What's going on with hotels in this economy? Which markets are they thriving now? What are the benefits of investing and operating hotels? What are some types of hotels that may be great investments today?

Tell us a little bit about you.
I started in the hotel industry seven years ago, after I graduated from Cornell's hotel school. I worked in consulting and brokerage for a number of years. Now, I work in private equity, and my firm invests in multifamily, but also has an in-house brokerage firm, so I still get to do some hotel work with them.

What is going on with hotels today? I'm aware that once there's a hit in the economy, hotels are the first ones to feel it.
Through COVID, you would expect that hotels got hit the most because of the stoppage in most travel, both in business, leisure and international group, and yet hotels were able to weather the storm based because of the PPP loans that were given out by the government. And each hotel employs a fairly large number of people, anywhere from a Best Western that has 20 employees and up to 1,000, and Marriott which might have 200 employees, and they took advantage of that. So, there wasn't a lot of distress in the market that we really expected to see. In fact, my firm was going to try to find some opportunities in the hospitality and real estate investment market, but it never really transpired. 

What we're seeing now is, even though hotels, like every other asset class, are subject to interest rising rates because a lot of the loans are floating rate debt; yet, travel isn't really slowing. Business travels remain a little bit subdued, as does group travel, and certain markets more than others, like San Francisco, which happens to be a particularly challenging market, is not recovered to where it was pre-COVID. But then you look at leisure markets, and they're doing better than they were before. I recently was looking at a hotel in Orlando, raising equity for a company, and it is doing better than it was doing in 2019. The pricing actually has come down a little bit because of the interest rates, you can't get new loans at cheap prices. 

I think there is a lot more opportunity for investments right now. And though hotels typically suffer more in a down market because of that pent-up travel, especially in leisure markets, we're not really seeing that. New York is also challenged, domestic travel has picked up in New York, however, business travel is still probably at least 60% of where it used to be. Group travel is starting to pick up again but markets that have high international inbound travelers, especially from China and Japan are still suffering. So, San Francisco and New York are still struggling, whereas in Miami, the South American markets, travelers picked up a lot more.

What are some of the benefits of investing and operating hotels? It's very hands-on, you have people moving in and out on a daily basis, but are the returns better?
The biggest challenge with hotels today is staffing. Every industry is having trouble with staffing, especially the hospitality industry, hotels, and restaurants because there are a lot of turnovers and there are not as many international H-1B1 visas. However, the biggest benefit of a hotel versus any other type of real estate asset class is in times of inflation, when the value of the dollar is going up, hotels can react quickly. They set their rates every single day so you'll notice when you look at, not just hotels, but airlines also, the prices are going up pretty significantly along with everything else. Whereas, if you have a multifamily lease or an office lease, retail, or industrial, some of those either get reset once a year or get reset every five years, which is a lot harder to react to inflation.

How do you go about finding great people and keeping them nowadays?
It's an excellent question and I deal with that every day. My expertise is in hotels, I still do some hotel work with our in-house brokerage firm; however, my company owns almost 30 multifamily complexes across the US, and we actually have our own in-house management company, I work very closely with them. And that's a challenge that we meet every day, each one of our properties has anywhere around 10 at the small end up to 50 employees at our biggest complex. We've had a lot of turnover in the last year, but things are calming down, we hired a new president for our management company. And I think the biggest thing is not just the pay, although it is important to be competitive in a market, but what keeps people is culture. And that can be a challenge too because you have different properties that are spread out, so how do you have a common culture that permeates throughout? It starts from the top. We're having a retreat later this week with our regional managers, we're trying to build something that's long-lasting, where people like where they work, they feel comfortable, they're paid equitably, and they want to stay with us for their career, which is another thing that is important to provide for, upward mobility.

If you were to purchase a hotel today, what are some of the major things you would be looking for?
I personally look for the upside, and that's the key. If you're looking at a hotel, maybe it has a brand that is strong, but there should be an opportunity to make it something "upmarket" to take advantage of. What has been attractive for hotel investors is the ability to assume a loan at a fixed interest rate. There are a lot of hotels, particularly midscale hotels with limited service, that are on long-term CMBS loans and maybe they have a fixed interest rate of four and a half percent, and that's extremely attractive right now. Another thing that has been attractive for people and for some sellers is that the big firms that have the ability to do so are offering seller financing at terms lower than what you can find in the market. I'm seeing hotels that were not attractive buys five years ago, but sellers are able to sell them now because they can offer that financing at cheaper rates, which really improves the upside, at least in comparison to what you can find.

