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Zach Demuth from JLL's Hotels and Hospitality Group

• Jeff Borman and Matt Brown

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The hardest working man in hotel research talks with us about the state of hotel brand acquisitions, optimism among investors about urban markets and luxury assets, and how hotels can learn from Taylor Swift (can't we all?).

Plus: What's the most overrated statistic in hotel research? What's one piece of unvarnished advice he'd give to a new investment group? Why are partnerships on the rise in Vegas and Orlando?

https://www.us.jll.com/en/people/zachariah-demuth
https://www.hotelmanagement.net/transactions/review-2024-year-us-hospitality-deals

Speaker 1:

Hi everybody, welcome to season four. That's right, season four of no Show. They said we couldn't do it, but we made it and we're here. New year, new us, and we have an amazing guest today. These days, you can't click on a hotel trade article or a podcast or a clip from a conference panel and not see a quote from Zach DeMuth. What's he talking about? He's talking about industry trends, investment insights, destination tourism, asset management, hotel transactions and a fleet of related topics. Based in New York City, zach is the global head of hotels research for JLL's Hotels and Hospitality Group. He oversees the global hotel research platform and drives the group's content and data analytics efforts. He sits on the Real Estate Council at Boston University School of Hospitality Administration and is an advisor to the Pillsbury Institute at Cornell University. He's an alumnus of both world traveler, excellent cook, risk taker, fisherman and the hardest working man in hotel research. Zach, welcome to no Show.

Speaker 2:

Thank you guys so much for having me. I don't know if all of that is true, but I appreciate it nonetheless.

Speaker 3:

Zach the fisherman part. Matt does good sleuthing. I didn't know you were a fisherman, but excellent cook. We're going off script right away. Oh boy, what's your go-to? You're entertaining. You're having people come over for the first time. What?

Speaker 2:

are you making? So my wife and I have recently really got into making our own pasta. We got a pasta maker for our wedding a number of years ago and I think we've recently tried to break it out more frequently. I'd say my wife is more of the creative type and I'm more on the execution, but I would say we're that good at it yet. But we enjoy our own cooking, nice bottle of wine and fishing yes, I got that from my dad. Still do a lot of it Less these days than I'd like to, but as much as possible.

Speaker 3:

Let's get to the meat of it, right? 2024, man, no pun there, right, yeah, no pun intended. Yeah, 2024,. We saw a lot of activity, particularly among brands using their balance sheets to drive growth. Why is this remarkable?

Speaker 2:

Yeah, I mean, I think, when we think about the way the hotel brands and we're talking about Marriott, hilton, hyatt, ihg, and, if you look to Europe, accor the way they make money is by generating fees, right, and the way they increase that on an annual basis is either by what they call same-store growth, which you guys know means the growth of existing hotels right, existing hotels generate more rev par and they generate more fees and by adding new hotels to their collections. Historically, the latter, so adding new hotels to their collections, is about 50% of their year-on-year fee growth, which drives their shareholder value. And historically, that comes from new organic supply development, right, so the development of new hotels that they ascribe their names to conversions, right, an independent to a Marriott or a Hilton to a Hyatt or whatever. What we've seen, what we started to see, kind of the immediate aftermath of COVID in mid 2020 and 2021, is that there is a material slowdown in new supply growth. Construction got exceptionally expensive, right. We all know about these well-documented supply chain disruptions which caused not only delays in construction materials but high, driving up high costs. And then, at the back of that, we've seen the US and other major economic bodies increase interest rates, which means development financing, which is often the riskiest form of financing, became exceptionally challenging, if not impossible. So these confluence of factors again, they started in mid-2020, 2021, 2022, really came to a head in 2024 and will continue actually for at least the next three to five years, such that the development of new hotels in the US and globally is much slower than it's going, than it has been historically Nearly 220 basis points or 2.2 percentage points less than its long-term average over the next five years, which is a significant slowdown.

