Hotel Ownership and Investment are a Hot Topic in DC
The Cornell Center for Innovative Hospitality Labor and Employment Relations (CIHLER) and the Center for Real Estate and Finance at Cornell University's School of Hotel Administration (SHA) in the SC Johnson College of Business jointly presented the Owners and Operators Roundtable in Washington, D.C., on May 11, 2018. The event was generously sponsored by Jones Day. The roundtable included participation from almost 30 industry leaders, representing owners, operators, (legal) counsel, analysts, and consultants, as well as Cornell faculty, staff, and students.
The first part of the program featured three sessions on hotel ownership and investment. The sessions began with a discussion about asset management—ways to maximize the value of existing investments—with a particular focus on the value of brands in this context. Participants discussed the latest research by Cornell professor Linda Canina on the differences between brand-affiliated and -unaffiliated hotels in terms of ADR, occupancy and RevPAR results, the effects of brand affiliation on the volatility of those performance measures over time, and differences in the effects of brand affiliation on performance by market and segment. In terms of EBITDA, Canina's research suggests that the marginal product of labor is higher in brand-affiliated hotels, raising the question among participants whether management companies leave money on the table. The session contributors concluded by noting the mutually beneficial nature of strategic alliances between hotels and brands/management companies.
The second session focused on hotel capital market trends. Cornell professor Jan deRoos reviewed recent market data indicating declining cap rates in commercial real estate overall and hotel real estate. Both investors and market analysts stressed the importance of the different sources of capital investing in the hotel market over time, beginning with public REITs, Chinese capital from overseas, and, more recently, private equity capital. In relation to the latter, roundtable participants noted the successively lower hurdle rates at which private equity players reportedly underwrite hotel investment deals at this time, reflecting their low cost of capital. Investment consultants also highlighted the role of frothy debt markets in the present market climate, raising the question of how much longer the current debt rally is going to last. On the whole, participants agreed that the current capital market cycle is nearing its peak but has longer to run with little indication of an imminent downturn.
The third session focused on hotel investment in the New Economy. Cornell professor Chris Anderson shared an overview of the evolution of providers such as Airbnb, which has expanded into higher-end listings with its Airbnb Plus concept and into home-sharing apartment communities through its affiliate Niido. Similarly, OTAs have begun to enter the vacation rental space, e.g., through Expedia's acquisition of Homeaway. In response, traditional hotel companies also embrace variants of the sharing economy. For instance, Accor has recently invested in the vacation rental company Onefinestay. Participants stressed the value for today's customers of being able to stay in authentic homes, located in the most attractive, upcoming neighborhoods, and to experience local amenities before they turn mainstream. Providers such as Airbnb have a strong advantage in this respect. In closing, one participant suggested that the best way for the hotel industry to position itself in relation to New Economy entrants into its space may be by embracing the underlying concepts and customer values they reflect.