This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.
| 1 minute read

Inflationary pressures in the hotel sector

After a busy time at the extremely well delivered 2021 Annual Hotel Conference in Manchester, this article by Hotstats succinctly sums up the concerns of hotel owners and operators, and by proximity their financiers, over the very real inflationary pressures faced by the hotel (and indeed the wider hospitality) sector.

Whilst increases are being seen across all cost centres, driven by a scarcity of logistics and resources, the area that was most talked about at the AHC was the thorny topic of payroll inflation.

With competing opportunities in other sectors, transient employees in all departments are understandably having their heads turned by attractive wage opportunities making it hard for some hotel owner/operators to offer historic service levels and/or even fully open. Stories of 15% payroll inflation were common, with one owner offering closer to 40% to maintain its key staff.

This is clearly not sustainable for lower NOI assets from a working capital perspective and, whilst less talked about currently, this will also have serious implications for future refinancing due to compressed debt service cover.  As readers will know, lending to hotels pivoted after the 2008 financial crisis towards trailing EBITDA leverage models rather than LTV being the core metric.

Owners/operators will of course continue to innovate and manage cost bases as best as possible, but they and their financiers must look ahead sooner rather than later to establish true debt capacity to avoid unpleasant conversations in the future.

Even for great assets and portfolios, we may sadly see a rise in hotel distress due to inflation and challenged capital stacks in the coming 12 months. The good news however is the prevalence of debt and equity investors waiting in the wings, even if it comes at a cost.

Our advice is to 'underwrite the future' now - establish a robust recovery trajectory underpinned by industry statistics and expert real estate consultants, and entrust capital advisers to navigate the debt and equity markets on your behalf.

The supply chain crunch and inflation are compounding what’s already a nettlesome recovery for hotel owners and operators.

Tags

hotels, frpadvisory, hospitality