The year is 2019, and the United States hotel industry has recorded its tenth consecutive year of RevPAR growth, achieving high water marks in all top line indices. As a result, many savvy, sophisticated and opportunistic commercial real estate developers and investors are well on their way to opening new hotel projects across all markets and product tiers. Then, as we were collectively crossing over into 2020, what is known in numerology as an “angel number,” rumblings about a virus began to surface, and shortly thereafter, the world came to a screeching halt. The hotel industry, which had just experienced its longest period of prosperity, was now facing the dreaded “black swan” event, the impact of which was felt almost immediately, catapulting hotels into unprecedented territory and significant loss.
Contributed by Dan Walsh, vice president, CHMWarnick, Beverly, Massachusetts
Now, imagine opening a new hotel during this time, an undertaking that, in the best of times, is fraught with challenge and complexity. Although the industry is still not on the other side of this global pandemic and challenges still abound, we are fortunate to have emerged with many learnings, among them, how to open a hotel during such troubled times. This article includes observations and considerations for owners derived from opening multiple hotels during this period.
- Revisit the business plan. Opening a hotel during the pandemic using the original playbook can be like trying to fit a square peg in a round hole, as most of the projects were underwritten back in 2017/18 under the very best of market conditions. As a result, a hard look at the business plan to address current pitfalls, new demand dynamics, and other situations unique to this period will be needed to mitigate impact and optimize future performance and value. This may also require an honest assessment of the hold period and other factors to manage partner expectations versus original underwriting, so adjustments to the investment strategy can be made accordingly.
- Mind your business mix: Occupancy/ADR dynamics are trickier than ever to navigate. There are some significant factors to consider and potential management pitfalls to look out for:
- Deviating from your target customer/focusing on current demand. Nearly every hotel has been forced to pivot and adjust its segmentation and channel strategy to opportunistically target available business as a means of getting through the immediate term. While this is a prudent strategy for well-established hotels, there are longer-term effects that new hotels need to consider before they go off-script. The old expression rings true: “You only have one chance to make a first impression.” New hotels need to focus on building awareness, establishing their market positioning, fostering relationships, and planting seeds for future business, which may not lend itself to prioritizing short-term gain. Carefully question “who are the long-term customers that the hotel needs to be successful?”, “Is there a short-term business that can be pursued without negatively impacting rate positioning?”, “What will deviating from the underwriting strategy do in terms of the future market positioning and performance of the hotel?” Owners need to be mindful of sacrificing long-term value for immediate cash flow.
- Dropping rate in efforts to stimulate high occupancy is a bad thing. Research and statistics have proven time and again that a rate race to the bottom sinks all ships and prolongs recovery, the effects of which will be even more pronounced as operating cost increases continue to outpace revenue growth. So, let’s consider this a lesson learned from the last two downturns. Now, let’s consider the following issues at hand. We are facing a major staffing crisis right now; not only is labor in incredibly short supply, but managers and staff alike are facing burnout, forcing many to look to other industries for employment. This, coupled with the wear and tear on a building that otherwise would have had a more robust preventive maintenance program pre-pandemic, can lead to unintended capital consequences down the road. Be mindful of the pricing tactics being used to drive occupancy, and evaluate what level of operation makes sense given current resources.
- Be mindful of price gouging. On the flipside, use caution in charging too high a rate with limited amenities and service levels. While this will undoubtedly reap short-term gains in the leisure markets that have been able to capitalize on strong demand, these increases are not sustainable. Guests will likely remember the experience of paying US$500 a night for a hotel that did not offer food and beverage options, access to the gym/pool, or other amenities that should come along with such a room rate. A negative reputation, whether memorialized on TripAdvisor or shared anecdotally, is tough to overcome.
- A new hotel is in effect “making history” in real-time, as opposed to relying on it, which makes it increasingly more difficult for newly opened hotels to assess how best to measure and benchmark performance. While comparing macro indicators such as occupancy and average daily rate to 2019 has proven the industry standard and useful to established hotels, other metrics, such as housekeeping productivity, food cost, linen PAR levels, and a host of others, have been difficult and nuanced due to changes in cleaning standards, supply chain issues, the lack of skilled labor across many departments and issues with third-party vendors. Looking to how other hotels had performed in pre-pandemic times becomes an increasingly difficult exercise and a poor predictor of future performance. Zero-based budgeting in light of current conditions and establishing key performance targets is imperative to managing hotels effectively during early opening.
- Open food and beverage outlets the right way; avoid rushing outlet openings to meet grand opening deadlines if not ready or fully staffed. This is especially important in the case of lifestyle-focused hotels, where a particular outlet may be the focal point or is expected to be a local/regional draw to the non-hotel guest. As stated previously, you do not get a second chance to make a first impression, so better to knock it out of the park when an operation is truly ready to do so, as opposed to limping to an opening date with less than what the outlet was envisioned and pro-forma’ed to be! Also, if there is an opportunity to incorporate or focus on opening rooftop pool/bar/F&B outlets or other outdoor dining spaces, these have proven extremely popular and have driven significant revenues, given their open-air and general appeal; it is almost a must-have in the lifestyle space.
- Seek creative staffing solutions. Staffing challenges have also been widely experienced throughout the industry, as many hotels were forced to reduce staff significantly due to business levels and/or to merely survive. Today, hotels are challenged to fill positions for a myriad reasons, but for a new hotel, the effects can be even greater, with no prior labor pool from which to draw. Some strategies to consider include looking to alternative sources of labor. For instance, the gig-work environment, often employing college aged workers looking for freedom to pick up work as desired and across varying departments, has proven useful in several of our newly opened hotels. If it is possible to staff “reserves,” consider this as an insurance policy for the time that all outlets or departments have been effectively opened. If these employees can be cross utilized in the meantime, all the better.
- Strengthen your sales bench. In newly opened properties, consider staffing in sales over and above originally budgeted headcounts (if you can find the talent!) in anticipation of the short-term flood gates that are going to open, as well as effectively building relationships that will bear long term success. There were also many months of “lost sales” during the pre-opening period, which need to be made up, which also speaks to having a more robust sales effort right out of the gate.
- Consider “shrinking the box,” effectively selling and staffing to a reduced inventory. This tactic was employed by many hotels that were previously in a temporary suspension of operations and reopened after the worst of the pandemic subsided. This allows for a right-sized staff to meet market demand. Of course, another option would be to delay the opening altogether.
- Revisit retail space. If you have the luxury of retail space and can bring in tenants that can offer something you cannot (e.g., food and beverage tenants could be a welcome relief to the constraints of a hotel and what it is able to drive in food and beverage profitability), consider adjusting your tenant mix. Alternatively, seek opportunities for repurposing or selling space to allow for more creative meetings and separation as needed.
Owners of newly opened hotels need to be mindful that strategies being employed to get through this challenging time are not a “one-size-fits-all.” Decisions made today about staffing, segmentation and pricing, among others, can have a lasting impact on reputation, operational ramp-up, and future value. Conversely, new hotels may also have an opportunity to revisit business plans and adjust operations in ways that existing properties cannot. In all instances, seek counsel from experts who have lived through new hotel openings during COVID. Implementing lessons learned in real-time can save owners from costly mistakes that will impact performance today and asset value in the future.