April 3 2020 – Michelle Russo joined a panel of industry experts to discuss to discuss COVID-19 and its impact on the hospitality industry.
View the entire webinar HERE.
Do you foresee consolidation/acquisition activity in the industry during this challenging climate?
- Alan Benjamin: Of course, in all times of disruption there are opportunity funds and they will be looking for the right opportunities to take over new developments and existing hotels.
How will the government’s relief package aid your company and other owners?
- Jim Merkel: The CARES Act will primarily support our team members—75 percent of the loans’ proceeds are required to be spent on payroll. The other 25 percent can go towards rent, utilities, or debt service.
On permit-ready deals, what kind of construction reprice are you expecting and how long—three months, six months, one year?
- JM: We are already seeing pricing declines in several areas as vendor pipelines start to slow. Many projects will get put on hold or struggle to get capital. We are targeting 10 percent savings across a project.
Is this a good time to continue renovating while hotels are closed or at low capacity?
- AB: Yes, you don’t worry about displacement of revenue since there is so little to displace and you don’t worry about negative GSS (guest satisfaction scores), as you can add additional buffer floors between where limited amounts of guests are staying to limit noise and dust disruption. Also, when the recovery happens, you will have a fully renovated hotel with the most competitive product to regain market share.
Part of the recovery assistance program makes funds for rapid depreciation possible. Do you think this will help generate renovations?
- AB: Yes! It may depend on ownership structure and their tax status.
Do they think the hospitality market will rebound or is this just the beginning of a much larger recession?
- JM: Unfortunately, we think the market will take some time to rebound. The good news is that it will end and our industry will adapt to new opportunities created by the event.
Does PPP need to be submitted via financial institutions or directly to the government?
- Michael Suomi: The CARE Act’s Paycheck Protection Program loan program is being administered by banks, credit unions, and other similar financial institutions.
We are a FFE supplier—Have major brands given you any indication when they expect to resume CapEx purchases?
- AB: CapEx purchases are still going on; many brands allowed a time extension, which may vary by brand.
With Vietnam and most of the countries shut down, how long do you foresee that affecting vendors’ ability to be on time? What role do you think China will play now that it is the only country open?
- MS: Factories in many countries, including Vietnam, are still in operation.
- AB: As discussed on the call, 95 percent of the global supply chain is operating.
- Are you pushing forward on order entries today?
- AB: We are monitoring the global supply chain on a daily basis and ordering from vendors that will allow our clients’ goals to be met.
Are any hotels in your portfolio for sale due to the situation?
- JM: We are well capitalized. Always be good cash managers—it’s critical to one’s success and necessary for survival during unexpected downturns.
- Michelle Russo: No. Several were on market for sale and that process has been suspended. There is no lender market right now either.
What do we believe are the worst and best case scenarios over the next 12–18 months?
- JM: Worst case is a slow return over the next three years and best case is a one-year hiccup.
- MR: HVS and CBRE have issued best case and worst case scenarios that are available via their website. Most everyone is projecting a RevPAR decline between 45–55 percent in 2020.
Have you utilized the Care Act for the family leave and extended family leave for staff that would qualify?
- MS: Not yet.
- MR: My understanding is family leave only applies to companies with more than 50 employees; check with your accountant.
Knowing what we know today about COVID-19 and considering recession and recovery to follow, what is your optimistic “return to normal” period?
- MR: We published our outlook on our website where we forecast five years for a full recovery to prior-event performance levels. That does not mean it will take the industry five years to be profitable. 2019 was one of the most profitable years in history.
- JM: 12 months
How has COVID-19 made you think differently about current and future design?
- MS: Depending upon the outcomes of this pandemic, there may be more of a design focus on easily cleanable surfaces and finishes, anti-microbial finishes, and other methods for eliminating viruses and germs. Design to better accommodate smaller groups and individuals with CDC-recommended social distancing may play a role in the future of F&B spaces and other public areas.
We’ve seen some vendors announce that they have closed their doors. How is this affecting projects?
- AB: If a particular item affects a project, we find a solution for that category.
Once hotels are reopened, will you resume renovations and new construction with the same interior design firms you worked with before?
- MR: Yes, there would not be a reason to change unless that company does not have the same resources as pre-COVID-19.
- JM: We do not expect COVID-19 to drive a change with the design firms we work with.
When are you projecting hotel occupancies to return to normal levels?
- JM: 12-24 months
Do you have any idea what the government cash injection will do to support the operating hotels and their staff during the shut down?
- MR: The actual benefit is going to be negligible relative to what we initially thought.
- JM: The PPP loans are designed to support the hotel’s operations. 75 percent of the proceeds are required to be spent on payroll. While these loans are helpful, they are not a full solution to the challenges our industry faces.
