Luxury Hospitality Trends, Opportunities, and Innovation - Zach Demuth, JLL

Josiah: 0:00

What's going on in luxury hospitality And what opportunities could it present for you? Zach Demuth is the global head of hotels research in JLL's Hotels and Hospitality Group. In this episode, he shares what he learned as part of their recent study on luxury travel in hospitality. We started out talking about how Zach's career journey prepared him for his work today, how he and his team approach research and trends they're seeing in the implications for everyone in hospitality. Zach, thanks for making some time to chat. You and I actually had reconnected about a year ago at an event, and I remember we were sitting, I think, across an aisle from each other. We were chatting a little bit as we were waiting between sessions, and I was really interested in what you do, why you do it, but also your career journey, and so, maybe for our listeners to set the stage for our conversation, i wonder if you could tell me a little bit about your role today and also your journey to that role.

Zach: 1:18

Yeah, of course I mean first just thanks so much for having me, Josiah. I think, if I remember correctly, it was the Skift event, maybe in New York. But yeah, it's great to reconnect and great to be here as well. So currently I lead JLL's Global Hotel Research Platform, based in New York City, but I lead research across the Americas, across Europe, the Middle East, africa and then as well as Asia Pacific. So our role is kind of twofold. You know, on one hand we are looking at industry trends as it relates to hotel performance, investment opportunities, investment trends, who's buying hotels, who's selling hotels, what hotels are doing well, what may be doing not so well, opportunities. We do that externally, for the industry as well, for our clients, on a one-on-one basis. And then we also consider ourselves general subject matter experts across all things hotels and lodging. And with that we speak at a number of events. I think we mentioned NYU recently that just occurred, right. We speak at that event. We speak at ALICE, IHIF, which occurred in Germany a couple of weeks ago, right, with just the idea again of trying to inform the industry as well as our clients around what's happening in the world with hotels.

Josiah: 2:23

Awesome And I wonder if you could speak just a little bit to your career journey, because that's one thing that stood out to me when we talked. You haven't spent your whole career in consulting. You've been in these businesses, running these businesses.

Zach: 2:34

Yeah, I mean, my journey into JLL's is sort of circuitous. I spent the previous, so I've been with JLL for about two years. I spent the previous almost 12 years working for Marriott International, predominantly in revenue management, strategy and distribution, mostly on the luxury side. So I worked with Ritz Carlton and following the Starwood acquisition, I worked with St Regis and W. But yeah, my career started and predominantly was working in hotels. Right, I spent a lot of time understanding hotel dynamics as it relates to booking, customer acquisition, revenue maximization across the entire value chain. I worked in most many, or I should say many markets across the US, including California, south Florida, New Orleans, Atlanta. And then I've also worked internationally. I did a lot of work earlier in my career in the Caribbean and Mexico, again with Ritz Carlton and then other luxury brands. So, yeah, my passion is always about understanding why hotels perform the way they do, and while some might say what we do now is different, I would argue it's actually pretty much the same. It's just, instead of trying to maximize performance, we're trying to look at why things happen and then maybe how could they happen a little bit differently.

Josiah: 3:42

So you have first-hand experience in these businesses. Now you have a global role of leading research. I'm just curious why does research matter? A lot of times, i'll talk to people that will be oh, i have a lot of conversations or I see this and that happening at my hotels. What's the role of research and why does it matter today?

Zach: 4:01

Yeah, i think we are an increasingly data-driven society. Data is king. I think we can Most of us could probably agree to that, and I would say, particularly as it relates to businesses that rely heavily on consumer spending right I mean we're hotels or our consumer-facing business You have to understand the reality behind the situation. I mean there is some value into saying qualitatively I see this type of traveler coming and going But again, that's very qualitative right And if you're looking on a broad basis and you're trying to advise a client to make a $100 million purchase, most clients that are spending that kind of money are not going to do it based on your intuition. So for us in research, we look at kind of ourselves as data analysts, data analysts But also what does that mean for the real world? I think hotels are living, breathing operations. I think it's really important to me, and I know many of my colleagues, that we never forget that we are a people-first business. So you have to understand the reality of what you're talking about. So us in research, i think we try to blend the quantitative with the qualitative right. We actually look at the data and say this is what it means, but also this is the real-world impact. You know, maybe you want to build a thousand-room hotel but you're in a market where you're not going to get that much labor And if you do that, you're going to have a very negative guest experience which is ultimately going to erode your profits, going to make it challenging to sell in the future. Right, so you really have to balance the quantitative with the qualitative.

