In the push and pull over hotel property improvement plans, asset managers say there’s still room to negotiate.
As the U.S. hotel industry continues its overall recovery from the pandemic, hotel brands have been increasing the pressure on owners to make some capital improvements, many of which are long overdue according to traditional PIP timelines. Owners, in turn, are trying to build back cash reserves and focus any work on what will provide the biggest return on investment.
These two interests aren’t necessarily competing, hotel asset managers told HNN. There’s a middle ground owners can find with brands by focusing on the improvements that will most improve guest satisfaction scores while staying in line with brands’ newer standards.
Many hotel owners had to push off renovation projects in 2020 and 2021 because it was all about survival then, said Loren Balsam, chief investment officer and executive of advisory for HotelAVE. The owners were trying to keep their business afloat and hold on to equity, and the brand companies understood the situation and paused PIP requirements.
“They weren’t in a position to force owners, plus there really wasn’t capital to do the renovations,” he said.
Most brands suspended quality assurance reviews of hotels, said Chad Sorensen, managing director and chief operating officer at CHMWarnick. When those reviews started to ramp back up, many were virtual, which wasn’t as effective as in-person, he said.
Customer service scores dipped in almost every segment in every type of hotel during the pandemic, he said. That’s a major issue for brands, so they’re bringing back the quality assurance process faster than most owners would like. That means there isn’t a lot of flexibility to kick the can down the road for big projects, and they’re expecting owners to step up to reinvest capital into their properties.
At the same time, owners, operators and brands had to lock arms as they helped each other through the worst of the pandemic, Sorensen said. Brands have been empathetic with owners, and with owners recognizing what’s important to brands, they are able to have two-way conversations about renovations.
“I think the brands are willing to be more flexible in timing and phasing in the approach to a project,” he said. “There’s been no time like now where the brand and owners need to work together. They’re never going to agree on all of it. Generally speaking, everybody’s trying to be collaborative and accomplish everybody’s goals in a period where it’s just really challenging.”
Hotel owners will always want to prioritize guest-facing areas because they affect the guest experience the most, Balsam said. That could include things like new mattresses, TVs with streaming packages or bathroom upgrades.
The brands’ wish list for renovations sometimes include things like lobby updates and scraping the stucco, or “popcorn,” finish off of guestroom ceilings, he said. Many brands have moved to an open-closet design in guestrooms, and owners likely won’t want to prioritize that because guests don’t select hotels because of the closet experience.
“Those are things I think owners are probably going to continue to push back on,” Balsam said.
The brands are coming back to what they could consider to be their normal scope of work for both the seven-year cycle with replacing soft goods and the 12- to 14-year cycle for full renovations, said Neil Flavin, chief operating officer at HVS Asset & Hotel Management. However, they’re willing to negotiate to make sure the primary pillars of the brand — the trademark pieces of a hotel — are taken care of.
Owners are able to go a little off the mark to accomplish these goals, he said. They haven’t been able to fully replenish cash reserves, and the brands understand that to some extent.
“They are continuing to bend a little whereas in 2018, 2019, they may not have bent at all,” he said.
Brands are also willing to negotiate on areas that have been improved somewhat within the past five years, Flavin said. They still have to look good and be presentable, and that’s possible given many hotels had few guests for about a year and a half.
“The wear-and-tear factor was not as great as it would have been during normal operating times,” he said. “They’re willing to accept, in many cases, appearance and condition for an additional period of ‘X’ instead of demanding that be done today.”
Every owner and brand company are talking about the PIP life cycles and whether there are ways to stretch them out, Sorensen said. That conversation sometimes centers on hotels that were lightly used during the pandemic and didn’t experience the usual wear and tear. That could mean the guestrooms, furniture, fitness equipment and other parts of the hotel wouldn’t need to be replaced or updated according to the traditional schedule.
“From a timing perspective, [the brands] say it’s time, but if it’s still in good condition and the hotel is being used, generally speaking I think the brands are open to those discussions,” he said. “You just have to be somewhat strategic.”
Things like this require collaboration, and owners can’t just ask to push off everything, Sorensen said. If there are areas that need to be addressed, those will be more difficult to delay.
Balsam said they’re working with owners and brands on how to make case goods and soft goods last longer, potentially stretching the seven-year cycle to 10 years or longer for certain items. One example is how some brands have moved to hard-surface flooring instead of carpet as their new standards. Carpet typically gets replaced after seven years, but with hard-surface flooring, that could stretch to 10 to 12 years.
That conversation is necessary as owners face challenges with accessing capital, Balsam said. It’s uncertain whether this is a short-term problem or it’s a more systemic issue that will be the new reality for the industry.
“What are the types of case goods and renovations, what are the things that we can put in that we can get more mileage out of?” he said.
As hotel owners prepare for any kind of capital project, they need to keep in mind that materials and construction labor costs are up, and they’re not going to come down, Flavin said. That means the traditional 4% of revenues set aside for capital improvements is not enough — and likely wasn’t enough pre-pandemic, either.
“Four percent reserves on an annual basis is not enough unless an owner has the wherewithal to write a very large check when a renovation is due,” he said. “The number in order not to write a check needs to be a minimum of 8% these days.”
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