When we think of hotels we tend to think of a few large brands that dominate the market.
Marriott is the largest after having gobbled up with Starwood Group which had all the Sheraton brands. Hilton is #2 with about 30 brands under its umbrella, and Intercontinental Hotel Group which owns Holiday Inn and a host of brands is number three. There are remarkably few independent chains left. Hyatt remains largely independent. The Accor Group in France owns brands like Mercure, Ibis, Novotel, and Sofitel to name just a few.
Some would think that the hotel industry is highly consolidated with a small number of players. From an operations standpoint, there is a lot of consolidation of brand ownership. But that doesn’t mean a lot of consolidation of hotel ownership.
Some hotels are owned by the brand, but in fact most are franchise arrangements. Hotel owners are investors, like us, who happen to specialize in owning hotels instead of apartment buildings.
There are all kinds of different plays in hotel ownership. Some specialize in resort properties. Others specialize in local hotels, the ones that crop up all over the city. These serve a small radius and have anywhere from 80 to 150 rooms. Some are combo hotels where you might find two hotels side by side on the same property with different brand positioning. One might be a suite hotel for more extended stays, and the other might be a more budget hotel for shorter transient stays.
There are business hotels in the central business district or in the shadow of business parks. There are hotels that cater to convention centre traffic. All these segments are distinct businesses with unique client needs and distinct business models. Today, in the pandemic environment, most are hurting quite badly.
There are a few rare exceptions. Some hotels that are driving distance from major population centres and are in vacation areas like Myrtle Beach are doing comparatively well.
The rest are all losing money. I’ve been in discussion with a number of hotel owners over the past several months. Most had built a 90-150 day cash buffer into their plan. That assumed that they would have low occupancy. They assumed that the return to normal would start in late Spring and that by the fall, occupancies would be back to normal levels.
Hotels are small businesses. They tie up a lot of capital and they have a lot of debt, but they don’t employ that many people. The largest number of staff members are fairly low wage earners. The huge fixed operating cost and debt service that hotels face is the one thing that they can’t do much about.
They can cut costs temporarily by cutting staff. They can reach some agreements with their lenders for a few months. But that will save maybe a third of the expense for a finite period of time.
Most of the hotel operators I spoke with said that they had enough cash to last until the fall, maybe September or October.
It’s now August and there are no signs of significant recovery in the travel industry, and recovery in hospitality is definitely levelling off.
We also see a difference in demand based on property type. In the midscale and economy segments, occupancy is roughly double that of the luxury segment. That means that corporate travel and luxury have not really started to pick up yet.
This is going to be a long and slow recovery. The only thing driving the market right now is the summer vacation demand. This will diminish as schools reopen in August and will shrink further after labor day. Corporate travel shows no signs of picking up. Therein lies the worry for many hotel owners. The resurgence we are seeing is going to be short lived with a drop in occupancy starting in September, followed by a more severe drop if we see a resurgence in the number of Covid-19 cases.
We will start to see high quality assets at discounted prices in the near future.