Josiah: 5:24

I think it's that combination that makes this business so interesting, right, the quantitative and the qualitative coming together here. I think I just want to call out there may be some people listening to this thinking of why are we doing this deep dive on research and luxury? We have people listening to this show that are across the ecosystem, from owners and investors to operators to other participants, And a lot of people listening in to get a sense of what is possible in hospitality. Today, and you and I were coming from. Earlier this week we were at an investment conference And at that Ac cor, CEO was talking a little bit about luxury and was talking about, i think he said, half of his guests from ultra luxury brands are not even asking about price. They're just like I want this experience immediately booking, and so it seems there is demand out here for luxury And you and I are going to kind of talk through some of the things that you found in the study that you've done. I just want to set the stage that there is sort of this consumer trend that is happening that I think, regardless of where you are in the ecosystem, you need to be aware of this, because it could unlock opportunities to create really interesting things. So I guess, with that being said, tell me a little bit about this study. What set it up and what led you on this path to study luxury hospitality?

Zach: 6:42

Yeah, i mean, i think, kind of what you said, right, i mean there's secular shifts going on across the world, across the country, however you want to look at it in the way we all live, the way we all work and then the way we all play. And play is obviously a broad statement, but let's just say travel for a second argument. We all know what's happening from a worker perspective, right, increased flexibility. Individuals don't necessarily want to be in an office five days a week. Companies are a little bit more flexible. So that, really, i think at first there was this inclination that that would be a net negative for the hospitality industry. Right, we rely on people being in an office because that means they travel from office to office. I think the reality is and I don't want to speak for them, but our America CEO, Kevin Davis, has always said that this actually is a net positive for the industry. It creates hotels now have more opportunity to capture people traveling, and so that's a major secular shift. You add on top of that that you know, depending on where you are in the world, we were locked down for as much as three solid years. I think we all know that. We don't get into the reasons, but this could have created a starvation for experiences. So you look at, people now have more flexibility, people are starving or striving for more experiences, so they're favoring to spend their discretionary income experiences relative to goods. And then this is a backdrop against rising worldwide wealth, and obviously there's exceptions to that. I'm not trying to marginalize or minimize, but if you look at just the wealth in the world, it has steadily risen over the past decade, no more so than the last two years. I mean, there's we all know about government stimulus here in the US. Obviously it's gotten some challenging situations currently, but you know it's still pumped a lot of money into the economy. Similar things happen in other regions. And then, just generally speaking, wealth has been rising at a pretty steady clip. So you add that people have more money to spend on discretionary purchases. People want to spend this discretionary purchases on experiences Oh and, by the way, people have more time to do that And that really all capitulates into a perfect opportunity for luxury. So we're really kind of have seen this over the past two years. We've seen investors sort of gravitate toward this space more underpin against this backdrop of demand, and for us we just felt like this was like a perfect time to really, you know, we were hesitant to do it, i think, a little early on. We didn't want to come off being a little bit offensive In any way. Obviously understand there's some real economic challenges out there, but this is what the industry is seeing, it's factual, and we don't think this is a short-term blip. We really think this is a systemic, long-term change in consumer behavior and ultimately has a real benefit towards luxury hotels.

Josiah: 9:13

I wonder if you could talk a little bit about how you approached the researcher putting this report together, And then we could jump into the insights themselves. you know, just to what you mentioned earlier around this combination of quantitative and qualitative analysis, how did you think about actually putting this study together?

Zach: 9:30

Yeah, I mean, I think so the way we kind of approach all of our research is we start with what is the data saying, right? So in this case, we always look at hotels from kind of three angles. The first is just macroeconomic, and that can be a variety of different things. That could be GDP, could be population growth, could be wealth. In this case, right, What is discretionary income? You know, many countries do a very good job of tracking kind of consumer spending or consumer income in a variety of levels. So that's kind of the first place, right. Whatever you're trying to study, what's the macroeconomic backdrop? The second is how are hotels actually performing? Unlike other real estate classes, hotels are again, as I mentioned, a living, breathing asset, right, They're a daily operation. So you really have to look at how are they performing, How are luxury hotels performing in specific markets, in specific regions, et cetera. And then the last, and this is arguably the most important in our line of work, is what does it mean from an investment perspective? So we kind of always use those kind of three backdrops anytime we do research. Now, a lot of that is data-driven, right? You can look at hotel performance using STR data. You can look at macroeconomic data using any number of economic tools Oxford, et cetera. Investment data that's sort of where you get into a little bit more nuance. We're pretty lucky. I mean, that's what we do as a business. That's our competitive advantage is, we have a lot of clients who are active hotel investors across the value chain. We spend time at conferences like NYU, at various one-on-one meetings, talking to investors. Again, you can use the data as kind of like bringing it back home to the real world, but you have to really talk to people. I mean, we are a people-first business, right. So kind of look at those three and spend a lot of time talking, a lot of time listening, and then how does it come home from a data perspective?