Will products coming from Asian countries have any issues with customs? Is that a foreseen issue?
- AB: The supply chain from Asia is operating well at the present time, however, we monitor the global supply chain on a daily basis.
For Jim and Michelle, what is the outlook for 2021?
- MR: The expert projections we have seen are around 85 percent of 2019 performance in 2021.
- JM: Our best thinking has 2021 performing at slightly down to 2019. We are continuing to refine our forecasts as the market is changing quickly.
How concerned are you with the financial strength of your suppliers? How are you addressing this within your company?
- MR: Very
- MS: I am recommending direct discussions with the owners of vendors/manufacturers that my clients are currently considering.
What do you expect to happen with the major brand pipelines?
- JM: Pipelines will slow—only great projects with great sponsorship will get done in next 24 months.
- MR: Those that don’t have financing will be delayed for sure.
In pushing forward with projects and renovations right now, what construction and/or supply chain issues are you running into if any?
- AB: Some cities have shut down construction sites, however the vast majority are considered essential projects and are still open.
Do you have any recommendations on how to get more visibility to the ownership groups and CapEx managers?
- JM: Network and do video presentations. Our development team is looking to do more of these types of meetings.
How are stop-work orders for construction impacting your projects? How long do you think that will last?
- JM: We are managing through this issue, but fortunately (at the moment) we are not feeling its impact.
Do you think hotels being used for patients will have to be renovated prior to reopening and accepting new transient/business guests?
- JM: Hotels that are used for COVID-19 patients will be cleaned to CDC standards and reopened.
- MR: No. There are companies who are experts at a disinfection process (similar to those used at hospitals) that the hotel industry is using now.
For those working on design projects at the moment: What are you doing to make remote collaboration work for your team? How are you managing?
- MS: My office was set up using custom laptops with docking screens and a remotely accessible server. For our design projects, my staff is using every tool available including all types of online meeting platforms, frequent telephone calls, FaceTime, etc.
How the crisis will affect new hotel openings?
- AB: Openings vary greatly by specific cities and projects.
For projects slated to open in next 12 months, what kinds of delays are general contractors and subcontractors indicating the project may experience?
- MR: It depends if the project is in a jurisdiction that requires a construction stoppage or not. Generally projects under construction are continuing.
- JM: We are seeing some manufacturing delays due to stay-at-home orders for non-essential businesses.
What are your thoughts on nearshoring versus offshore sourcing?
- JM: We are looking at alternative sourcing for all our projects, including more domestic manufacturers, but have not concluded what the best decision will be. I presume it will depend on the timing of the project. This is a worldwide problem that is affecting different areas of the world.
What can we do in the hospitality industry to help recover from the pandemic faster?
- MS: By maintaining social distancing, wearing mouth/nose coverings in public areas, and self-quarantining as much as possible.
Do you think that hospitality will recover faster than it did with 9/11?
- MR: No. The industry was in deceleration before coronavirus with a lot of headwinds (above market new supply and alternative accommodations, which didn’t exist after 9/11).
- JM: We do not think so.
How are you planning on protecting clients and guests? What are you seeing change in the short term and long term?
- MR: Cleanliness and sanitation are going to become necessary marketing themes for the hotel industry. I would anticipate that there would be more guest communication, including in the guestroom about the cleaning and sanitation approach.
- JM: We are having to look at our operation protocols and make sure our guest and family members are safe. I have witnessed the amazing human spirit of hospitality over the past few weeks and I have no doubt hospitality will recover and be stronger than ever.
Do you foresee changes in hotel design as it relates to wellbeing and social areas?
- JM: I believe that hospitality is constantly adapting to the needs of customers and a continuously changing market. Current events will definitely bring about change and it is our job to adapt.
- MR: This is a fascinating question. From a reopening standpoint, I could foresee hotels limiting capacity in restaurants and bars (such as every other table), but not permanently.
Have you seen large increases in shipping costs?
- AB: We have not seen an increase in shipping costs with the exception of global air freight, which is due to a decline in air freight capacity.
Do you think there will be changes in specs and designs of product to accommodate a cleaner public environment in hotels going forward?
- MR: Another great question. Yes, eliminating or substantially reducing fabrics that can hold viruses and substituting with materials that can undergo a more aggressive cleaning and sanitation regime.
Once your hotels are back up and running, what do you see as the long-term impacts on your hotels’ recovery and getting back to renovations?
- JM: You can delay, but cannot avoid renovations. We believe we have a two-year challenge.
- MR: It depends. Well capitalized owners are going to try to take advantage of doing renovations now while occupancy is below average. However, other owners are using their FF&E reserve to fund operating shortfalls and debt service and will need to rebuild this fund before commencing a renovation.