Savvy Hospitality Strategies for What Lies Ahead

By Dennis Kaiser

Marcus & Millichap hosted a six-part webcast this week titled, “Mastering the Markets,” which explored emerging trends across the major commercial real estate asset classes. The Hospitality Investment Forecast included presenters Peachtree Hotel Group’s Brian Waldman, Marcus & Millichap’s Skyler Cooper, National Director, Hospitality, and Marcus & Millichap Research Services’ John Chang.

The deep-dive conversation examined the top issues, concerns and opportunities that face the hospitality sector today and in 2020. At the top of the list of topics was the economy. Chang said, “The hospitality sector is very sensitive to economic movement and that’s a natural thing because RevPAR in the hotel sector is most significantly affected by economic movement, much more so than say the retail, office or industrial which have longer leases.” He did note that the positive economic momentum is resulting in increased travel across the U.S., which in turn, is driving hotel demand.

Peachtree Hotel’s Waldman says as a value-add investor the company looks to “move the needle” with investments at this time in the cycle via other means than counting on continued economic growth to generate returns. “So, for us, when we look at making an investment, we look for opportunities, whether it’s on the revenue generation side or on the expense side, ways to drive more cash to the bottom line than just assume the market’s going to carry you.” He notes, those efforts to improve operations may include top line measures, better management or a renovation or repositioning strategy.

Waldman also noted that based on where we are in the economic cycle, they have also adjusted their strategy to seek assets that are more recession proof and resilient. That has led them to properties in college markets, or hotels near medical facilities where there’s expected to be less pull back should a downturn occur. Given that the hospitality sector is a “street-corner business,” it is more important for investors to know a local market and property rather than only following national trends, which may indicate looking at a different asset class.

The panelists agreed that a recession doesn’t appear imminent, in fact, Cooper noted the economic growth is the longest cycle ever recorded. Chang added that the long steady climb out of the Great Recession over the past 10-plus years recorded a growth rate of 26%, which he notes is middle-of-the-pack compared to other recoveries. He says the current phase is somewhat of a “Goldilocks zone,” especially for those in CRE, as many are now waiting for the “other shoe to drop.”

“We never got to that point where we overheated. We didn’t really over develop as an industry and we didn’t really overleverage, all of the things you normally see in a fast growth cycle,” said Chang. Notwithstanding the past few months when economic headwinds began to build, Chang notes, “That gives us the potential to continue to extend [the expansion] forward,” since it looks like there’s some “legs to this cycle.”

Chang pointed out there are risks to watch, including market volatility, interest rate changes, a trade war, and Brexit, among others. Any one of which, he notes could “pop out and hit the economy at any given time.” For now, he says things have stabilized, though there are things “lurking” out there that could present a challenge.

Among the investment strategy recommendations Waldman offered was to find opportunities that are going to survive whatever is ahead. He says, “If there is a pull-back we want to be protective. We want to be defensive in our investments to make sure that we can hold on.”

One of the ways Peachtree has done that is by being more conservative with leverage. Waldman says they have “pulled back leverage on acquisitions and we’re happy to trade leverage for terms such as an Interest Only period or a better rate.” He indicated that helps to give them “flexibility to see what lies ahead.”

For comments, questions or concerns, please contact Dennis Kaiser