The Threat to Hotel Financing That Nobody Talks About

By Zak Selbert Founder & CEO, Vista Capital Company | August 13, 2017

The hospitality capital markets have been liquid and strong since 2011. Rates have been low. Leverage has been reasonable but high. Underwriting has been practical and favorable. Lending has mirrored macro hotel operating performance, which has also been strong and improving since 2009.

With this strong market come the threats and concerns that everyone is talking about: are interest rates going to rise? Will new hotel supply hurt future performance? Will PIP costs, construction costs, and sales prices kill another deal? Are we nearing the end of the credit cycle? Will risk retention destroy the CMBS market? Is underwriting too strict? Will my lender re-trade me? These are all valid fears. I mitigate them daily.

Rates are likely to rise, but we've been expecting that for many years and significant increases have not materialized. They will, eventually. New hotel supply will hurt future performance, but the market is overestimating this threat. Hotels are being built where demand is increasing. Population growth and increased business activity will, over time, continue to increase demand, offsetting the risk of new hotel supply. PIP and constructions costs are not going to drop, but nothing can be done in this department unless franchisors take the lead, which we all highly doubt.

As for underwriting, it isn't too strict. In a post financial crash world, lenders are smart to be peeling back T12 cash flows. They're smart to require significant PIP reserves and to look at every deal in excessive detail before funding. This should give borrowers confidence, since it will result in long-term capital market stability. Another stabilizing change, implemented in late 2016, was the risk-retention regulatory requirement placed on CMBS lenders. Many thought this would hurt spreads and underwriting but it hasn't. Smaller lenders had to leave the market, but there has been a solid increase in deal volume in 2017, albeit by fewer, but stronger lenders.

The threat nobody is focusing on is AirBNB. We should be. In the last few year years, almost every home and apartment in the world has become a competitor to a local hotel. With varied levels of luxury, there are now millions of rentable houses and apartments available to compete against hotels at every price point and amenity level. And for many travelers, especially millennials and young families, AirBNB is the only option. The demand for AirBNB product is growing rapidly and adoption is just starting to cross the "this is a big deal" line.

From a demand standpoint, AirBNB listings are attractive to guests for many reasons. The major reason is space. Having a kitchen, a separate living area, and multiple bedrooms is far more appealing to a family than a small hotel room could ever be. A family of four does not need to rent two hotel rooms when they can rent an apartment with two bedrooms on AirBNB. With the added plus of a kitchen, guests save money and are able to eat more healthily than if all their meals must be at restaurants. Houses and apartments provide more privacy as well as the ability to experience and briefly live in a city like a local. Above all, AirBNB listings are less expensive than hotels, especially on a per square foot basis. There are downsides too, but for most leisure travelers, AirBNB-listed properties feature far more benefits than they do drawbacks.

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Coming up in June 2019...

Sales & Marketing: Selling Experiences

There are innumerable strategies that Hotel Sales and Marketing Directors employ to find, engage and entice guests to their property, and those strategies are constantly evolving. A breakthrough technology, pioneering platform, or even a simple algorithm update can cause new trends to emerge and upend the best laid plans. Sales and marketing departments must remain agile so they can adapt to the ever changing digital landscape. As an example, the popularity of virtual reality is on the rise, as 360 interactive technologies become more mainstream. Chatbots and artificial intelligence are also poised to become the next big things, as they take guest personalization to a whole new level. But one sales and marketing trend that is currently resulting in major benefits for hotels is experiential marketing - the effort to deliver an experience to potential guests. Mainly this is accomplished through the creative use of video and images, and by utilizing what has become known as User Generated Content. By sharing actual personal content (videos and pictures) from satisfied guests who have experienced the delights of a property, prospective guests can more easily imagine themselves having the same experience. Similarly, Hotel Generated Content is equally important. Hotels are more than beds and effective video presentations can tell a compelling story - a story about what makes the hotel appealing and unique. A video walk-through of rooms is essential, as are video tours in different areas of a hotel. The goal is to highlight what makes the property exceptional, but also to show real people having real fun - an experience that prospective guests can have too. The June Hotel Business Review will report on some of these issues and strategies, and examine how some sales and marketing professionals are integrating them into their operations.