The pandemic has provided the hotel industry with opportunities to rethink current business models and diversify portfolios into other more stable sectors. Here are some things to consider.
In times of deep crisis, opportunity still reigns. As unusual as that sounds, it is during the darkest times where innovators and adaptors find solutions that help us return to daylight.
Way back in the 1930s, Austrian-turned-American-immigrant and economist Joseph Schumpeter developed numerous theories regarding capitalism and business cycles. Credited with introducing the concept of entrepreneurship, Schumpeter consistently argued that crisis creates innovation, which spurs the reinvention of certain industries while simultaneously inventing new ones.
With the hotel industry experiencing the worst downturn in hospitality history, the hotel business is ripe for reinvention. This is not to say the traditional hotel experience and consumer behavioral trends will be permanently evaporated or altered, but the severity and depth of the decline right now is forcing hoteliers to rethink everything as some properties falter due to soaring loan defaults.
With the quantity of hotels in default due to not meeting financial returns as lodging assets, an atmosphere of innovative thinking has increased to evaluate whether specific buildings should even remain as hotels.
Hotel investors are now thinking that perhaps a hotel could be reinvented as a multi-family building, senior living facility, condos, or something else entirely such as a storage facility. We saw this exact story play out during the 1990s as surging New York City saw many hotels transition to more profitable varietals of the residential model.
When considering transitioning the property, it is essential to first research the best use of that facility in your market, then find out what that area is zoned for. If zoning rules do not match your vision, see if the zoning laws can be relatively painlessly adapted to the way you want to adapt your investment.
Then it is critical to understand the opportunities and limitations of that physical plant. Would you need to move walls? How would plumbing or shared services work? Would this property easily convert to offices as we’ve seen in the WeWork model, but with one or two person rooms rather than large open spaces with small common areas in the core of the building?
We recommend working with a consultant who can assist in evaluating how the current hotel’s footprint can be adapted to fit market needs. Once the study is complete, a good project management firm, design team and contractor can help create this new vision and determine the scope of work required to reinvent the property into a profitable asset.
While the rules we have collectively accepted as sacrosanct are no longer viable, the current COVID-19 pandemic has involuntary forced many ownerships to reevaluate their lodging assets. In hindsight, this may be an opportunity to rethink current business models and diversify portfolios into other more stable sectors.
Though Schumpeter is credited with creating the theory of entrepreneurship, that spirit has always been within the human mindset. While some businesses thrive and some fail, it is the ones that reinvent themselves that last the longest. Do you want to be like Nintendo, which started in 1889 as a playing card company and is now a global family entertainment force, or will you wind up relegated to the pages of history like Blockbuster or Tower Records? Your future is up to you.
Stephen Siegel is principal of H-CPM (Hospitality CPM).
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