The future of ownership goes beyond hospitality
By Cathleen Draper
For decades, the playbook for hotel ownership was simple: Buy the box, flag it with a strong brand, run it well, and let the returns roll in. But for a growing number of owners, that strategy no longer plays out the way it used to.
Margins have tightened, financing has gotten harder to come by, and the daily grind of capturing paying guests looks far riskier than it once did.
“The bottom line is getting thinner and thinner and thinner,” said Sanjay Patel, president & CEO of MHG Hotels, which operates hotels, student housing, self-storage, and multifamily housing in six states, as well as a new insurance program. Rates, he noted, haven’t kept pace with inflation, and that gap shows no signs of closing. “I’m afraid it’s going to come to the point where everything will just not make sense.”
He compares hotels to a stock. There are ups and downs in the business, and it’s one with the potential for a home run, but equal potential for a strike-out. On the other hand, he said, assets such as self-storage or multifamily housing behave like a bond: Steady, gradual, and without the volatile swings.
Montu Patel, president & CEO of Innovative Hospitality Management, sees a similar dynamic. When hotel owners find themselves with a little extra cash in the bank, they start hunting for new deals – only to discover hotel returns aren’t what they used to be pre-COVID.
“That compressed margin has, I believe, led other people to look at other industry types where they can still capture the returns they were looking for,” said Montu, who has expanded into restaurants, delis, banking, senior living, and warehouse space.
Banks aren’t biting, either. When Montu took a hotel financing deal to 14 banks, he got 13 “nos.” But he asked a telling question: Would those same lenders have said yes if it were a multifamily deal? All 14 said yes, they would. Hotels are a daily agreement, a single night’s worth of rent that requires immense effort to secure. But in multifamily housing, occupancy doesn’t change every day – it shifts once per year when leases are up. It made Montu question why he would continue to pursue hotels.
“Why am I busting my head trying to build something that’s riskier, that does not have a significantly better return?” he asked.
Timing It Well
When it comes to expanding one’s portfolio, timing is everything. The best time to diversify is before you need to.
“We try to diversify when times are good,” Sanjay said. “A lot of people diversify when times are bad, because now they’re behind the eight ball, and they’re scrambling.”
Starting any new venture requires capital, and that capital is much easier to come by when your core business is healthy. Trying to launch a major new project while your hotel is struggling to cover its mortgage, he warned, could lead to a “double whammy” failure.
The day an owner wakes up and thinks to themselves, “I want to minimize risk and protect some of my wealth,” is the day they are ready to diversify, Montu said.
An owner who puts their entire net worth into one hotel is like an investor who puts everything into a single stock, Montu opined. “I would never, in a million years, take everything my family is worth and put all of it into [a single] stock – but that’s what we’re doing in the hotel industry.”
Before the Leap
The secret to diversifying successfully is humility – and tons of research.
“You’ve got to understand the business,” Sanjay said. “Before we got into self-storage, I had zero experience. Before I got into construction, same thing.” It takes time to learn a new industry, but today, there are plenty of tools to help build that understanding. However, he cautioned, don’t let that turn into paralysis. “If you over-analyze it, you’ll talk yourself out of it.”
According to Montu, in their first non-hotel deal, owners need to think of themselves as either the quarterback or as a team player. If an owner wants to be the principal partner (the quarterback) putting the deal together, they need to know the industry, whether it be senior living, self-storage, or franchise restaurants, in and out.
If an owner doesn’t have that knowledge (or isn’t interested in investing the time to gain it), they need to focus on bringing in capital and business acumen, then find an expert to run point, Montu said. “It’s good to find a well-diverse thought leader who has practical abilities to look at a different business segment, dissect it, study it.”
Owners must be aware that regulations differ across industries and states, and for assets such as senior living communities, rules change often due to federal regulation updates. There are a plethora of resources to support owners in navigating compliance – consultants, attorneys, architects, management companies, and AI. But the effort might not be worth it to them.
When a deal is in place, many of the same skills that hoteliers cultivate through ownership are transferable to alternative assets. But, Montu cautioned, they need to actually hold the baseline skills to successfully run a hotel. And above the technical skills, leadership is the most important trait.
“If you’re getting into something, ensure that you have that financial acumen, that you know how to lead people, you know how to create a culture, you know how to have a wonderful guest experience, staff are staying with you.”
Weighing the Trade-Offs
Diversifying doesn’t eliminate risk – it spreads it. “There is nothing guaranteed,” Sanjay said. “You can diversify, and that’s all you can do.” But, owners can be smart about minimizing risk and build in balance. Sanjay pointed to his own geographic mix – he owns properties in Indiana, Florida, and Texas. Slow winters in Indiana are offset by peak season in Miami. “
All you can do is try to mitigate,” he said.
Every asset class has its own cycle – the real question is whether an owner knows where they are in it.
For example, Montu’s company opened its first senior living community the same month COVID hit and lost money on the outset, gaining profit down the road. The second community, developed during the pandemic, has yet to turn a profit. Knowing the cycle – and your position in it – is critical no matter which asset class you choose.
Knowing that position also helps owners to determine whether an investment is just a fad or something that sticks. Unlike a hotel, where the underlying real estate retains value even if a brand changes, a restaurant concept, such as a drive-thru coffee kiosk, that falls out of favor can leave an owner holding a lease with no easy exit.
There’s no one-size-fits-all answer about which asset is the right one to diversify with.
“Each person is different,” Sanjay said. There are plenty of resources for them to turn to when making that decision, such as case studies and reports.
He described MHG’s approach as going all-in once a direction is chosen, spending a year or more researching an industry like insurance, securing the right licenses, building out infrastructure, and bringing in the right people before moving on to the next venture.
Montu’s advice to owners considering their first step outside the hotel box is straightforward: “Create a strong business plan, and don’t just follow what the person down the street is doing. It might not be the right fit for you.”
But above all, he said, pursue something you’re genuinely passionate about – something that, even on the hard days, doesn’t feel like work.
Image: Mykyta/stock.adobe.com
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