Management companies were in the headlines quite a bit in 2024 with ongoing consolidation, company shake-ups and never-ending back and forth between owners and operators on fee structures.
A few key takeaways emerged as we spoke to owners and operators about what’s next in the hotel management arena: managing labor costs will continue to be crucial; getting more serious about making food and beverage a profit center is paramount; and more incentive fee models that reduce base fees and let managers more appropriately participate more on the upside.
The labor challenge
The labor cost piece of the management equation is still priority number one, according to Noble Investment Group Senior Vice President Dustin Fisher.
“The labor cost in a flattening revenue growth environment continues to be our primary area of focus, both with our managers and on markets we select to invest in,” Fisher said.
To offset higher labor costs, Fisher said a lot of operators are trying to add more bespoke offerings that drive revenue – whether it be through additional services, parking, F&B or other amenities.
“You see roles starting to exist in organizations primarily focused on food and beverage, or how to make a hotel more of an experience than just a traditional, transient-oriented box,” Fisher continued. “You’ll continue to see that, and we’re trying to design most of our new hotels to cater that way, too.”
Fisher said Noble is also trying to cater to more mid- and small-sized groups. “It’s these kinds of approaches and incremental revenue that even helps you justify the feasibility of a new development or an acquisition,” he added.
Raines Company Managing Partner Grey Raines echoed the need to dedicate more resources to F&B.
“For a long time, as owners and operators, you always wanted to admit you were in the hotel business, and you wanted to shy away from the fact that you were also heavily in the food and beverage business,” Raines said. “We better be focused on it… COVID taught us you can no longer afford to have a division or an outlier, whether that’s a courtyard bistro or a full-service restaurant to be just amenities anymore. Amenities lose money. You need your F&B outlets to be profitable and that drives organic success throughout the entire property. When you have that culture of, well, we’re going to make money on our rooms and get by everywhere else – it’s just not sustainable.”
Raines wouldn’t go as far to say his company would create a dedicated F&B division and it will probably continue to sit within the operations team. “But we continue to invest in people and technology to succeed in the F&B world,” he said.
For Gencom, who plays more in the luxury space, Alessandro Colantonio said he has seen an evolution where the luxury brands are more open to bringing in third-party F&B operators.
“Not only does it bring the buzz, the foot traffic and all the social media that comes with some of these major F&B operators, but it kind of lets the brand focus on what they do best, which is driving rate, driving occupancy and profitability,” he said.
Right-sizing
While making F&B a profit center can certainly drive the top line, Hospitality Ventures Management Group (HVMG) Executive Vice President and Chief Growth Officer Woody Woodward discussed a more basic issue surrounding labor challenges: attracting and retaining talent at the property level.
“We talk about how technology and AI can help on the expense load, but it honestly comes down to the talent you have on property and the talent you have above property,” Woodward said. “If you have a great GM, that can be a great leader, doesn’t just print out the schedule every week and instead is really immersed in the product and the team that they have, you’re going to have a successful property, right?”
Woodward also lamented a bit about having the right size management company. “The bigger you get the more you have to attract and retain. “And the larger you get, there is diminishing returns when you scale either too fast or you scale too much.”
More broadly, Woodward talked about a more focused strategy as a management company generally creating better performance.
“What scares me on the management side is trying to stretch and doing something that really isn’t within your guardrails,” he said. “That can put a lot of strain, not only on those types of assets and that ownership group that you're taking on, but on your resources in general as you spend some much on trying to figure it out. Then problems start to happen with what you’re good at because your not focused on your strengths.”
Woodward said HVMG has done research to look at what they are best at and what types of ownership groups they work best with. As a result, he said it helps them “stay within their guardrails.”
Fee structure options
Multiple management company sources referenced changes in agreements with owners that focus more on the bottom line and resulting incentives.
“I’m seeing more owners look at an incentive model to hit certain NOI or profitability thresholds,” said Bryan Postema, COO at Driftwood Hospitality Management.
At the higher end of the market, Mark Keiser, president of development at Viceroy Hotels & Resorts, added that owners have a lot of negotiating leverage today because growth hasn’t been as prolific with higher inflation and interest rates.
Keiser added that they are still focused on long-term contracts with appropriate base fees, as well as alignment on the incentive fee level.
“Our success will be in generating NOI per key for our owners, and if we have an incentive fee that captures appropriately the upside is more relevant as opposed to moving from 3% to 5% on food and beverage, for example. We’re still making it – but based off of driving returns to our owners,” Keiser said.
Woodward added that HVMG has taken management of a property with a negative NOI and ownership needing to sell within 18 months. They asked HVMG to come in and improve margins and quality scores. If HVMG hit certain NOI thresholds they would receive a share on the backend of the sale.
“We helped them with a little discount in fees on the front end,” Woodward added. “We were also aligned and knew their objectives… These types of deals have worked out well for us.”
By Jeffrey Weinstein