Speaker 2:

And so, again, going back to the brands, the way they derive growth 50% of their growth by adding new hotels to their collection. In the absence of organic supply growth, really, the only way to do that in a material manner is by acquiring other brands and again, that is exceptionally rare. We saw Marriott do that with Starwood, of course, way back, although that was a bit of a different acquisition, although one could argue, similar trajectory. But we saw in 2024, you saw Hyatt acquired Standard, you saw Hilton acquire Graduate and we'll talk about some of the interesting partnerships such as Marriott, sonder and everything else. But I think that's just the tip of the iceberg. We've heard rumors about Hyatt possibly acquiring Playa, which is an all-inclusive platform in Mexico and the Caribbean. A lot of other rumors out there that I can't obviously name names, but I think we'll see a lot of that in 2025, probably even more in 2026. And that's just in the US right. Globally, there's tremendous amount of what we'd call brand M&A or brand partnerships on the horizon.

Speaker 3:

What stood out to me. Marriott is kind of a well-oiled machine in this field. At this point you mentioned Starwood, which nobody can forget because it's such a big deal. But by the time it got to Starwood, marriott had made an acquisition almost annually right, buying AC coming out of the Iberian Peninsula with a little bit of a Latin American presence. But it made Marriott, with that acquisition, the largest supplier in those areas. And then it bought Protea the next year in Africa, probably not well known to our listeners, but it made Marriott the largest supplier of hotel rooms in Africa and after that Delta, it's the largest in Canada Check that box Gaylord, largest of big boxes, check that box right.

Speaker 3:

Then along comes Starwood. So by the time it got to Starwood it felt like it was a well-oiled machine, ready for m&a. But really I think to your point of using the balance sheet. Marriott had a history of doing those things. What was really stood out to me in 24 was two things that you touched on. First at hilton, did it right? He'll be rare, not Not one in the Neseta era, right? I mean the thinking there was always why buy if you can build and can you guys just fill in real quick?

Speaker 1:

Why was that rare for Hilton? What do you think stopped them from doing that in the past?

Speaker 3:

Well, I'll give my take. I think there is a reluctance to spend the money to buy a brand. When you have a well-oiled machine to build it right, why buy? And, matt, you and I years ago talked about the example with Kempton. Why spend the $420 million that IHG did to purchase Kempton when, within 10 years, you can just create Canopy and have the same distribution? To create a brand probably costs you $20 million. To buy that brand probably costs you $400. Zach, what's your take?

Speaker 2:

Totally agree, and I think you asked for the look at the roots of these companies right. So obviously Blackstone owned Hilton for a long time. Blackstone is a real estate company, so I think they really understood the real estate and they recognized that. To Jeff's point, you could either acquire independent hotels or even alternative uses and spend less money to convert into a new hotel brand. You could build Ground Up which Blackstone is very familiar with. And so I think, again that goes to Hilton's roots of a. Again, way back all the brands were real estate companies, but that goes way, way back.

Speaker 2:

Hilton's not that far back, it's pretty recent, and Neseta is still a holdover from that generation, as is Kevin Jacobs and all the others. And so you look with Spark. In my opinion in that space is groundbreaking. They took old Home 2s, old Hamptons, old Comforts, and recognized that it would be cheaper and they could actually get this great arbitrage with owners by offering the conversion to a new brand, marriott. At first at least, their response was to acquire City Express Again an acquisition, not a buildup Now, since they've followed up with Studio Res and others Again an acquisition, not a buildup Now, since they've followed up with Studio Res and others. But I think again Hilton's, you have to go back to the roots of the company and how historically they've been able to grow at arguably better multiples. They're still a smaller company than Marriott but their multiple historically has been up until this year has traded at higher rates than the other brands.

