Operating in a Recessionary Environment Presented by: Daniel C. Hanrahan II, MAI, CRE
Presented by: Daniel C. Hanrahan II, MAI, CRE
Although the National Bureau of Economic Research has yet to officially declare that the United States’ economy is in a state of recession, hotel markets across the nation have already suffered negative impact from the slowing economy. As we enter the last quarter of 2008, hoteliers are generally tasked with setting operational strategies for the next year which is made even more challenging given today’s volatile economic conditions. Economic slowdowns reveal the efficiency level of a hotel operation; all properties must refine their product offering to adapt to guests’ needs and additionally, underperforming properties must adopt potentially more radical tactics to streamline their operations.
In developing an operational strategy for the upcoming year, it is prudent to develop a balance between revenue management and decreasing expenses in order to generate the highest net operating income possible. No universal panacea that accomplishes this goal exists for the hotel industry. Instead, it is critical for operators to measure the overall health and depth of local lodging demand while simultaneously assessing the competitive position of their property against that of other hotels within the marketplace. In developing a budget, utilize as much detail as possible to identify opportunities for improvement. Additionally, as it is challenging to predict the intensity and length of a recession, be sure to reconsider current reforecasting policies. If the property does not reforecast, begin to do so. If it does, consider increasing the frequency. By updating initial budgets the risk of a large gap between budgets and actual results that reflect unrealistic expectations given the market circumstances will be eliminated.
Within this article, we will present means to better understand the specific state of the local economy as well as better manage revenues and expenses to react to the changing economic environs.
Local Economic Climate
While the lodging industry is inherently linked to the national and international economies due to globalization, the commercial, industrial, and leisure businesses located within close proximity are the most salient demand generators for any given property. Utilize sales and marketing personnel’s knowledge of the customer base to engage in direct communication with these businesses so as to understand what their vision and needs for the near-term future will be.
Interviews with staff from a local economic development entity can reveal trends in employment creation or loss, changes in the inventory of businesses, and any new programs or initiatives offering incentives for local businesses. Supplemented with participation in local chamber of commerce events, these meetings will allow hotel operators to pinpoint specific opportunities or threats that influence the local economy. A local convention and visitor bureau may maintain travel statistics such as the number of travelers, occupancy and rate performance, additions to supply within the local area, and leisure-related statistics. Additionally, there are many free statistical resources that can offer additional information about the state of the local economy. If airlines are a prominent means of transportation for local businesses, airport statistics detailing the number of flights and passengers can be obtained from local airports. Finally, detailed labor information is available through the United States Bureau of Labor Statistics (http://www.bls.gov).
When establishing a rate strategy, often hotel operators are tempted to drop rate in order to attract more demand. While it may be necessary to decrease rate to remain competitive, consider the long-term viability of that strategy as it may reduce ability to regain rate in the future due to diminished value perception. In terms of demand, contemplate the hotel’s competitive positioning to determine how the property can make the best of the situation; for example, as corporations and leisure travelers become more price sensitive, they may be willing to consider hotels at a lower service category than they previously would have considered – provided that they still receive the services they demand at a valuable price. Also, it may be advisable for hotel operators to temporarily accept hotel demand at a lower rate from groups which they would not have considered in the past to build a demand base during periods of slower occupancy. While in the last recession earlier this decade there was a strong utilization of hotel intermediaries, hotel operators have become more disciplined in the use of these partnerships. However, opaque channels may be a useful tool to gain demand without directly advertising a diminished rate.
In times of economic hardship the amount of revenue derived from ancillary services such as food and beverage, spas, and other sundry items is likely to decrease. To manage these services, re-evaluate their relevance to guests to apply reductions that eliminate ineffective programs, while maintaining services and/or amenities needed to comply with brand standards, if applicable.
Make changes and reductions to customize the guest experience; however, be wary of cutting so deeply that the product is compromised and a potential downward spiral of market share losses is initiated. Be especially mindful of the relevance of complimentary services and edit these offerings to eliminate those which do not significantly affect the overall guest experience and do not damage the property’s overall competitiveness.
Staffing related expenses are one of the largest components of hotel expenses. While it is important to closely monitor personnel during all phases of the economic cycle, it becomes especially crucial to evaluate staffing needs during an economic downturn to become more cost-efficient. When making any staffing modifications, be mindful of terms and conditions stipulated in a collective bargaining agreement, as relevant. Key personnel are extremely valuable during a recession; be mindful of employee morale and retain the best employees to avoid operational unrest than can worsen a hotel’s financial situation.
Property Tax Assessments
Depending on the timing and procedures used in the real estate tax assessment, it may have been assessed based on an overstated income. Alternatively, when referencing publicly available tax information, a property may be assessed at a higher rate than comparable properties within its competitive set. In either case, consider contesting the property tax assessment if it seems too high versus benchmark competitors. While the process requires time and does not reap immediate benefits, the potential reduction of this controllable expense is one that potentially will last for several years into the future.
If there are reserves for replacement that have been set aside in prior years, now may be a good time to renovate in order to emerge with a stronger product once the economy improves. Develop a renovation plan that yields a high benefit in relation to its overall cost, of particular interest are renovations related to energy-efficient technologies. The price of energy is increasing at a rapid rate which results in an improved return on investment for these new products. Additionally, if the property is experiencing reduced demand, the disruption in guest experience from a renovation will be minimized. However, if capital has not been set aside, today’s lending climate may prove difficult to secure funds.