S.E.C. Real Estate Observer

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Any article focusing on the hotel industry in today’s world is a daunting task. So much is happening with lightning speed that to stop for a moment and explain what is going on in this tsunami of change is almost impossible. The hospitality industry is undergoing a significant evolutionary period on many fronts. The impetus for this has obviously been the deleterious effect of the COVID-19 global pandemic combined with the advent of remote workplace environments, expansion of 5G capabilities,   insurgency, governmental lockdowns, local mandates, and politics. The combined affects have pushed this remarkable transformation.

No one saw the virus coming or imagined that the aggressive hotel and restaurant environment pre-virus would be so dramatically turned upside down in just a few months. Hospitality includes guest rooms, food & beverage, convention, conference, and meeting space. All are staples of the hospitality industry, which have all been negatively affected. Everyone barricaded themselves in a cocoon of uncertainty. When people cannot socially congregate, the heart of hospitality is threatened.

Alexi Khajavi, president of the Hospitality and Travel Group for Questex LLC, noted in a recent article how he defined his latest guest hotel experience

“One of my favorite hotels was largely empty and all the public spaces were closed and void of life – kind of like staying in an apartment by yourself. Yet it was more what the hotel did than what they didn’t do that shook me and fueled this story. Sanitation was value proposition # 1. It was promoted on the TV, laminated posters on the wall and the smell of lavender scented Lysol punctuated the entire experience so much that I can still smell it on my suitcase nearly three weeks later. All human contact was eschewed for, and I quote, “exquisite touchless technology for my peace of mind and health.” I would have gladly given up a chunk of my peaceful mind for a smile and a drink at the bar, yet I ended up buying a burrito and a bottle of a big California red and devouring both alone in my room—ahem, my hotel room. People are still going to travel to get in touch with not only themselves, but with the locals, the environment, and even the proprietors and employees. Hospitality serves that higher purpose. Human connection.

I think those of us who have traveled recently have experienced much the same. Something has definitely been lost. Pre-COVID, we were trending toward the “customer experience economy,” but now it is merely socially distanced blocking and tackling—and don’t forget your mask. A hotel that simply connects people with accommodations, even well-sanitized ,hygienic ones, is not in the business of creating memorable experiences; it’s in the business of e-commerce.

Richard Reno, considered the founding father of the Society of Exchange Counselors, made a distinction in the practice of real estate that crystallized into the Society’s overriding purpose. He noted that people are more important that real estate. He stressed that a house does not get a divorce, create an estate, lose a job, or create or destroy a market. With every developed land parcel, the improvement, whether a hotel, shopping center, office building or warehouse, remains an inanimate object that is not easily moved. Therefore, the only way they become valuable is if people can use these assets for their benefit, which includes economics, social activity, human interaction, and experiences. When people no longer see or feel those benefits, they vote with their feet. “Mass Migration” creates new opportunities and destroys old ones. In the case of market destruction, otherwise incredible assets like hotels, become less valuable overnight. All because market forces change and people move. It has already proven that it can turn on a dime. People react accordingly.

A prime example is our major cities. Employees of many corporations have been conditioned by the virus that working from home can be as productive, and perhaps more so, than taking a commute to daily work. This trend was influenced by the Millennials pre-COVID, who emphasized life experiences and the time to enjoy them. Working remotely was a product of their influence. This phenomenon was in its initial stage prior to the advent of the virus and has now accelerated to warp speed. Violence in our cities has made exiting even more prolific. These same workers have figured out that they can also improve their lifestyle by moving to the “cool places,” where newfound freedoms, with lower living costs, safer environments, and more amenities abide, yet they can still make the same income. A revolution unto itself. Hotel owners of hotels that were once the icons of strong inner cities serving business, leisure, and groups must now adjust internally or follow the market to these new territories. Secondary and tertiary towns and communities are now in the limelight. Mass migrations occur when circumstances are unpalatable. Hotels follow. For example, home purchases in the mountains of North Carolina and the beaches of South Carolina are booming with people seeking new environment or a place close to home. Hotels in resort, mountain, or beach areas within a two-hour drive are in high demand.

In the midst of these monumental shifts, the entire hotel industry has not collapsed, but there is a total cleansing both literally and figuratively in the repositioning mindset. All the forces of the industry are focused on the “Hotel of Tomorrow.” Like a fire burning the brush that has accumulated in the forest canopy, older, larger convention hotels, hotels that have not been maintained, those that are highly leveraged with no reserves, located in less desirable areas, or where markets have diminished may succumb to the revolution. In my opinion, we will lose about 15–20% of the hotels across America.

