Hotel Owner Strategy 2025
By Robert A. Rauch
Some analysts argue that the cycle is “getting long in the tooth” this year since we have been expanding for over 45 months since 2021. Since the tourism industry is resilient and growing, success will be possible for several years. Further, 2025 will be somewhat prosperous with interest rate reductions, strong consumer confidence, a durable job market, and a relatively robust global economy. The election may impact these factors.
Purchasing or Retaining a Hotel
When considering the purchase or retention of a hotel, the quality of your team is of utmost importance. As a hotel owner, the role of a single operator in optimizing revenues and expenses, making sales calls, and managing the financial aspects of the business is significant. Therefore, thorough due diligence is necessary to ensure the hotel has the right management, brand, renovation, and business plan/budget. Hospitality, once an art, has now evolved into a science with the introduction of revenue management, distribution channel management, social media marketing, website development, artificial intelligence, robotics, and more. If you’re planning to build or renovate, you’ll need an architect, designer, contractor, lawyer, brand, management company, engineers, lender, and a competent operating team.
When purchasing a hotel, I advocate for a compelling narrative. A need for renovation, brand change, or management change can significantly boost the numbers. If you can implement all three changes effectively, it can be a game-changer. A strong market and a healthy market mix, coupled with a solid business base, can ensure operating leverage. Operating leverage is achieved when fixed costs are met, and additional revenues’ flow through’ to the net income line, potentially leading to a ‘home run’ investment.
Location Location Location
Five key areas can provide the framework for success: location, product, management, marketing, and financial structure. The location has everything to do with the submarket in which the asset competes. An area with substantial barriers to entry—government regulations, cost of land, or other barriers—is a safer bet than an area with no limit to the amount of new supply coming in. Moreover, location refers to the market demand generators. A strong market should include multiple demand generators, such as corporate, leisure, and group, which provide leverage for the operation as mentioned earlier.
Product – aka Choosing the Right Brand
The second strategy for success is the product, which might include choosing the right brand. Marriott International, Hilton, InterContinental Hotels Group (IHG), and Choice Hotels are four of the leading hotel franchising companies. The “verticality” of brands—i.e., Marriott’s 30+ brands and Hilton’s 20+ brands—makes the market very complex. Critical review points include system reservation performance, impact policy, recommendations from other franchisees, and support for the brand’s property and growth.
Today, Gen Z and millennial travelers are helping us discard some of the tried-and-true strategies of the past decade. Product quality is paramount to profitable operations, and independent boutique hotels enjoy significant success. This and brands desiring to expand have led to many new “soft brands.”
Marketing & Management of Hotels
The third and fourth strategies, marketing and management, can be the difference between being able to pay the lender or not. Some firms are good at marketing and driving top-line revenue. Others are good at management and controlling expenses. Some charge back their corporate overhead, while others charge only for direct property expenditures. Finding that balance between good marketing and management is hard, but it is essential. Interview a few firms and choose one that suits you best.
Financial Structure
Lastly, it is virtually impossible to succeed without the proper financial structure. Today, first mortgage money is typically low-leverage, averaging just 65% of the acquisition cost and less if it is a new development. This might generate a need for a second mortgage or mezzanine loan; since this money is at a higher risk, a premium is attached to the rate. Today’s structure may be 65% first mortgage debt at 7.5% interest, 15% mezzanine debt at 10%+ interest, plus 20% borrower equity.
A return-on-investment analysis will determine if the project will succeed. This is the most critical element in deciding to purchase or build. Today, many potential sellers have commercial mortgage-backed securities (CMBS) loans due in the next 12-18 months.
So, Should I Own a Hotel?
Many institutional funds and real estate investment trusts have invested in full-service hotels or the urban, focused-service/upscale lodging sector. This leaves an opening for entrepreneurs today to look at turn-around opportunities or more focused-service hotels, perhaps in secondary markets.
Some critical tenets for success are required, including persistence, hard work, and honesty. Avoid mediocrity, move quickly with reversible decisions and slowly with non-reversible choices, seek out committed people, review accountability for everything, and do not be a spectator—get in the game!
So, if after reading this you feel like today requires too much work as a hotel owner, sell—you should get a reasonable price! Now, all that is needed is the goal and a set of action steps to achieve it. If the entrepreneurial spirit lifts you, go for it! Have a great 2025!