Counter-cyclical Capex

The hotel industry is not known for rolling out capital expenditures during a downturn and the ongoing recession is turning out to be no different than the first of the new millennium. During that downturn, a report (Capex 2007) from three agencies (International Society of Hospitality Consultants, the Hospitality Asset Managers Association & the American Hotel
& Lodging Association) underscored the truism that successful
hotels
require ongoing and growing capital investment for product improvements
to stay competitive but also found that capital improvement between 2001 and 2003 dried up, constrained by the age old malaise of cash-flow shortages stemming from revenue drops.

A counter-cyclical strategy is even harder to execute given the fact that the bottom line for the hotel industry has touched new bottoms per a recent report from PKF which noted that "hotel profits declined 35.4 percent". Therefore, it is unsurprising that history seems to be repeating itself. Nevertheless, the hospitality industry can, perhaps, swim against the tide as cash flows are not as constrained owing to unprecedentedly low interest rates and draw lessons from an unlikely source: the airline industry. In the 2001 downturn budget airline carriers including JetBlue, Ryanair, easyJet and
IndiGo from India quite literally took off as a consequence of bulking up their aircraft inventory in a big way at the depth of the slump in 2001 and 2002. and were rewarded handsomely when travel resumed.

Around the world, a few are heeding that self-evident, if seldom followed, truth. These include hotels in far-off corners such as Zimbabwe's Meikles  spend US$53 million by end-March 2011 to revamp its hotels to the recently completed $150m restoration of the Washington Hilton.

The need for investing in renovations in markets with double digit growth in new supply such as New York City is particularly compelling as customers are unlikely to return to aging hostelry when there is a wealth of choice. With hotels opening almost at the rate of one a week (the latest being the Trump SoHo), failure to do so could even result in the hotel going under the jackhammer as was the case with this former Holiday Inn in Delaware.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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