Speaker 3:

Let's say you have 300. It's all about NUG. Let's say you have 300, you know, it's all about NUG. And if they're going to be 300 openings of Hampton, that may, in a year, only net 150 because 150 are going to exit the system. Right, right, they're too old, they don't fit the brand and it's probably too expensive to bring a 30-year-old Hampton up to the modern Hampton brand standards. That's where the brilliance of Spark, to me, really was, was the arbitrage that you mentioned is in that example, 150 hotels don't necessarily have to leave the system and instead of upgrading you know, a Hampton Inn for 15 million, maybe it only costs five to become a Spark.

Speaker 2:

Exactly. And you look at what Hilton did acquire this year in Graduate, it's a very different play. I think, arguably, building it's one thing. To build from the ground up a mid-scale brand, maybe even upper mid-scale brand, it's a very different play. I think, arguably, building it's one thing. To build from the ground up a mid-scale brand, maybe even upper mid-scale brand, it's an entirely different thing. To build from the ground up a I'm not saying graduate is luxury, but a lifestyle type brand.

Speaker 2:

Now, obviously AJ Capital did. It took them a long time and success was all over the map. So I think to build a brand like that from the ground up in today's environment, given everything from a construction perspective and availability of land, is a challenge to acquire. It makes a lot more sense, right? So you look at what Hilton has historically built. You look at what the other brands have built. Again, it's much easier to build in the lower segments. It's much harder to do it in the higher segments and particularly to capture that level of demand. I mean, we see this amazing confluence of for a lot of different reasons demand for lifestyle and both luxury and sort of that upscale space. I think that is a secular trend but it also may be somewhat short-lived, and so I think Hilton recognized now is the time to do it. We can monetize fees. It's a relatively low basis, but it's not the same as acquiring a mid-scale brand which they think and have proven that they can build from the ground up.

Speaker 1:

What do you think it's going to be a short-term trend.

Speaker 2:

Again, I'm hesitant to say short-term. I think it's going to be the next, I think I don't think it's peak yet, but I think we're getting there. You know, life in some ways having branded lifestyle is sort of antithetical, right. The whole idea of lifestyle to some capacity is that they are boutique, independent hotels. Now I think the collection brands, the autographs of the world, the luxuries, the vignettes have done a really good job of saying, hey, you keep your level of independence but you get our distribution system and so you can increase your demand.

Speaker 2:

And by and large the average consumer doesn't necessarily think or know they're staying at a Marriott or a Hilton or a IHG. They see the independence. But sort of the branded lifestyle space, to me again, that kind of goes against the idea of this authentic experience. And again, I know graduates a bit different, right, because they play on, of course, the university and they are all unique. But I worry that when you see more and more of these kind of upper upscale, even luxury, but they're branded lifestyle, does that sort of go against the whole idea that consumers want unique and authentic experiences.

Speaker 3:

The other trend that you touched on this a bit at the top that I thought was remarkable in that I think it has great staying power and would love your take on this too is partnerships. What Marriott did with MGM, what Hilton has done with small luxury hotels, that's new in this space. You guys stay yourselves, Just get on honors and get on the Bonvoy platforms. Hyatt's also doing it. This whole conversation isn't a Hilton and Marriott conversation, but I mean they're the big boys and they're setting the trend for the future. That's the one that I see has almost unlimited potential.

Speaker 2:

Yeah, Totally agree, and Hyatt did it with Mr and Mrs Smith. You mentioned, obviously, small luxury hotels Marriott, mgm, marriott, sonder which is a totally different beast, but I think it goes back to what we talked about at the top is that brands generate revenue and drive shareholder value from generating fees, and, in some ways, generating a fee through a partnership is actually the lowest risk because they really don't have to outweigh anything. Sure, in some cases they outweigh a little bit of capital. Sure, they dedicate some sales resources, obviously some distribution resources, but they're not managing the properties, they're not taking any ownership for them, and so for them it's just a pure fee play. And from the perspective of the partnered brand, whether it's Mr or Mrs Smith or Small Luxury, obviously you get plugged into this, generally speaking, incredible distribution system. The fees you pay for the booked reservations are generally lower than you would otherwise pay on the third parties, the OTAs. So, generally speaking, it's a win-win and I think we'll see more and more of that.