Yes, there are hotels closing and others on life support, but the industry has already shown the ability to quickly adapt.  An example is long term stay hotels, which seem to be capitalizing on essential workers and business groups with modest rate reductions. Large 200-500 room luxury hotels are, however, suffering. Good brands, such as Marriott, Hilton, IHG, Choice and others, although cutting back their internal operations, are doubling up their support for their franchisees.

Many hotel operators now center on increased technology, which they believe supplants the personal experience.  No more greeter at the Walmart effect. Now you will arrive at your hotel and every aspect of your stay will be handled by tech. Your sign in, access, reservations, tours, special needs, and preferences will be handled by a virtual guest host, personalized and reachable online at any time to meet your expectations. This is a real person specifically assigned to you, but someone you will only interact with online. It’s kind of like a Zoom call with only one other participant. The trick that the industry is grappling with is how to make this virtual experience capture the intimacy of socializing with other people, a staple of the hospitality philosophy.

A year ago, while visiting S.E.C. Steve Eustis in San Angelo, Texas, he invited me to a seminar sponsored by his bank. The speaker was Horst Schulze, who created the Ritz-Carlton hotel empire. Having read his book Excellence Wins recently, it was a great opportunity to hear him speak. One overriding philosophy was that “excellence” in every aspect of a hotel must be employed by staff to serve the guest right down to the final details. Again, the lifeblood of the hotel business is to make every guest feel special.  Even two or three years of a pandemic will not change 10,000 years of human inclination to roam, meet, greet, and drink. Because of COVID-19,  hotels have crammed ten years of normal progress into six months to address many of these new challenges. The question remains; how do we define guest experience when a high-touch business meets a no-touch world?

Hotels are also trying to solve a medical problem, the virus. The hotel universe has quickly mobilized, and initial attempts to modernize cleanliness standards have now been culled into more standardized methods and procedures in just a few short months. Adherence to these guidelines makes hotels one of the cleanest places to stay. Changes to common area and room air flow, updated and state-of-the-art self-controlled vending machines, disposable items, elimination of small toiletries to bulk dispensers, and strict guidelines for employee interaction with guests are all being integrated. Handwashing has always been a basic practice for cleanliness, so a quick improvement for any public restroom is simply to employ new faucet technology. Dyson is a leader in this area, and its latest faucet designs integrate washing and drying into one station, with no buttons or paper towels. Door hardware is a common way to spread germs.  While stainless steel, chrome, and nickel have long been a typical hardware choice, a simple switch to copper or brass hardware provides a more hygienic option.  Open Path is one group innovating solutions for touchless building access, from entry doors to elevator operation. Introducing more natural light and operable windows is another switch for existing buildings. Beyond the benefits of natural UV rays for a healthy environment, exposure to daylight improves vision, sleep quality, and eye strain, creating general wellness for the building occupants. Operable windows allow us to increase ventilation, keeping the air fresh, and reducing germs from settling on surfaces.

Hospitality has always been on the cutting edge of architecture, design, technology, and innovation of all real estate trends. If you own a 100-room hotel, that means you effectively meet anywhere from 50–100 guests per day, which means 18,250 to 36,500 contacts on an annual basis. These interactions provide immediate market feedback for new trends, guest preferences, demographic changes, and much more. You know how your hotel business is being affected by external factors with each guest you meet. Nowhere in the real estate business is this feedback received in such a timely manner. Changes to your business model can be made overnight to accommodate changes in the market. You can change rates overnight on your iPhone. Failing to adapt correctly will leave you in the dust.

In my opinion, Hotels of Tomorrow will become smaller in size primarily due to increasing costs of construction, labor, and land.  Experiential Hotels will be at the forefront recapturing the Customer Experience. These Hotels will be built in locations unaffected by large convention centers, specialty attractions like Disneyland, airports, and other types of large demand drivers. They will emphasize destination and lifestyle experiences.

Do not count the hotel business out. As in every downturn, one of the largest transfers of wealth ever experienced in America is happening now, not only in mainstream real estate, but also in hotels. Buying when there is “blood in the streets” is not new. There will be an interim lull in new hotel construction for the short term; however, at the same time there will be new and immediate need of hospitality in locations not previously considered. This is where experienced hotel developers will achieve greater profitability and opportunity.