The U.S. hotel sector is performing relatively well this summer, but there is too much uncertainty heading into fall in cities that rely on business travelers. Hotel companies shouldn’t take a few months of strong performance as a signal to reintroduce brand standards and costly renovation mandates.
The U.S. hotel industry, buoyed by summer leisure travel, exceeded expectations in recent months and even surpassed pre-pandemic performance levels last week. But if another aspect of hotel operations quickly snaps back to normal, hotel owners could be in trouble.
Most hotel companies relaxed brand standards, which range from what kind of cereal to serve at a continental breakfast buffet all the way up to costly renovations of guest rooms and public spaces, during the pandemic as a way to help owners save money during a long stretch of minimal demand.
Should the U.S. hotel recovery momentum continue into the fall, enforcing brand standards are likely back on the table. That could spur a wave of long-awaited hotel property sales.
“It might be the looming capital expenditures and property improvement plans and lack of cash that might cause the capitulation,” said Alan Benjamin, founder and president of hotel furniture and equipment procurement firm Benjamin West.
The combination of more than a year of deferred maintenance and renovations combined with hotel companies looking to avoid bad reviews from travelers coming out of the pandemic will push capital expenditures to all-time highs between 2022 and 2024, West estimates.
The overwhelming demand stems from both hotels that put off these costs during the pandemic as well as from normal maintenance and renovation schedules from hotels that opened or were previously renovated in the last seven years. But some owners may not be able to afford to stick around long enough to go through a renovation cycle.
Hotel owners are typically expected to have cash reserves of 4 to 5 percent of gross revenue readily available for capital expenditures to keep up with brand standards. But owners got permission to tap into these reserves to stay afloat through the pandemic.
“For the first time ever, the lenders greenlit taking that money to hang on to control the asset,” Benjamin said.
Many analysts doubt these reserves have been restored over the last few months, especially in hotels outside leisure markets still struggling to recover. Revenue at U.S. urban hotels in May was still down 52 percent from the same month in 2019, the American Hotel & Lodging Association reported this week.
Eager investors have been salivating over pandemic-related opportunities and bargains to emerge from the hospitality sector, given its outsized impact from the health crisis. While some owners may not discount the pricing of their hotel, many could decide to sell instead of pump money into an asset after a year of tanked revenue and an uncertain recovery trajectory in the years ahead.
A Long-Simmering Debate
Owners and investors have decried brand standards for years over their perceived excessive costs and limited return on investment.
Starwood Capital spent $250 million on property improvement plans on a portfolio, and the investment firm’s CEO, Barry Sternlicht, claimed last year at the Saudi Arabian Ministry of Tourism’s Future Hospitality Summit the company didn’t gain any market share following the investment.
“If you own a Courtyard and it is number one in its [competitive] set, they’ll ask you to spend $7 million when it rebrands, and none of that money has been worthwhile,” he added. “It’s like throwing money in the ocean.”
Sternlicht and Starwood Capital are more in the camp of buy mode, but analysts think other owners could be in a more vulnerable position.
“Brand standard upgrades and renovations can either crush a hotel or help reposition it into a more desirable market ‘sweet spot,’” said Chekitan Dev, the Singapore Tourism Distinguished Professor at Cornell University and an expert on hospitality branding. “Bringing back a full set of pre-pandemic standards is going to be a hard sell for brands and a hard slog for owners who are trying to recover lost profits.”
There was already a pre-pandemic tension around brand standards issued from hotel companies to the owners responsible for paying for them. The brands want to add enhanced amenities and design with the hope more customers will choose their property instead of a competitor’s. Owners are typically more focused on reducing costs to boost profit.
Both stances are likely to continue during the pandemic recovery. Brands are likely to do what they can to differentiate a property in a more competitive market with limited travel demand — like urban markets the rely more on business travel — while owners will want to find efficiencies to save money.
Dev sees four options for hotel owners: revert to pre-pandemic brand standards, convert to a different brand with different standards, debrand entirely and become an independent hotel, or sell.
“Ultimately, the decision will be driven by a multitude of factors including the renovation cost per key vis a vis the ability to raise rate, the owner’s bargaining position with the brand, the brand’s desirability, the availability of alternate brands, the owner’s marketing and operating expertise, the availability of third-party management companies, the location of the hotel, and buyers for the hotel,” he added.
Solutions Beyond a Sale
Not every hotel owner necessarily needs to panic about a quick revert to the way things used to be with brand standards.
Hotel executives indicated in recent months there are at least some conversations around how to reintroduce these measures without breaking the bank for owners only just beginning to see occupancy rates on the rise.
“We are currently assessing post-COVID renovation of brand standards with a view toward finding more ways to improve hotel profitability while preserving the quality and experiences guests expect of our brands when they stay with us,” Leeny Oberg, chief financial officer at Marriott, said on the company’s first quarter earnings call before later adding: “We’ve got to make sure that we’re taking into consideration the dramatically lower cash reserves that the hotel owners have and picking our spots and making sure that we’re picking the renovation work that is critical to the customer experience.”
While she didn’t provide specifics, Oberg noted she expected the company to have a finalized approach on brand standards sometime next year.
For owners that are expected to snap back into costly renovations, there are other options. The Curator Hotel & Resort Collection launched last year aimed at appealing to hotel owners wanting a bit more autonomy than they would have associating with a bigger brand, including around brand standards.
Global hotel companies would be wise to note they aren’t the only option for owners coming out of the pandemic.
“Many brands permitted hotels to gut brand standard to help the hotels stay alive. The consequence of this is hotels that have learned to operate with a lot less and differently than they did before the pandemic,” Dev said. “To preserve the brand-hotel relationship, and to bring back the standards that define the brands’ reason for being, brands must draw on learnings from the pandemic and be creative to help hotels meet their standards.”
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Photo Credit: Brand standards are always a costly tussle between hotel companies and owners, but the tension is especially heated coming out of the pandemic (Pictured: a Marriott in Boston awaits new signage with the brand's revised logo). Cameron Sperance / Skift