Josiah: 11:11

So that's great. So, for the investors listening to this, the rest of what we talk about is driven by a lot of conversations with your peers, so you're understanding what's going on. I think for the operators or others that are listening to this as well, it's important to still listen in, because what investors are doing, how they're thinking, how they're allocating capital, is going to affect your business and affect what's possible, and so this is a really important theme to dig into a little bit. So, with that context, i appreciate it. Zach, i think let's get into some of the takeaways or the insights that you had from this study. You talked a little bit about the rise in global wealth. What are some of the other things that you found as you were going through this study?

Zach: 11:50

Yeah. So I think, again, starting with that macroeconomic backdrop, rising global wealth and we're seeing it across almost all major regions across the country, across the world. Obviously, the US has historically driven that, but we're seeing actually a pretty large growth in wealth coming out of Asia. I think India is a country we all, as an industry, have and should continue to talk about. India is now the world's largest population, overtaking China. There's a growing middle class. Therefore there's growing wealth and there's a growing desire to travel. So not only is it really being driven by the Western world, we're also seeing it kind of globally. So that's kind of the backdrop And with that, we really are seeing a growth in luxury hotel performance. If you look at previous economic different disruptions whether it's 9-11, great financial crisis or pretty much any other historically luxury hotels were impacted the most and took the longest to recover. COVID, obviously a very different type of economic disruption for so many reasons, but with that, luxury hotels were actually the first to recover with average rates, as we've talked about, you know, in many markets going through the roof, rev par, which obviously is incredibly important to operators and owners alike, recovering at a quicker pace than really any other market type across the country or across the world. So I think again you have this very favorable macroeconomic backdrop. you're seeing hotel performance in many markets from a luxury perspective like never before. Oh and then, by the way, you're seeing investors, particularly on the institutional side, invest in luxury hotels where historically they really haven't. you know, if you look at kind of the 1990s, early 2000s, luxury hotels were developed and owned predominantly by high net worth individuals as more of a vanity purchase, and the reason for that is that historically luxury hotels, while they do generate some level of profit, it's generally been below the broader industry due to cost structure and other things. Because this demand has skyrocketed, because there's more people looking for luxury travel than ever before. you're seeing the likes of Braemar as an example, who's a publicly traded re. you're seeing major private equity firms and you're seeing many other institutional players invest their dollars in this space. just really, really great for our industry. It means that there's more opportunity for luxury hotels, for luxury development, and it's really kind of putting this asset class on the map, so to speak, for for institutional players.

Josiah: 14:08

That's great, And I think it's always encouraging to hear more money entering the space, because I think in some pockets of our industry there's a constant sentiment that oh, we just don't have enough to work with here.

Zach: 14:20

And I think if you look at more capital coming in, is it fair to say that there's also maybe some more resources for innovation or creating some cool stuff in the space 100% And that's the second part of our report is we look at ourselves as hospitality researchers and we're at JLL, we're JLL Hotels and Hospitality Group, so it's not just hotels, and I think, on what you're seeing on the luxury side is really this growth in non-traditional hotel verticals And, i would say, real innovation. And again, that goes against the backdrop of this rising consumer wealth, rising consumer spending. The first sort of example of this, i think, was Ritz Carlton when they launched their yacht collection a couple of years ago And they've, you know, they did that basically with their own balance sheet And then in the last couple of years they got a massive investment from Oak Tree Capital, which is again a very large institutional player. Then you saw Amman Hotels and Resorts launch their private members club, the first of which is in New York City. I mean, this take private membership clubs to a extreme exclusivity level. But they've seen incredible response, incredible demand And they've talked publicly about how they're going to expand that globally. And with that they got a massive investment from PIS out of Saudi Arabia to really expand their efforts right across the entire value chain. And so I think you're seeing other brands sort of look to how do they own the entire travel experience. We know that luxury travelers love seamless travel, so why have them go outside of your ecosystem If you can find a capital partner to create an opportunity to own the whole experience creates opportunity on the loyalty side, creates branding opportunities And then it really creates great opportunities from an operator perspective to really grow the entire value chain.