Speaker 2:

I think what's happening in Vegas to me it started with Marriott and MGM Hyatt just signed a licensing deal with Venetian, which is fascinating because they signed it literally the day that Venetian's agreement with IHE expired.

Speaker 2:

It's pretty incredible, right Coincidence, I'm sure, yeah, I'm sure, right, exactly, and I think Vegas is a market, obviously tremendous amount of demand, one of the highest occupancy markets in the US and the world, despite having more hotel rooms than any market in the US. And for years the major brands have kind of been hesitant to build because it's very expensive, for obvious reasons, some challenges or some concerns with the casino environment. But we can do a partnership. We can still generate close to as much fees as if we had our own hotel there, we don't have to assume any risk, and so I think that's going to be a fascinating game. But these partnership agreements are unique. I mean the Venetian sort of spelled it out they're not forever, right, they typically are 20, 30, 40 years or even less sometimes, and so you create customer confusion, right, one day I'm saying the Venetian under an IHG rewards, tomorrow it's, I mean, bonvoy, I don't know.

Speaker 3:

To me it's a bit odd, but great for the brands overall. One day we have Uber and the next day we have Lyft right, the two big monsters that really I don't think brands and the hotel industry in the US really talk that much about or focus as much on as they should are Las Vegas. And then the other, in my opinion, is Disney. Is there a partnership? Is there something out there who could tame Disney? Would anyone even try to bring that into a brand partnership?

Speaker 2:

A really interesting question, arguably, why not? What I found interesting about Vegas and MGM's perspective is, prior to Marriott creating that partnership, mgm and they're obviously pretty public were running 85% annualized occupancies and it wasn't clear to me from their perspective what accretive additions Marriott could add. It's not an occupancy play. Were they creating a more loyal customer base? Did they add a higher rated customer base? And again, it hasn't been long enough to play out and so I guess there must be that. But I wonder in Disney's case I mean you'd have to, from their perspective it would have to add enough value. But I wonder, in Disney's case I mean you'd have to, from their perspective it would have to add enough value. But again, I think never say never.

Speaker 2:

I look at all the partnerships that materialized in the last two years. A lot that I know are coming over the next 12 to 18 months. A lot of them I never would have anticipated 10, 15 years ago. I think Disney's interesting, right, you look at what Lowe's is doing in Orlando, around a lot of the new Disney resorts, and again Lowe's is a brand we almost never talk about, very different than the others. They'll appear to play a real estate company in many ways. But is that something right? I mean, there was this talk in 2019 around Omni and Lowe's, possibly forging a partnership, which sort of fizzled for a variety of reasons. Again, two smaller brands, but if that's possible, why couldn't we see one of the big ones get in there and create some sort of a loyalty sharing partnership?

Speaker 3:

Do you remember when the Nickelodeon Marriott experiment was attempted? Right, how can they get into this Disney game in Orlando? But they needed to find a different partner, something that was also an appeal to kids and fell flat on its face. Mainly, you can't recreate the entertainment industry from a hotelier's background, and I think that's where Matt and I are fascinated with Las Vegas. But I think that's that similar gap why brands have not been successful on the strip.

Speaker 1:

They aren't going to be successful in creating theme parks, I mean beyond the expense of getting into either market, particularly Vegas. Is the culture just so different from what you need to do, what you need to provide, the skill set you need to have to run the hotel? Is Vegas just kind of a one of one?

