunately, ADR growth rates are approaching these cost increases. But rising ADRs cannot offset problems of lengthy delays and shortages. A select few speakers stated that their firms are engaged in renovations. The inputs needed to complete these projects have even longer delivery delays and price increases (also not immediately helped by ADR growth). One panelist was asked how much it costs to build an extended stay hotel and he jokingly remarked, “When this panel began it was $110 per square foot. I just checked and now it is $115 per square foot.”

Extended Stay: The Bright Star

One panel addressed why extended stay (ES) hotels are the darling of the hotel industry.

1. 1The panel moderator presented side-by-side comparisons between the various ES segments and comparable grouping (by ADR) of limited service and select service properties showing a sizeable gap over time in favor of ES in all performance categories.
2. Demand from the usual sources continued but at a slower pace. During 2020 and 2021, mobile first responders and health workers provided a huge boost to ES performance.
3. The other dominant business for ES is related to the housing crisis – transitional sellers of houses. Many families sold their home for large gains with the intention of purchasing a replacement property shortly thereafter. In the words of one panelist in this session, “A couple who just sold their home came to us saying they would be staying three weeks, and six months later they checked out.” The other related category is traditional apartment renters who needed far more time to gain approval to rent an apartment. The consensus was the housing crisis will not end any time soon!
4. Operating an ES hotel requires half the number of employees that comparable limited and select service hotels require.
5. Regarding ES locations, one panelist said, “It’s about livability, not accessibility.” The ES properties are close to shopping centers, grocery stores, and thereby close to single-family subdivisions which often cause site approval problems. Yet compared to locating near major transportation arteries and lines that drive the accessibility needed by guests of traditional hotels, the land costs to develop ES hotel locations are considerably lower.

One company builds structures configured as one-half ES and the other half vacant apartments, which brings into direct focus the merger of this segment of the hotel and the multifamily sectors.

As a sidebar the nature of the questions that investors and developers had for the panel alluded to them having intentions to enter or increase their positions in ES. 

Deals but No Steals!

Value-add investors were everywhere as they traditionally have been at hotel investment conferences. The challenge with completing deals today is twofold. First, development and repositioning require considerable patience, perseverance and reserve capital. The frequency of cost increase and supply chain problems have elevated the risk of completing projects. A speaker mentioned the challenge of finding general contractors and sub-contractors by stating that the construction industry is shrinking. Some reluctantly admitted that loan-to-value ratios slid from the 1960s to the 1950s.

Second, participating in the existing hotel acquisition market means facing soaring prices (low cap rates). The bidding is fierce, yet deals are being made; transaction volume set a record in 2021. Investors are seeking select-service hotels. Cap and discount rates for limited- and full-service hotels are nearly equal according to speakers. In the past, the spread was 75 to 135 basis points (bps). Acquisitions have become clouded and complicated by deferred property information plans (PIPs) - some more than three years overdue because of brand forbearance. Asked about investment fund hurdle rates (i.e., required rates of return) the fund manager responded that they have come down “only not on paper.” In addition, buying well below replacement cost is not as likely now as in the past because the gap between prices of existing properties and replacement costs has narrowed.

Recovery or Reset

Throughout the conference, people referred to recovery in the traditional sense. Indeed, a benchmark can be set at 2019 for full recovery and as many mentioned, performance measures are thankfully moving in the right direction. Each of the economist presentations cast optimism that full recovery is not far off.

Hotel performance measures are returning to 2019 levels following an unprecedented health crisis. A well-respected investor said his firm was underwriting a mild recession two to three years out in 2019. At that time recession probabilities were running about 30 percent. They are again running about 30 percent and rising according to Goldman Sachs. The yield curve is teetering on reversion, a common predecessor to recession. Only one time did the ‘r’ word come into the air at Hunter. An attendee labeled the period as a ‘rain delay.’

For Next Year

Below are suggestions for the 34th annual Hunter conference in 2023.

Disruptors Session
One of the guest speakers at Hunter was the CEO of Clear. He pointed out hotel applications of their verification platform beyond the airport system now in place. Attendees also mentioned other tech innovations for both operations and investment.

Future Session
As cited above, pandemic-related past and current issues were well covered. Expectations about the future were not as well articulated.

Travel Session
The hotel industry is travel dependent. Investors need more content about the behavioral tendencies of travelers and how they are changing.

Less is More in Slide Presentations
Encourage presenters to slow down and digest for the audience the implications of fewer more penetrating slides.