The Hospitality Industry’s Road to Recovery

Many industries have suffered greatly as a result of the COVID-19 pandemic, and the hospitality sector is among the hardest hit. Those within the industry have faced unprecedented challenges and have had to move swiftly to adapt to the “new normal”. After experiencing a period of almost complete shutdown in the global hospitality industry, things are looking up as vaccines have started to be distributed. However, as public health restrictions begin to be lifted and the economy reopens, the hospitality sector might find itself changed. Will there be new customer behaviors? And will hospitality businesses be able to make a recovery in a post-pandemic environment?

Topics covered in this webinar:

• Lending (conventional, SBA, liquidity market)
• CMBS borrowers in the hospitality space
• Shift in customer behavior as a result of the pandemic and navigating challenges as the market opens back up

Retail has taken a hit, but has hospitality taken an even bigger hit?

In a webinar discussion with Mili Shah of Ready Capital, many pressing topics surrounding the hospitality industry were discussed. Shah opened the conversation by giving a brief overview of her background. Whether it’s financing assets, looking at hospitality deals, operations management/development and construction, Shah does it all. She wears three different hats: hotelier by blood, lawyer by education, and SBA Lender at Ready Capital. Ready Capital is a non-bank SBA lender. They have a license to do SBA loans across the country in all 50 states across all industries. They have helped numerous small business owners and were very active in PPP lending to customers and non-customers.

With a lengthy background in hospitality, Shah had great insight into how the industry has handled navigating an uncertain market. The hospitality industry has taken a massive hit (arguable the largest) among others. Shah reacted to this statement with advice she gives to her clients: “Stay right above the water. If you can survive like you did in 2008/2009, then you’ll survive this too.”

Shah went on to discuss how the SBA came out with various programs as part of different stimulus packages last year and this year, which played a huge role in the survival of many businesses.

1. PPP: The PPP program allowed small businesses to apply for funds to go towards payroll, rent, mortgage expenses, utilities, etc.
2. PPP 2.0: Now, PPP 2.0 has allowed certain industries to get 3.5x payroll. Thankfully, hospitality fell into this category.
3. EIDL Program: “The EIDL program was an actual loan program, where you could get up to $150,000, depending on revenues and net income. Since the written interest rate is so low, a lot of people took advantage of that, which again helped save businesses.”

With vaccines in the early stages of distribution, there is light at the end of the tunnel. Shah is hopeful for the industry, as she explained- “We do see markets opening back up, even more than we thought they would. But right now, your character is really important. Your character as a person, and how you’ve performed in the past with that back on your loan. If you have good character, your collateral is there, you have credit, then people are willing to lend.” We are turning a corner; however, it’s going to be quite a bit of time before getting back to a pre-covid state.

A Shift in Customer Behavior

When it comes to traveling, there’s no concern surrounding occupancy. People are more ready than ever to travel. Shah has already seen numbers begin to pick back up, comparing this January to last January (pre-covid). The real obstacle is going to be a shift in customer behavior.

Class of Travelers
Full service businesses are going to take a while to recover, while economy hotels are doing much better. The biggest difference is going to be a shift in class of travelers. “Who you would have expected to stay in a Hilton or Marriott is going to change, because the rate and the ADR is going to stay so low for the next three years.” Not only will you have the business class continuing to stay, but a whole new group that can afford these hotels, as well.

Expectations
Customers will expect more. You have a totally different clientele, so some of the business traveler expectations are bound to change; “Things like towels not getting changed daily, rooms not being cleaned daily, or breakfast not being served for free.” This will be a big adjustment for many people that are used to these small luxuries when traveling.

Loyalty and Rewards Members
It will also be a change for loyalty and rewards members. “The cost of doing business is rising and labor is rising. If the wage changes, small businesses will absolutely be affected.”

“Hospitality is the only business in the world, besides hospitals, that runs a 24/7 operation. People are even making a side hustle business in the industry because they know labor, inventory, system processes, breakfast… all of that is taking a toll on hospitality.” Labor was an issue in this sector before covid; now, after and during, it is still a pain point for the industry.

Mitigating Risks and Evaluating Opportunities

Holding power is essential if you’re looking to acquire
“It always goes back to holding power. You need to have the cash available in case it doesn’t pan out the way you thought it would. Even enough for 2-3 years.”

Location is a factor
A lot of people are banking on the location of an asset. Coastal cities will continue to be places that travelers will flock to. In addition, hotels off of main highways in the US are expected to stay busy. The market that has been effected the most by the pandemic are the hotels in bigger cities (NYC and Chicago). These luxury locations will take some time to recover.

Opportunity to Invest
The big question for investors is: will there be discounts like we saw in 2008/2009? Shah says we are actually seeing things being priced at market value or above. “You’re gonna see some assets that are discounted, but there may not be cash flow. Someone will come around and own and operate it. And you’ll also see other assets at market value. There’s buyers and sellers that are ready to go. Pricing is just how you value it.”

Preparing for a Post-Pandemic Environment

We’re still in the thick of covid, but with the end in sight, it’s important to prepare for a post-pandemic environment. Shah gave her insight as to what hospitality experts can be doing to get ready:

“There’s so many aspects of the hotel industry that are going to need modification, and it’s really up to hoteliers to lobby for that. The market will come back, but without change, this is not sustainable.” Thinking outside-the-box is going to be a key factor in the success of hospitality businesses in a post-pandemic environment.

What to Expect:
There’s a lot of people looking to convert. Whether it’s studio apartments with a kitchenette, senior living, assisted living, etc., this could be the whole next play for certain properties.