Speaker 2:

Yeah, I think in many ways it is and I think you know it's interesting, right, the brands, particularly over the last five or six years, have tried to find new verticals to expand into again, to increase their loyalty, to drive higher share of wallet. And I think what you've seen, particularly in 2024, and we'll see over the next three to five years, is their core competency is running hotels Doesn't mean that they don't have loyalty sharing agreements outside of the traditional hotel space Mentioned Vegas talk about Saunders shortly obviously their credit card companies, yachts, et cetera. But they typically turn again. It's either a partnership or a third party to help run it. Because I think there's a recognition and it's been to your point about the Nickelodeon example. It's been proven out in other places. They're just not built to do that. They.

Speaker 2:

Also, and it's been very clear based on some of the unfortunate recent restructuring, wall Street doesn't value that right. Wall Street values fees. It doesn't value them taking on additional risk via headcounts, via experimental things. It's unfortunate in some ways because I think they could do it if given the resources they have the resources, if given the leeway. But Wall Street is very quick For better or worse. These are all public companies, at least for now, and their value is generating fee revenue.

Speaker 3:

I think that goes back to the spin of Park from Hilton. The core principle there is not that Blackstone still owned the same amount of real estate. It did January 7th as it did January 6th of 2017, when it was Hilton and Park were separated. But by doing that, the investment landscape was very clean, for sure, for sure.

Speaker 2:

Marriott Host, exactly right. I mean all of landscape was very clean, for sure, for sure. Marriott Host, exactly Right. I mean all of the all of the brands have gone through this evolution. It's interesting, right? We talk, obviously we're in the US, we talk heavily about the US brands. My work also covers global Right, and so it's interesting because, accor, they're in the stage that most of the US brands ran a decade ago and it's interesting to watch. They're following a similar playbook but also possibly making it better. But again, valuation, you know they still get some credit for their real estate holdings, whereas in the US, hyatt's basically sold off all of their holdings in the past two years and will sell off the remaining over the next year, and they get so much credit for that right, whereas 10 years ago it was a totally different landscape.

Speaker 1:

Now that 2025 is here, we're seeing a renewed sense of optimism among hotel investors, who are bullish about urban markets and luxury assets, and that optimism applies to both domestic and international capital. I think it's easy at the beginning of this year to think that everything literally is on fire on all fronts. What do you think is behind all of this optimism?

Speaker 2:

Yeah, I mean, I think it's no secret right over the last two years, the commercial real estate sector, or industry broadly has, it's no secret right over the last two years, the commercial real estate sector, or industry broadly, has been very negatively impacted. Right, interest rates not only rose, but rose quicker than really in any other period in US history. Pretty much ground everything to a screeching halt, and this comes off the back of 2021 and 2022 were actually some of the best years for hotel investment volume in the US. Cumulatively, around $80 billion were invested into hotels in 2021 and 2022, the best two-year period we've ever seen. Again, 2023 declined to less than a quarter of that and then 2024 declined even further.

Speaker 2:

I think what we're starting to see is on the back of COVID. There was a tremendous amount of pent-up travel. You know, we know hotels many hotels are posting double digit rev par growth which, for those of the industry know that that's not normal. There's a lot of reasons for why that happened, but it's not a normal situation and I think owners were kind of saying like why? You know interest rates are high, I'm not going to get the value I want, why sell? Because my hotel's performing exceptionally well anyway, and so I'm not going to be able to trade for what I want, but I'm going to be able to get operating returns. Now we're starting to see performance normalize. Interest rates remain high but they're coming down and there's clarity that at least they're not going to rise any further. They may not fall as much as people want and this is what really drives hotel investment volume in the US. Urban hotels are finally starting to perform exceptionally well. You see the return of international travel, particularly from Europe, starting to see some inbound from Asia through the turn of groups, some corporate demand, and so investors that have held these hotels are starting to see their performance normalize or moderate. Interest rates are at least this clarity around that and performance again there is some green shoots from the segments that historically or that have been slow to rebound, so we're starting to see a lot more interest.

