Courtesy of  CoStar

Renovations, Labor Will Be Major Costs for Hoteliers

U.S. hoteliers preparing their budgets for 2023 said they expect the cost of labor will continue to be a major expense as they try to provide competitive wages and benefits. (Getty Images)U.S. hoteliers preparing their budgets for 2023 said they expect the cost of labor will continue to be a major expense as they try to provide competitive wages and benefits.

The overall lack of visibility because conditions were changing daily meant hoteliers were less than sure about setting budgets the way they had always done before. As they look ahead to next year, however, they do so with greater clarity, higher levels of demand and strong rate growth.

Changes to the Process

The pandemic changed the way Hospitality Ventures Management Group has approached its budgeting process in recent years, said Richard Jones, senior vice president and chief operating officer. Though the industry is still recovering, this year is different from last year, so the company continues to adapt to the realities of the market as there are different levels of recovery for each hotel.

The biggest change is the degree of visibility and greater confidence in expectations heading into 2023 compared to this time of year in 2020 and 2021, he said.

Though there’s never a guarantee or perfect view of the future, HVMG believes there’s enough visibility now to return to its budgeting process used before the pandemic, Jones said. It will use a bottom-up budget strategy in which general managers and leaders in the field drive the process and tell HVMG and hotel owners their expectations for the full potential of their hotels. During the height of the pandemic, the company used a more top-down strategy.

“We’re going back to build it from the bottom up, build it from the ground where the team on the ground has the best intelligence; they have the best read on what’s going on in the market,” he said. “They’re the best-qualified and positioned to tell you what the potential is.”

While the scheduling hasn’t changed much, Twenty Four Seven Hotels is using different metrics to look at baselines and benchmarks, said Isaac Rodriguez, senior vice president of revenue strategy and distribution. Most of its hotels are establishing new trends or getting back to pre-pandemic patterns, including some hotels where the company is not using 2019 as a benchmark anymore.

“There’s some hotels that have created new trends, and that new baseline is more focused on 2021,” he said.

Island Hospitality’s budget process for 2023 has mostly normalized to how it set up budgets before the pandemic, President and COO Gregg Forde said. At this stage, the company is forecasting 2023 top-line revenue and looking at expenses at the macro level.

The biggest challenge over the last couple of years has been that there were so many what-ifs, he said. Going into this year, the expectations were that things would look a little more like performance before the pandemic, but the omicron variant disrupted that. However, the recovery of 2022 was generally stronger than what was expected at this time of year in 2021.

“The process this year going into ’23 probably looks more like it ever has to that pre-pandemic time because there’s less of the unknowns,” he said. “You’re able to gauge 2023 expectations a little bit better than obviously we could do the last couple of years.”

Revenue Expectations

Dan Paola, vice president of operations at Raines Company, said he expects to see a moderate increase in average daily rate and occupancy for the full year, leading to higher revenue per available room. Destination markets, such as Charleston, South Carolina, and Nashville, Tennessee, will likely be able to increase ADR and see some softer occupancy demand. He added he expects the interstate properties will perform similar to how they did this year.

There has been a spike in fall sports and group bookings, and that bodes well for a stronger group segment in 2023 even if the traditional business transient segment isn’t matching 2019 levels yet, he said.

“But man, I’ll say I’ve been out flying around and traveling, and there’s a lot of business travel back,” Paola said. “It’s good to see. It’s exciting to see.”

The best business plan is one that is aggressive yet achievable in which everyone delivers the full potential of their hotel in its market, Jones said. HVMG has put a lot of focus in forecasting the markets and driving market share growth and optimizing market share performance.

The company has a number of hotels and resort destinations that have been far outperforming the industry over the last couple of years, he said. It also has urban, corporate and group hotels that have been lagging.

There will be a gradual return to the long-run average level of performance for resort and leisure destinations, Jones said. While they will continue to outperform, it may not be to the level they did this year and last. The company is confident there will be a gradual return of business travel and continued strengthening in group business recovery.

“Those hotels in those markets that have been lagging the industry recovery over the last couple of years, we’re going to expect them to outperform the average industry number in 2023,” he said. “We’re going to challenge ourselves and challenge our teams to get every ounce of market share that they can as those other segments of demand come back.”

Most of Twenty Four Seven Hotels’ properties will find revenue growth opportunities through a mix of sales, Rodriguez said. The company has been hyper-focused on its mix of sales by season and using last year as benchmark to improve that mix. It will also strive for more retail bookings and less on discount channels.

The company anticipates most of its annualized occupancy will be similar to where it is, he said. But there are some hotels in certain markets that still have the opportunity to further recover.

“For the most part, the occupancies are more or less where we’d like it to be from a model perspective,” he said. “We just really want to improve that average daily rate.”

Looking at the forecasts for 2023, there’s no continuing rebound on the occupancy side, so the overall direction for next year is ADR growth, and those expectations are in the double-digit range compared to 2019, Forde said. Any industry forecasts show that range for next year.

“I don’t think there’s anything at this stage that says we don’t look to be within those forecasts as well,” he said.

Spending Priorities

Raines performed a lot of deferred maintenance this year, and there’s still some more capital expenditures it will need to do next year, Paola said. The brands have been pushing property-improvement plans, and some of those will come to term in 2023.

The work will likely be what the hotels wanted to get to this year but couldn’t yet, such as tile and grout or resurfacing pools, he said. Other projects may be work the Raines held off on until the hotels recovered further.

Given the inflationary environment, the increase in ADRs will help to absorb some of the rising costs, Paola said.

Labor will definitely be front and center in accounting for HVMG’s expenses next year, Jones said. The company has been staying close to what’s going on in the market to be competitive with wages and benefits. The goal is to be the preferred employer in every one of its markets.

“That wage inflation is definitely putting the greatest pressure on the [profits and losses report],” he said.

HVMG is doing everything it can to find ways to improve its labor productivity and efficiencies to offset that pressure as much as possible, Jones said. That could be through several avenues, such as technology or consolidating management positions in markets with multiple hotels. It has centralized a number of services to take some pressure off the execution at the hotel level and get economies of scale above property level.

“We’re really doing our best to stay competitive and be able to keep our hotels properly staffed and, at the same time, find efficiencies through operational strategies and technologies as much as possible,” he said.

There’s a renewed interest in automation technology to help deal with staffing shortages, Rodriguez said.

“We definitely want to make sure that we have a new focus on systems and system automation,” he said. “Whether it needs to be in finance, revenue, our sales process and tracking — we’re trying to make a lot more headway in automation.”

Twenty Four Seven Hotels is also having photos taken of its properties to have new pictures put online to go along with their direct booking campaigns, he said. It will also invest more in its food-and-beverage programming as a way to elevate the guest experience and create more revenue opportunities, particularly at properties where there’s not much opportunity to raise rates further.