As part of the Americas Lodging Investment Summit’s Patron sponsorship program, ALIS asked Sonesta Hotels EVP/President of Franchise & Development Keith Pierce eight timely questions as we prepare for the 20th annual event July 26-28, 2021, at the JW Marriott/Ritz-Carlton Los Angeles L.A. LIVE. Following are his responses.
How would you describe the evolution of franchising between when you started in the business 30 years ago and today as you embark on your latest opportunity with Sonesta?
Over the last 30 years, brand proliferation and consolidation have created behemoth size global hospitality companies that primarily rely on leveraging their size and scale to drive and deliver value to owners and operators. Developing brand cultures and long-lasting franchisee relationships seems to be an art of the past. We are in the business of people serving people and we believe that focusing on the basics of servicing and supporting our franchisees as well as creating a company culture of collaboration and openness is where we will be able to create a point of difference.
What are you seeing on the development front in terms of interest in building new construction properties? How do the costs and availability of labor and materials compare with the pre-COVID environment?
Despite the challenges presented to hoteliers during the pandemic, we are optimistic for the rebound of new construction deals. Although the US construction pipeline has declined by nearly 9% in Q4 2020 vs. Q4 2019 (according to Lodging Econometrics), there’s been a pickup at the end of 2020 in the Early Planning stages for new construction.
One hurdle has been the increase in construction costs in all areas of real estate including hotels. A recent Fortune article said lumber costs are up 188%—that’s a significant number. In addition, obtaining permits and approvals has been a challenge due to slower throughput from municipalities.
We are seeing a welcome uptick of interest from developers, and currently have many target markets open for Knights Inn, Americas Best Value Inns, Red Lion, Red Lion Inn and Suites, and Guesthouse Extended Stay as well as some new construction opportunities for Sonesta in the future.
What challenges and opportunities will emerge on the hotel development front during the next 12 months from a development standpoint?
Hotel development is a function of demand and demand for lodging is increasing. In fact, STR showed early April 2021 hitting nearly 60% occupancy for the U.S. As demand rebounds in a post-pandemic recovery in travel, we will begin to see previously planned projects as well as new development starts. The prevailing challenges will be higher project and operating costs as a result of an increase in raw material costs as well as wages and availability of talent.
How will the industrywide brand conversion market take shape during the next 12 months, and how will it affect Sonesta's growth plans?
As the lodging market heals, owners will start to evaluate renovations, PIPs, and brand initiatives and standards costs versus their return of investment and the guest satisfaction received.
For Sonesta, the goal is to make the process of transitioning to our brands quick, adaptable, and welcoming. Many of the innovations we learned through the Pandemic will create opportunities as well; the flexibility we demonstrated around the guest experience, cleanliness, and some of the tech solutions regarding the front desk and room service will continue and advance.
Depending on the brand, we will work with owners to get the balance right. In order to convert, the owner will have a PIP. While some investment is required, we are committed to being smart and focused regarding what we call for and when for each of our brands. Our extended-stay portfolio of Sonesta ES, Sonesta Simply Suites, and the new GuestHouse Extended Stay allows us to help an owner with an extended-stay conversion in the upscale, midscale, and economy segments to ensure the best platform for success.
What do you think will be the mindset of lenders in general for the next 18 months? Will lenders' purse strings loosen during that time?
As occupancy improves, and assets begin to trade, we believe a robust lending environment will return, and the impact on the industry and risks will normalize.
During the pandemic, mainstream banks withdrew and the CMBS market closed. Post-pandemic, overall, the lending fundamentals and underwriting principles for the hotel business have not changed. As occupancy improves, hotel lending terms will improve, and loans made will accelerate.
U.S. Hotel Advisors is saying leverage could increase to 65% by year’s end if travel demand stays on the current upward trajectory. The YOY trends will also make loan applications more attractive as the year moves on. Lenders have been quoting both 5- and 10-years products with tight underwriting, with rates in the 4% to 5% range. They are still somewhat tentative, considering the March Trepp report showing over 24% of all existing loading loans in special servicing.
You began your hotel career on the marketing side of the business. How has that helped you as you have gone down the development and franchising paths?
Starting my career in franchise marketing provided me with great visibility into the functional areas that are the key revenue drivers of property performance for brands and owners. As a result, my leadership and development lens are always focused on ways to adapt and improve the value and revenue we deliver to our franchise owners and operators.
What is the most valuable business lesson you have learned as a result of having to navigate a global pandemic?
The pandemic reinforced for me that the power of personal relationships in our industry as well as being a true partner to our owners is one of the most important and valuable aspects of who we are as hoteliers.
What’s the one takeaway people should know about Keith Pierce?
I’m driven to make a positive mark on the industry, as my father did.