Speaker 2:

Private equity groups, who have raised a tremendous amount of money over the two years and just haven't been able to invest because interest rates are high, started to come off the sidelines. We saw REITs, which have been hit a bit hard by the public markets, but some of them, like Host and others, have been quite active in the past 12 months and will continue to be. We also see a lot of new capital coming to the hotel space, which this, to me, is the long-term trend and really exciting Hotels, after decades of being an alternative asset class most funds allocate very little, if any, to the hotel space Starting to see institutional funds allocating 5%, 10%, 15% of their real estate holdings to hotels. Last year, we saw 20% of all global hotel capital was acquired by first-time buyers, and so I think this is exciting. It creates a lot of educational opportunities.

Speaker 2:

We all know hotels are complex beings operational assets, everything else but I think there's a lot of excitement, a lot of optimism, and you know 2025 is not likely going to get back to 2021 and 2022. I don't want to. You know it's going to grow, but not to that same level, but by 2026, 2027,. We see a lot again, barring any unknowns, a lot of really positive momentum on the horizon.

Speaker 3:

It's hard to talk about 25 or the future in any definition without mentioning AI and one of the things that really stood out. There was an article in Focus Wire recently that I thought was really good looking in travel predictions the kind of thing you get this time of year. But here's what really caught my attention the question of will AI, powered search, co-pilot and the like take a significant share away from Google and will startups flourish or the big get bigger? Anyone looking at AI as the great equalizer might be disappointed was the quote, and that intuitively fits where I'm seeing, or at least my perspective looking forward. Ai depends on data. The more it has, the better it functions and advises. So it seems to me like the biggest companies with the most data are going to be the first and the largest winners. Do you see it playing out that way, marriott and Hilton? Are they really in that wonderful little position to go value from the?

Speaker 2:

technology that's crashing down all around us. Yeah, you know it sort of pains me to say this, to be honest, but the hotel industry and this is well documented has historically been woefully slow to adopt new technologies. I mean, we all know this, obviously, jeff, from our days at Marriott Marriott to this day I know they're possibly changing but still uses a reservation system that was built in the 80s, and I think the other brands have historically similar challenges. It's really hard for me to envision that suddenly they're going to go from these antiquated tech companies to riding the wave of the future. Now there's no reason they shouldn't. They have tremendous data. I mean, beyond the fact they're fee-generating companies, the reason they acquire all these brands and have all these partnerships is to drive loyalty, and cumulatively they have upwards of a billion loyalty members and there's no reason why, with all this data they collect, they basically force everyone to use the apps. They shouldn't be able to create truly customized trip experiences, trip planning? I mean, there's really no limit, but I have personally a really hard time seeing it just based on the way they've historically adopted. And again, wall Street doesn't value them to be tech companies and so sure they might dabble here and there they might acquire third parties, they might partner, but for them to go out and invest all these resources to become a tech company, which ostensibly is what this would require, it's hard to envision.

Speaker 2:

Now, on the flip side of that, everyone wants to talk about AI from a hotel perspective, from the consumer side. Right, the connected trip is sort of this holy grail that bookingcom touts and some others. You know personalized travel, personalized marketing, all these things, and that would be amazing To me. The opportunity is and hotels have used this to some capacity. Obviously we know with revenue management and others, but it's back of house, it's not as sexy, it's not as intriguing, but it can have a real impact in your operations. Whether, again, revenue management operates on some level of AI, that's great.

Speaker 2:

What about staffing? Again, there are some systems out. There goes back to collecting the right data, staff optimizations, labor force optimizations, food costs, smart thermostats, I mean, there's a lot of these things that, again, from the consumer's perspective, they don't care, they may never see it, but that can have a material impact on the hotel space, which already struggles with cost challenges and profitability issues. And so to me, that's where the opportunity is. Again, consumers don't want that and that's not where the headlines are going to be, but I think that can have a real impact on the industry.

