This article was originally published in Hotel News Now by CoStar Group on April 5th 2023 and has been republished with permission.
The rapid collapse of Silicon Valley Bank in the U.S. and the subsequent Credit Suisse bailout has led to creeping fears of a recession and concerns among businesses of all sizes about their financial future.
More recently, First Republic Bank was taken over by the Federal Deposit Insurance Corporation at a cost of approximately $13 billion, triggering a new wave of panic.
The debate still rages as to whether this signals a full-fledged banking crisis that could lead to a recession.
This is of global concern, not just an American one.
It is important to comprehend the events that led up to these developments and what their implications are for the economy and, specifically, the hospitality industry.
Earlier in March, SVB — the largest lender to the country’s tech and startup industry — collapsed after a classic bank run and was taken over by the FDIC. A week later, a second U.S. regional bank, Signature Bank, was shut down and a third, First Republic Bank, was rescued after a run on its deposits by customers who were alarmed by the collapse of SVB.
Another three days went by before Credit Suisse collapsed by as much as 30%, at which point Swiss authorities intervened and drew up a rescue plan, only for it to be acquired by UBS.
For far too long, tech firms and startups had access to an almost free flow of capital through venture-capital funding that kept them afloat despite mounting losses. Last year, as inflation hit a recent record high, this access to cash dried up and led to massive layoffs. The companies turned to their cash in the bank to meet payroll.
As a result, banks such as SVB had to dig into their high ratio of uninsured deposits to meet the increasing cash demand, making their business models unserviceable. Word spread quickly, and even more customers lined up to withdraw their cash.
The recent collapse of First Republic and its consequent buyout by JPMorgan Chase & Co. is an exact parallel, a combination of falling deposits and increasing losses linked to rising interest rates. It serves as a painful reminder that the banking crisis may not be behind us.
The threat of recession is not yet over.
To date, the Federal Reserve has provided a total of $318 billion in loans to the financial system.
This amount is already half of what was provided during the global financial crisis of 2008.
While the good news here is that a system that was set up to prevent another Great Recession is working, it highlights that banks today need a lot more money to just stay afloat. This raises the question: Is your money in the bank safe?
Different countries’ governments insure deposits up to different amounts — in the U.S., that is $250,000 in a U.S. bank account; in Switzerland, the equivalent in today’s exchange rate of $108,000; in the European Union, $105,431; and in the United Kingdom, $102,484. Joint accounts often see these numbers doubled.
A critical part of running a business is securing loans, and all this bank stress has led to credit getting less available and more expensive.
Typically, a recession refers to a period of decreased economic activity accompanied by a surge in unemployment and a decline in incomes and profits.
According to the Wall Street Journal, several specialists speculate that recent events could indicate more significant economic troubles.
Even though the financial system has been stabilized after a costly crisis, the feeling of uncertainty and shock remains prominent.
Kirrit Bhikha, a Nashville-based hotel owner who has one branded property affiliated with Magnuson Hotels and Holiday Inn, as well as one independent hotel, told me, “We always thought of banks as stable, but they are not, they are a wild card. Which one is safe? No one knows. That’s a lot of vulnerability stacked against the owners.”
The extensive borrowing indicates the immense pressure on the current financial system, which in turn makes banks hesitant to lend money and scrutinize borrowers’ creditworthiness further.
Consequently, there will be a reduction in mortgages and less capital flowing into businesses, which can impede the global economy and potentially lead to a recession.
This, along with persisting global supply-chain distortions since the invasion of Ukraine, labor shortages and rising inflation, has caused the perfect storm for the hospitality industry.
Two points should be kept firmly in mind:
- Credit is expensive and not as easily available. If you are a hotel owner looking at undertaking the mandatory property-improvement plan or paying a penalty for defaulting on the timeline to do so, this will be a difficult year. According to actual renovation costs tracked by Newmark Valuation & Advisory, prices could be up to 30% higher than those incurred for the same renovation five years ago. If you require a loan for meeting operational expenditure alone, it is time to take some hard decisions and create a road map for cost-cutting.
- Demand can decline again. It’s not unexpected that the discretionary cost of travel will still be the top reduction for choosing vacation destinations this year.
Safeguarding What’s Yours
If you must borrow, find alternate sources of financing, such as crowdfunding or peer-to-peer lending.
Even if you are cash-comfortable right now, it is important to identify and explore how you can possibly diversify your sources of credit. By doing so, you can reduce reliance on traditional banks and become more resilient in the face of economic shocks.
Maintaining good credit is essential and that means paying bills on time, keeping debt levels low and monitoring credit reports for errors, not just for your business but also for your personal accounts. These institutions may be more willing to lend to individuals and businesses if they have a good track record and a long-standing relationship.
“Hotel owners need to engage with local bankers who have knowledge of the asset and its location. When decisions are made, they need to be made between the lender and the local banker. That’s a lot more favorable than decisions being made remotely by an individual who does not know the asset, the customer, or their business potential,” Bhikha added.
Diversify your bank accounts, and both your cash and debt. It is always beneficial to spread risk.
Brace for reduced demand. Maintaining a strong financial foundation should be a top priority.
This means having a solid cash flow and manageable debt.
Most importantly, draw up a diversified customer base and offer your best deals to essential business travelers.
At Magnuson Hotels, we specialize in creating a 52-week demand strategy by focusing on these travelers to help ensure hotel occupancy is profitable even in the off-season and during economic storms.
Run a stress test on your business. Do a scenario mapping exercise, see how your cash flow holds up and, accordingly, prepare a checklist of tactics for each scenario.
Now is a very good time to network and find all the expert advice you can get on all your mapped scenarios. Search online for free performance analyses of your business, consult with other hotel owners, read case studies and exchange information that can be helpful to everyone.
Even though everything points to an imminent recession, all hope is not lost.
The demand for travel is certainly in a better place than it was in 2008 and 2009 and during the pandemic.
European, U.S. and global governments are pulling all the stops to curb inflation and restore consumer confidence, and at the same time they are bailing out banks to stop contagion.
All these measures could be the much-needed runway that the hotel industry, particularly owners of small and medium-sized hotels, need to brace for impact.