Emerging Strong for Travel and Hospitality Industry

The hospitality sector has faced unprecedented challenges due to the COVID-19 pandemic; however, the industry has worked toward innovating in order to reshape the future of travel and hospitality. DHG and Pinkowski & Company recently hosted a webinar with a hospitality industry panel to discuss such recovery efforts and how to continue emerging strong from a post-COVID world. The following summarizes from their discussions some key takeaways and points of consideration for those in the hospitality industry.

What is the state of the demand sector’s recovery (leisure, business and group)?

While there has been somewhat of a revival for leisure travel, particularly for drive-to markets, business and group demands still remain uncertain for the remainder of 2020. Hotels should consider how they may prepare for the fall season when school starts and the leisure demand begins to pull back.

Group business travel is historically the last demand to return in the event of economic recession, and the current push toward remote working and work-from-home could significantly impact short-term stays for corporate travel.

Overall, the outlook for the rest of the third quarter as well as the fourth quarter is hard to ascertain; however, hotels can still look to re-evaluate certain operations costs in the meantime. For example, rethinking food and beverage offerings can mitigate the lost of revenue from banquet and full restaurant service, which tend to be a higher fixed cost. Many hotels are enhancing grab-and-go options and simpler menu offerings.

What is the outlook for construction projects already underway or still in the planning process?

Although there’s little traditional financing available for new construction projects, projects that were underway prior to the pandemic have continued mostly on schedule with minimal to no disruption.

Timing plays a significant factor for projects when considering their opening date. The panelists agreed that current projects opening one year now have the most opportunity for small amounts of savings in construction costs, as opposed to projects hoping to open currently or within the next six to nine months.

How can hotels adjust business models to the “new normal”?

The industry as a whole is looking for ways to reduce high-touch services and amenities, since customers generally look to reduce their social interactions for items like the front desk. According to the panel, customers value their hotel stays much higher when they have less guest-employee interactions. Hotels should consider how technology can functionalize as well as add value to front desk services, as well as other areas, in order to keep pace with this trend and continue to decrease overall costs. This may include, but not be limited to, virtual check-ins and reduced front desk staff.

Hotel cleanliness has also become a large priority service to offer to customers. While new and updated cleanliness standards and protocols can establish the right amount of confidence for customers to return, there is an impact to staff, costs and customer expectations. Hotels should consider potential cost offsets in operations to accommodate increased cost from more frequent cleanings.

How are investors currently evaluating acquisitions?

Previous economic recession cycles have presented unique acquisition opportunities; however, this current cycle is different because the pandemic has affected businesses worldwide. There are also many unknowns and a lack of visibility of normalized debt and equity markets. The lack of debt capital available in the market, combined with the fact that most banks are currently not willing to provide new loans, make it more challenging for acquisitions. However, panelists noted that if there is assumable financing available for an acquisition, that can potentially help pricing premiums by five or 10 percent. If there is seller financing available (which could be more frequently available in this cycle), that can potentially help premium pricing by 10 to 20 percent.

In addition, there will most likely be an elimination of trades in the short-term until the market can normalize back out. Most hotel owners have a 50 to 60 percent leverage across their asset, and a typical asset needs at least a 30 to 40 percent discount; therefore, most would not be interested in trading for their debt balance in the current market when they can potentially receive rescue or runway capital elsewhere.

ABOUT THE AUTHORS

Anthony Clark
Managing Partner, Memphis/Dallas/Los Angeles
Anthony.Clark@dhg.com
Aprille Bell
Managing Partner, Construction & Real Estate
Aprille.Bell@dhg.com

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