Speaker 1:

Of course, one of the biggest hotel stories of the last two years was Taylor Swift's Erez tour. Maybe you've heard of it. According to JLL, the pop star's world tour generated approximately $1 billion and counting in additional hotel revenue across the US, europe and Asia, with its impact rivaling traditional tourism drivers like the Super Bowl and even the Olympics during its peak periods. Quote from JLL in one of the articles in some ways, she's created many, many, many Super Bowls. Now Taylor Swift and Beyonce. Their impact on local economies has been reported breathlessly by news outlets. My question to you is what should hotels do with this information going forward? What should hotels do with this information going forward? Do they sit around and wait for another mega tour, or do they start being proactive about partnerships with musical acts of all sizes? How can they take what we've seen over the last couple of years and set themselves up for success?

Speaker 2:

Yeah, I mean, first it's pretty astonishing to me. I'm, you know, not necessarily a Swifty, although sure the music's on all the time, but the fact that we write about her effect on the industry and have been over the past almost two years now is just really incredible. That is probably secular. At least will hang around for a good period of time. People are willing to travel for live experiences, whether that's concerts, obviously we see it at sporting events. We see it in a number of things. I mean, what's fascinating about Taylor Swift is, if you look at the impact in Europe, more Americans actually traveled to Europe to see her events, stayed at a hotel, booked an airline ticket. The impact from Americans there was bigger than from Europeans. Right, and there's a variety of reasons for that the strong dollar and everything else but people clearly travel for that experience.

Speaker 2:

So I think hotels have to be proactive. I mean, obviously you can't recreate you know a megator of that nature by yourself, but is there partnerships you can do? You know, another brand that we often don't talk about but is becoming somewhat larger is Sinesta. You know they've created these live music partnerships with either local artists or regional artists and then they really use that kind of as a jumping off point to manufacture demand. And I think again, in the absence of organic demand from these events, you have to do something to manufacture, you have to create a buzz and I think consumers will travel for it. I think again, you have to be cautious, right Simply creating partnerships just for the sake of partnerships. They can be expensive, so you have to figure out is there a real return? But I think there's shown there's huge opportunity. Consumers will travel for experiences, whatever that experience might look like.

Speaker 3:

To bring this full circle. That's exactly what Disney and Vegas have figured out a long time ago how to create demand. Who goes to the middle of the desert? Well, they create a reason for hundreds and hundreds of thousands of people every day going to Las Vegas. Well, maybe not hundreds and hundreds, but the capacity of Vegas is what? About 150,000? Vegas? Or maybe not hundreds and hundreds, but the capacity of Vegas is what?

Speaker 2:

about 150,000 renters, yeah, right, and you talk about similar in some ways on a different scale. But what's happening in KSA and Saudi Arabia? All the mega projects there? They welcomed 100 million visitors this year. In 2019, they welcomed less than 10 million. I mean that growth is staggering. Now, granted, they've invested hundreds of billions of dollars. Obviously, they basically have, you know, never-ending capital for a variety of different reasons, but I mean, again, going literally to what was the middle of nowhere and they're welcoming people by the droves, you know, europeans, Americans, asians, like all across. And again, that's about manufacturing demand.

Speaker 1:

It's time for the lightning round, Zach. What's the most overrated statistic in hotel research?

Speaker 2:

Oh boy, probably an unpopular opinion, but Revpar I think Revpar should die one day. And don't get me wrong. I love my friends at STR and I think very highly of them and what they've created, and I get why we use Revpar as an industry, but Revpar never tells the whole story. It's been the case pre-COVID. But if COVID has taught us anything, as a hotel industry, revpar should not be used. Revpar has grown double digits and in many cases, profit, whether you look at the GOP level or the NOI level has not. And I think as we move forward, the industry wants to tell Revpar, revpar, revpar. And again, if you're the operator, maybe that's great. If you're the brand, maybe that's great. If you're the owner, that doesn't help me. You can't take Revpar to the bank. And I won't say too much more about it. As I know, the industry loves Revpar and I don't want to offend anybody, but I think that's the most overused, overrated statistic.

