Another Industry POUTlook?
20/01/09 06:42 Filed in: Article
“The best way to start looking at what happened in 2008 is taking a bit of a macro-economic look at our industry and in the U.S. This is particularly important since much of the equity that has been ready to pounce on the U.S. for so long, according to many pundits, we have found frankly take a macro-economic perspective, and are subsequently not pouncing... The economy is lousy. That’s my macro-economic review. The lodging industry is still alive and kicking. That is my industry review. There is tons of equity waiting for distressed deals that still may not make sense and the debt markets have a very confusing stronghold on the future of transaction volume, which is a both a good and very bad thing at the same time, and that is my capital markets review.” Chairman
That’s not what this will be. Seriously, we need that like we need another brand’s proprietary scent pumped into a lobby. First, let me make clear: my perspective of course does not represent that of all in our organization, or even my own office.
I may bitch and moan, but not about how terrible the industry has been, is and will be. I don’t feel that way. I believe these are times to build, be creative and prepare. 2008 was a stepping-stone; a chance to get our business plans together for the next several years. Perhaps I’m understating how difficult the past year has been for many of us, but there is a sliver of truth in all ramblings.
This newsletter and this article are supposed to be our annual review of the industry. I think you will see it is anything but a typical review. Then again, we are anything but the typical advisory company, which many of you already know, so I won’t use this as a sales piece.
The best way to start looking at what happened in 2008 is taking a bit of a macro-economic look at our industry and in the U.S.
This is particularly important since much of the equity that has been ready to pounce on the U.S. for so long, according to many pundits, we have found frankly take a macro-economic perspective, and are subsequently not pouncing.
The economy is lousy. That’s my macro-economic review. The lodging industry is still alive and kicking. That is my industry review. There is tons of equity waiting for distressed deals that still may not make sense and the debt markets have a very confusing stronghold on the future of transaction volume, which is a both a good and very bad thing at the same time, and that is my capital markets review.
In reality, it is an amazing time of change for the United States. We have a new president that we all hope will swing sentiment back our way, both domestically and internationally, and both of course would be welcome in our industry. From a local perspective he could help Chicago win the 2016 Olympics, which would likely reshape this city, and perhaps map it as the place to be in the United States- right here in the sleepy Midwest. At a macro level there very well may be plenty to be excited about. History shows us that the economy runs in cycles, and amidst good and bad presidents, we push forward.
What is different about the lodging industry? It also runs in cycles- often lagging behind the economy at large, and specifically corporate spending. Nobody timed this decline in statistics, and frankly it was rare to even hear anyone speak of an oncoming downturn. There is plenty of evidence that our industry is cyclical. Late 80’s and very early 90’s bad, the rest of the 90’s to 2001 good, 2001 to 2003 very bad, 2004 to 2007 very good. Although ultimately based on supply and demand, the timing and duration of a cycle is often determined by independent catalysts, economic or other; i.e. the savings and loan crisis, 9/11 and now sub prime. Further, overbuilding is a natural result of the upward momentum of a cycle, but the extent of overbuilding is difficult to determine, making it additionally impossible to time the cycle. So without knowing how long the swing up would be, fat and happy becomes acceptable and fun. But fat and happy should not equal dumb.
In January of 2006 at ALIS, a well respected industry executive mentioned to me and my colleagues that in 2005 at the same conference there was some pretty dumb money, but in 2006 things had changed, -it had become really really stupid money. That was approximately 30 months before this cycle really started turning. Even some of the best and brightest admit they made mistakes at the peak, but like they did before, they will learn from them.
There have always been good opportunities. The question is how and when they present themselves, and who is looking for them. My hope and belief is the true hoteliers of the world will remain, and the late arrivals to the last party will be gone.
There is a tremendous difference between hotels and the hotel business. Some of us love both. My business partner is quick to point out I am the guy who immediately cracks the can of pistachios from the mini bar. I also like to order off the room service menu, watch a first run movie, use the fitness center and have a drink in the lounge. I love hotels.
I also am the guy who swipes the top of the doorframe with his finger, checks under the bed for garbage, sees what temperature the mini room fridge is left at and likes to chat with the auditor after a night out. I love the hotel business.
What has happened in large part during the last great run here, is we attracted a tremendous amount of investors to the industry that love hotels. The resulting benefit is these people have made hotels a true real estate asset class with more transaction volume than retail or industrial over the last several years. But it’s also those people who lead (or can be led) down the wrong path in making an investment decision in the segment. It’s interesting how many organizations that began to invest or advise in the hotel sector had people involved or in charge of investment decisions who had never worked a day in a lodging facility. With or without a degree in hotel management, there is no replacement for that experience. They are commodity traders playing in an operating business. And now, when times are tough, are they capable of making the tough decisions, and do they even understand the question?
Let’s use the hotel brokerage industry as an example. There are some very good hotel brokers, and there are some very bad hotel brokers. But I do not believe they are born good or bad, they are developed or undeveloped. Unfortunately, when left undeveloped, they can easily be led in the wrong direction. There is a reason hotel brokers are often looked at as being at the bottom of the totem pole, mainly due to reputation. That reputation is I believe perpetuated by undeveloped and undertrained brokers. Take, for example, a broker who has not come from the hotel industry, or even a non-brokerage salesperson that has been in the industry. He /she is seduced by not only the potential money that can be made, but also because they are selling hotels- not parking garages. They are told they will have a mentor to teach them our industry, and in return the mentor will take a portion of the broker’s fee. In the end the new salesperson can be left with less than 25% of the commission available. This may be OK if they are trained and mentored properly, but often times they are not. They are handed a pro forma and package from an analyst, and told to send it to the purchasing community. When inquiries come in, these salespeople can’t answer questions. They need to go back, ask the analyst, and revert to the inquirer with an answer they still may not understand. This is ass-backwards, and it happens all the time. Ultimately it results in bad decision-making.
In the best of times, it’s not just brokers making bad decisions; it’s also the people in the equity and debt worlds. Even the brands and management companies get in on the game and try to change it. Traditional third party managers become fund participants. The amenity creep becomes an amenity race. PIPS’s become outrageous, and are often deal-breakers in a transaction or conversion if not understood or underwritten properly.
So what has made the last 18 months so bad? There is so little debt, available, and consequently no new deals to buy, build or convert. Management companies are looking for management contracts, and they need to fight for them. Brands seem to be pushing their most recent requirements less. Like I said, do we really need to be told what guests should smell when they walk in a lobby? Equity waits for things to shake out, and maybe some of the people that love hotels, but not the hotel business itself will fall in love with something else.
In the meantime, I believe there is one other benefit of this tough economic period. I feel the conversations that I have with industry professionals, whether analysts or executives, are far more meaningful than they were even a year ago. Talk revolves around the industry, acknowledgement that nobody really knows what is going to happen, and even some accountability for things that we have done wrong. We’re not sitting at the closing table planning the flip; we’re just sitting at the table talking about how we may be able to do business together sometime soon. I’m looking forward to conferences where there isn’t quite such a rush to get to that next appointment. It’s hard to explain, but it just feels more real.
This business is of course not a game, and I’m not insinuating that people intentionally treat it as that. However, it does seem we become reckless when things are good, when accumulating properties and wealth is at it’s easiest. It’s kind of like playing Monopoly. But like any game, you need to know how to play. After all, in Monopoly, hotels are just pieces of plastic.