Many hotel owners made quick decisions this past Spring to survive the uncertainty ahead. The need has never been greater to rethink what the optimal plan is to move forward in the fast-changing market. Don’t assume that the current business model will still yield the highest and best use going forward.
Whether contracting out rooms to healthcare providers, government-supported homeless people or students and stranded travelers; hard decisions were made urgently, to put assets on ‘life support’. Without a confirmed vaccine or cure, it’s unlikely that hospitality and tourism will return to pre-pandemic times for at least the next two years. Therefore, owners need to proactively rethink and reset plans for their asset(s), to achieve highest and best use. The plan may involve two distinct steps: short to medium and then long-term.
Accommodation Alternatives for your Hotel
It’s important for owners to step back from the whirlwind of the pandemic and consider all the alternatives that would best align each hotel asset for the future. Options may include rental accommodation, seniors’ housing and quarantine shelters; but, neither these nor the alternatives would be an easy or cost-free transition.
In addition to the recent short-term government subsidies, loans and deferrals; economists are recommending that government agencies shift to stimulus initiatives such as tax credits, grants, loan guarantees etc; the intent being to motivate organizations to invest in major capital projects, that will increase productivity and competitiveness. With interest rates historically low, the time has never been better!
Meeting Space Alternatives for your Hotel
One of the larger exposures for hotels with extensive meeting and event space is what to do with it? While meetings and corporate events are not gone; meetings are likely to be smaller and more regional in the foreseeable future. As Zoom has become both a verb and noun, resilient leaders must make it a priority to find opportunities to repurpose these spaces where possible.
Make it a priority to identify whether all or a portion of the meeting and event space in your property could be leased out or repurposed. Identify which local companies or sectors are doing the most hiring: start there to explore the alternatives.
- If the space has direct exterior access, could it be an Amazon or Ikea pick-up location?
- A dental or medical clinic?
- A new community or day care center?
In mixed-use developments, there may be an opportunity to return some/all of the function space to the landlord to allocate to other uses, thereby reducing overhead.
Repurposing Commercial Kitchens
In conjunction with reduced function & event space, capital-intensive commercial kitchens are assets that can also be re-purposed. What alternative use could it serve to improve cash-flow and reduce a hotel’s overhead? Potential considerations are to contract school lunches, meals for seniors and shut-ins, or even as a ‘ghost kitchen’ (part of the shared economy).
Many independent chef/owners have abandoned their restaurants, but not their ideas, dreams and customer lists. Identify which local operators have a great reputation and clientele, but can’t keep going under the burden of heavy overhead costs. They could become a ‘ghost restaurant’, out of your kitchen, in co-operation with other chefs and food delivery companies. It’s similar to co-working or co-living spaces where landlords offer more flexible terms in return for higher rents per square foot. Don’t wait to be asked!
Brand Change or Flag Alternatives for your Hotel
Guest rooms (plus lobbies and corridors) that are contracted-out, without housekeeping and maintenance, will soon become due for significant refurbishment of finishes & case goods.
This is a huge opportunity to re-evaluate what brand(s) would be the most successful in your evolving community. Has the market in your surrounding area changed to the extent that a new ‘lifestyle’ or select service brand would be more appealing and successful? The major brands have become more flexible in allowing owners to ‘swap’ brands within their portfolios. This is favorable to losing their room inventory in your property all together.
Owner agility and bold thinking in this area could be the best way forward to optimize the asset -and create a new business growth cycle.
Hotel Loan Evaluations
When is the borrowing on your hotel coming up for renewal? Be proactive in verifying whether the current market value exceeds or falls-short of the loan amount. Inform yourself and start discussions with your lender as soon as possible -to understand whether they have an interest in renewing the loan and on what terms? The terms are equally if not more important than the interest rate and remember, none of the lenders want to be hotel owners!
Airlines are seeking every opportunity they can find to stimulate increased air travel. Your hotel may have avoided wholesale rates in past. Don’t be too proud to (re)consider wholesale business, especially when bundled with airfares that will not be publicly visible or erode your ADR due to parity clauses. Secure a foundation of base business that you can leverage to (re)build on over the next few years.
The past 5 years have been good to hospitality and tourism: we’ve enjoyed continued demand growth and profitability with slowing additions to supply. Going forward in the near to medium term, success will be driven by ensuring that your asset/business is prepared for the future. Keep your business model agile, while also reducing risk. Out-of-the box forward-thinking leaders will be rewarded for the bold and forward-looking opportunities.
Stephen Darling is principal of Stephen Darling Hospitality Consulting Inc. and a Vancouver–based partner of Cayuga Hospitality Consultants. His focus is working with national and international clients on hotel development and operations. Stephen has consulted on several North American mixed-use developments in the luxury sector. He was a senior member of the teams that brought Mandarin Oriental and Shangri-La to North America. He is also certified as an independent board director and a member of the Cornell Hotel Society.