Speaker 3:

Does the current model of owner-operator and third-party manager have any fatal flaws in it over the next decade?

Speaker 2:

I mean absolutely, and I think it has over the previous decade. Right, they're just a lack of alignment. You know, you look at most hotels these days in the US and they have three or four constituents that all have different goals. You know the brands as we talked about, they're fee generating. Really, all they care about is top line revenue. In most cases it's just rooms. What if you have other revenue sources? If you're the third party operator, you care about everything and you care about obviously generating profit for your owner, but then you take a fee off of that, and if you're the owner, you take what's left over. And so, again, I think maybe Revpar is part of the reason to blame, but there's a lot of things in there.

Speaker 2:

There's just a lack of alignment and I think, particularly as the brands become less interested in managing and really turn to again franchise businesses, you have more third-party operators. It's a very competitive space. We've seen some of the biggest third-party operators really struggle because they compete on fees and that actually leads to their demise. And so how does that space unfold over the years? And then, from an owner perspective, how do you sort through the chaos? And I think it's going to be interesting to see. You know, in the US we're a very mature industry generally speaking, but, like in Asia, right now, the third party management space is basically zero, but the brands don't want to manage, so they have to find somebody to fill the gap.

Speaker 1:

So I think it's going to be really interesting to see the evolution. What's one piece of unbiased, unvarnished advice you'd give to an investment group looking to buy a select service or luxury hotel?

Speaker 2:

Know your market. I mean, we love to talk about how the select service segment performs exceptionally well, which it does. We love to talk about how luxury performs well, which it does, but it's all market specific, right. I mean you got to know your market in and out. You got to know what drives demand, what supply looks like today and what it will look like tomorrow. And if there aren't organic demand drivers, can you manufacture that demand at a reasonable cost? Because if any of those things are out of balance, it doesn't matter if you have the best hotel in the world or the best hotel anywhere. If you don't know your market, if you don't know what drives demand, you're never going to be successful.

Speaker 3:

The way Matt asked was select service and luxury Is full service. The monkey in the middle.

Speaker 2:

I think it is right. I mean, I think again, your traditional full service hotel, and whatever brand you want to pick, relies very heavily on think on that semi-commoditized consumer right, the average business traveler or the typical business traveler, typical group customer right, Less differentiation. Again, not saying that these hotels don't have a place, they absolutely do, but they've been sort of the forgotten children of COVID. Now we're seeing return there and we're seeing a lot of renewed interest. Right, as you know, some consumers from the top end get, get hinged down because of economic reasons and group travel returns. But yeah, I think it would be interesting, right, and that's why liquidity has declined so much that middle, which historically has made up 70% of investment volume in the US, has all but disappeared over the last two years.

Speaker 1:

What's the most essential piece of clothing you take with you when you travel?

Speaker 2:

most essential piece of clothing you take with you when you travel? Oh, that's a good question. I don't. I'm not really a clothes guy. You know, recently I've been trying to switch from not wearing like traditional dress shoes and go to the sneaker route. I think that's been really helpful. We don't wear ties anymore. So I'm a really big, like fun sock guy. So I try to, and I have different. I I've been fortunate to travel a lot and so I buy socks for every city I'm in, try to wear the socks from that city. New Orleans has some really cool socks, um, with the cable car, um, yeah. So I guess for me it's that's, that's my like, little bit of whimsy. I'm not really a whimsical guy, but that's where I can add a little bit of differentiation in my wardrobe.

Speaker 1:

So pro socks anti rep par. You heard it here everybody.

Speaker 2:

There you go.

Speaker 3:

Can't think of a better way to start season four. It was insightful, phenomenal. Thank you, zach.

Speaker 2:

Thank you, no, thank you, guys, so much. Really appreciate the invite and really enjoyed the conversation.