In the wake of the pandemic, people are starting to travel again. This is good for the hotel industry. At the same time, both private and public enterprises are telling staff to limit travel activity. And if we need to travel, we must do so in the most environmentally friendly way. The entire hotel industry must be prepared to be able to show its ESG credentials and document its climate efforts.
ESG is not new, but requires a different mindset
The hotel industry has long been measured on performance indicators with strange abbreviations and acronyms, such as RevPAR, ADR and MPI. Now there are three other important letters in the alphabet soup that we must consider: ESG - Environmental, Social, Governance. The concept is not entirely new, and not only hotels need to consciously relate to the sustainability goals. But the value of a hotel property is directly linked to its operating cash flows. ESG-compliant assets will not only generate higher cash flows for owners during the ownership period, but also create a higher exit value.
The pandemic has revealed that digital tools work well and are much cheaper to use than it is to travel. Business travel will, of course, not cease to exist. It is even likely that hotel bookings will increase in the short term, due to pent up demand. But the trend is clear, and it shows that the volume of business travel will be reduced. Employees are encouraged to travel less, and any travel that does take place must be documented to a greater extent with regard to emissions and environmental impact. Private travel will probably increase and compensate somewhat, but ESG considerations also affect these trips.
Sustainability as core curriculum, not an elective
Business travellers must prioritise the environment and sustainability ratings when choosing a hotel. Hotels must be able to document their ESG measures in order to participate in the fight for guests. This will cost. A bright spot is that as many as 53% of travellers, according to Skift, say they are willing to pay more for sustainable products.
Although hotels have suffered heavily from the effects of the pandemic, with the loss of guests, restrictions on the number of patrons, staff layoffs and the resulting staff shortages, the message now is that they cannot return to the way it used to be, because the market will change. Here are some possible solutions:
1. The relationship between property owners and hotel operators must change. Sustainability must be elevated as a key element in lease and operator agreements. Both parties must be able to terminate the agreement if the other party does not live up to its obligations in this regard.
2. Both the risk and the financial result of the hotel operation will be distributed differently. We are moving in the direction of more integration between operations and ownership of hotel buildings. Payments to the property owner should not be determined by turnover alone, but to a greater extent be linked to the operator's profitability and both parties' achievement of ESG targets.
3. Hotel buildings must have a viable plan for future use, also if there is no basis for further hotel operations, and the building itself must be constructed in a flexible manner so that any conversion to other purposes can take place through simple and circular measures.
ESG as a factor in valuation
Done right, ESG is a powerful tool for attracting and retaining both guests and employees. Motivated employees in hotel buildings where the owner has invested in their physical welfare, ensure good service, and satisfied guests willing to pay more. The result is higher profitability. Good ESG simply corresponds to lower risk. This means that, in the long run, both companies and properties that deliver on their ambitious ESG goals will be more valuable. If an investor plans to sell a hotel property, the pool of buyers for buildings that are not ESG-compatible will shrink, and values will fall.
In CBRE, we work actively to develop an improved set of measurement tools, so that in the short and long term we can measure the effect of a hotel's ESG effort on profitability, property value, the environment and society.
Need for new contract templates
ESG is not just for the big hotel chains. Small businesses also benefit from actions and culture that support society and employees, the environment and sustainability, and good corporate governance.
There are many reasons for optimism in the whole region. But to succeed for hotels, the solution is not to go back to the contract templates we had before the pandemic. Many hotels need to be operated in a new way and the traditional relationship between a passive property owner on the one hand and an active and outgoing hotel operator on the other, is outdated. Put another way: invest in sustainability or get left behind.
For more information, please contact
Erik Myklebust, Head of Hotels, Nordics
Patrik Kallenvret, Head of Capital Markets, Nordics