What kind of hotel size would you look for?
If I were to start my own investment firm today, I'm would buy limited-service hotels. The resorts and full service are very attractive and fun to own, but limited service is usually easier to operate. There are fewer employees and they're a lot cheaper to buy. Another thing that has always been attractive to me is to buy nicer economy hotels. I think those weather the storm really well as far as any kind of economic disruption, whether that be a newer build La Quinta, or Wyndham micro hotels, those hotels are a good long-term investment. Another thing that has been extremely sexy lately, which I think is phenomenal, are glamping sites. There's been a few companies that will buy old campgrounds, or RV parks and turn them into something cool that can get $300-$700 rates, depending on the season.

You mentioned the limited services. What does that mean in the hotel industry?
You have the traditional full services hotels like Marriott, or Hilton, that have a restaurant, a bar, and all the amenities that you would want. Then, you have what's called select service. An example of that is the Hilton Garden Inn, or a Courtyard where there is a restaurant but it's only open maybe for breakfast and happy hour. It has a very light menu, not a full kitchen, like one of those convection oven-type things, but it still has a gym and a few amenities. And then you have limited service, which you could think of a Hampton Inn, and a Fairfield Inn, where it's just beds, a front desk, maybe there's a little market to buy something, those are typically very good. Other interesting brands that have a lot of longevity and potential for upside, for up branding, are Best Western brands, they do really well among their subset. But there's also an opportunity to up brand with the right capital expense.

If I were personally to just get in the hotel industry myself, I would maybe do something like, "If we don't have to clean your room, you get a $30 discount every night”, is this something that anyone is doing right now to try to decrease those expenses?
I've stayed at several hotels over the last two years since COVID, whether it's personal travel or business travel, most hotels now with the exception of resorts or luxury, aren't doing housekeeping. I don't think that's going to come back. Personally, as a traveler, I don't really want people in my room, unless it's a resort, then I take advantage. But I think that's here to stay now, it's smart, housekeeping is a huge expense. With this trend, you don't need to employ as many people, and that's typically an area where it's been hard to stay fully staffed. And when you're not fully staffed, you spent a lot of money on temporary help, which is extremely expensive, and you don't get as much for your money either.

I have been coming back to hotels because Airbnb has been very expensive with their fees and everything else. And one of the reasons is that they actually clean my room. However, I've stayed at really nice hotels and they did not come to do anything.
It's a hybrid. Some travelers want that, there's a give-and-take on what you offer and that's to me the fun part of hotels in general, and multifamily as well. When you're managing them, it's figuring out how do you provide the type of service that attracts the best rate and also the best clientele, that's a factor as well, but also making the most money. In certain hotels, they will say that they will clean your room every third day, but if you want extra service call us. That's going to be the default, and I think a lot of consumers are going to be used to it. That'll be a big money saver for them.

Can you tell me about the worst period in your career for hotels and what was the situation? It can be a terrible day or it can be just a period of time.
I started in 2015, it was probably the best year the hotel industry had, between 2008, the great recession, and COVID 2020. It was an extremely strong year with a lot of markets, especially New York City. It was the top of pricing as far as transactions go, things were really good until COVID hit.

The onset of COVID and now knowing what was going to happen was a scary time. A lot of people started getting laid off, people took pay cuts, and there weren’t a lot of transactions happening. People were on the sidelines, like my new company, who thought they might invest in hotels, who are looking for a price drop that occurred in 2008, 2009, and 2010. But it never occurred because during the Great Recession, they didn't have PPP loans to give. And then you had sellers who were still holding on to the peak pricing that they may have had in 2019, or in the case of New York in 2015, and it was hard to adjust expectations. 

That was the hardest part for me which is why in 2021, I switched gears. Luckily, I still get to do hotels, but I'm more focused on multifamily. And that's why, there was like a pause and a hush, and that was extremely difficult. 

Julie Surago