We hear the baseball metaphor question on panels at just about every industry conference: what inning are we in with regard to the hotel investment cycle? Most industry experts will either candidly state that they have no idea or sheepishly offer a qualified estimate.
During the initial stages of a recovery, experts will typically refer to the fact that we are “in the early innings.” Once occupancy levels begin to stabilize and revenue per available room (RevPAR) increases are driven by room rate gains, we often hear a reference to “middle innings.” And when hotel performance metrics reach levels similar to the previous peaks, as they are now, the estimates will often fall in the sixth to seventh inning (“late innings of the cycle”). Over my 30 years in the industry, listening to and participating as a panelist, this seventh inning stretch can go on for five years or more.
Although economic and hotel cycles typically last between six and 10 years, we cannot predict the end of the cycle any more than we can predict the time a baseball game will end.
The fundamental flaw in the baseball analogy is that it presumes a nine inning game with a predictable end time. But in the current lodging cycle we’re seeing slow and steady growth throughout the last six years and the indisputably favorable supply and demand fundamentals, among other factors. That changes the whole ballgame and we’re likely to go into extra innings relative to past cycles. For example, the cycle that ended in 2000 lasted for nine years! Furthermore, as we find ourselves in extra innings, it is unlikely that anyone will recognize when the “walk off” hit will come.
It’s time we replace the baseball analogies and instead determine where we are in the game. Using a coach’s strategy to evaluate padding the lead through increased marketing versus leaving more in the reserves by investing capital becomes much more critical to prepare contingency plans for when the inevitable downturn occurs. By evaluating the game differently, it allows for progress to still be made in the first 12 months of the downturn and the several years that follow. The contingency plan should include:
- Forecast an annual budget: Use computer modeling to plan for a scenario in which things continue to go well. But also, plan a second budget with a shock scenario if the market and more importantly your competitors suddenly go in a different direction.
- Examine how demand was affected in your market during the last downturn. Did hotels that discounted rates achieve greater occupancy penetration? Or did they see roughly the same RevPAR positioning but at lower levels than would have been achieved if rates stayed the same?
- Apply capital to maintain or improve the quality of the hotel. Stay competitive by making improvements that allow you to stand out when a downturn occurs. However, hold off on major room or meeting space renovations where significant displacement occurs and reserve additional capital so that you can trigger that major renovation during a downturn when its impact will be minimized.
- Get long-term group business on the books. Since meetings and group travel have gotten hot again, full service hotels should be aggressively pursuing meeting planners while select service hotels can appeal to convention and visitors bureaus (CVBs) to offer a reasonable room rate in exchange for cancellation fees.
- If your equity strategy is not a long-term hold of the asset, position the property for disposition. Take the necessary operational steps to maximize the exit and establish a relationship with a broker in advance. When your lead is threatened, you can quickly go to market without wasting precious months looking for an advisor and creating sales materials from scratch.
The only sure fire way to avoid losses is maintaining the option to take your ball and go home after the 7th inning stretch. But to maximize wins, keep your perspective on the holding period of your hotel investment (finance, buy/build, refinance, hold, refinance, sell) relative to the economy while building the property contingency strategies. This is the only option that allows you and your investors to react appropriately, continue to play the game and make it home safely.
Contact Greg Hartmann, Managing Director for JLL’s Hotels and Hospitality Group to learn more