The new requirements for hotels through Covid-19

25. August 2022 | Blog

The unprecedented impact of the Covid19 pandemic appears to be over: Since April, occupancy rates have been climbing steeply again. The times of government subsidies, rent deferrals and short-time work seem almost forgotten. Massive catch-up effects in tourism, but also in the conference segment, are boosting the hotel industry. Not least due to massive price increases, many hotels are even outperforming pre-crisis levels. It is precisely this resilience that distinguishes the hotel industry. So much for the good news. For still weakened by the consequences of the pandemic, the next storm is looming on the horizon: Inflation, skills shortages, skyrocketing costs, faltering supply chains, war in Ukraine. Rarely has the industry been confronted with such serious crises at the same time. And that’s not all. By the end of 2024 alone, more than 70,000 new hotel rooms will vie for the favor of guests in Germany. What new requirements arise in challenging times like these?

Hotels in the cost squeeze: Prices up, costs down?
Indexed rents are rising in line with inflation. Energy costs are going through the roof. And who still finds skilled workers, will have to plan for ever more generous wages. So will hotel accommodation become more expensive? No. Recent studies have shown that room rates are rising, but not to the same extent as costs. Price increases cannot be imposed on all target groups in the same way. While there is already talk of “revenge travel” among leisure travelers and conferences, hotels are trying to push through cost increases in master agreements with companies, which in turn tend to cut their travel budgets. A key qualification of operating companies in the future will be their ability to scale costs through clustering and digitization. Behind closed doors, market rumors suggest that we are likely to see not only consolidation of hotel chains in the near future, but perhaps also more M&A activity between hotel and technology groups.

EU Taxonomy.
Once ridiculed, now a top priority. More and more, the focus is on ESG. For hotels, this means not only the demand for more transparency in order to concretely track energy consumption. The fundamental endeavor of win-win situations under the sign of sustainability will have to prove itself: After all, will an operator share the owner’s opinion that, for example, a double-digit million investment in facade upgrades should yield an appropriate return? After all, hotel properties are in the best of company in this respect, as all other asset classes are facing a similar fate.

High construction costs and faltering supply chains are slowing down new developments.
The lack of attractive city center locations, skyrocketing land prices, hardly predictable availability and costs of building materials and, last but not least, the rising cost of capital are all messing up developers’ calculations. This is good news for existing hotels, which sometimes have a competitive advantage over some new developments due to good micro-locations, for example. The slowdown in growth rates on the supply side should give the existing stock some breathing room for realignment and have a positive impact on price levels.

Nothing is more constant than change. The hotel asset class will face some new challenges, but these will also impact all other asset classes. The risk-reward profile of hotels is likely to remain attractive in the long term, in particular due to the industry’s high resilience and adaptability.