Josiah: 16:01

Do you feel there's reason to believe that trend will continue in the next decade or two? I'm fascinated by this concept of hospitality, sort of eating the world, as it were, in terms of taking some of these experiences into new places. You mentioned a couple of projects that have been announced, but do you feel like there's tailwinds here for that to continue?

Zach: 16:17

I do, and I think we're seeing it even more broadly. I know we're talking about luxury now, but I think we're seeing it across kind of all levels of the spectrum. We talk about it a lot as a team. We call it the hotelization of commercial real estate. I think a little cliche, but it almost started with Apple back early 2000s The Apple store. When you think about it, you have basically what is equivalent to a concierge desk. I mean that's a direct borrow or steal from the hotel industry. You go into most residential buildings in New York City or other major markets. You also have a front desk or something similar. Again, that's a direct steal from the hotel industry. So I do think we're going to continue to see this innovation across other areas, whether it's commercial real estate or non-traditional hospitality, kind of blurring of the lines. I think luxury is going to lead the way because again, you're catering to a group of individuals that typically have the propensity to spend And therefore, from a capital perspective, maybe you don't have to be as conscious of the capital you're spending, but I do. I mean we see these tailwinds, we see growth in so many other non-traditional hotel sectors and we see so much demand for it particularly with these secular shifts or amongst how we live, work and play our travel.

Josiah: 17:25

You said luxury will lead the way, And that's interesting to me because if you look at I don't know Tesla or any consumer-facing company, always innovation starts on the luxury side or I took it item And then money funds innovation that becomes more accessible, And so it sounds like that could be true here in hospitality as well.

Zach: 17:44

I think so. Yeah, i mean, i remember when I worked with Rick Carlson early on, we always used to talk about how there was a portion of the year we got to the typical luxury customer right of a certain income level, you know, certain travel propensity. But there was also the aspirational luxury customer right that we got on a regular basis And those are individuals that maybe wouldn't say that it's Carlton for their ten trips of the year, but would stay at them two or three. And I think what we're seeing now is and we see this across the data as well as globally Individuals are generally taking fewer trips, but on those individual trips They're taking, they're spending longer and they're spending more money, and that really benefits luxury, or at least up or up scale, depending on the market you're in. And so I think these kind of tailwinds around individuals gravitating towards experiences, authenticity really benefits the luxury sector and, i think, creates huge opportunity for innovation and whether that's leveraging technology, new verticals, i mean really you name it. We see and hear so many interesting ideas and I think now more than ever, given what we all went through over the past two, three years, I think we're all really open to the idea and I'm really looking for it.

Josiah: 18:52

Yeah, and I think there's. It just feels like we're at a time, in a moment in an industry was with so much potential. I, you know, see it back to that conference that we attended this week and there was Deutsche hospitality. Ceo Was was talking a little bit about you know, hey, this is the time to invest in Differentiation, and so, whether it's capital kind of from other sectors that can move into hospitality and create unique experience, or existing Participants, you know there's a chance to use that capital, especially in the luxury side, maybe beginning there and in building something really unique and special that allows you to maintain that, that pricing power, because you know, as you mentioned, there's secular tailwinds here on demand that may not continue in perpetuity, forever and ever, and so you need to kind of think about what is the product Innovation and the experience innovation that's going to sustain that a hundred percent.

Zach: 19:39

And I think again, if there's an opportunity to keep your customer, your guest, within your broader ecosystem, not only when they're actually traveling, but maybe when they're even living. I mean you look at what's happening on the residential side, right? I mean rich Carlton residences for seasoned residences have been around for quite some time, but you're seeing a massive growth in in so many other brands, not just typical hotels. I mean Miami, you have a Porsche residents, right? You have, you know, luxury fashion brands opening residences, right. And this is again the idea that why do I only have to have this as my customer when They're at, when I hang a handbag or when they're buying a car? Why can't I create an entire value chain? and I think, somewhat obviously, hotel brands are uniquely qualified to really fill this niche.

Josiah: 20:23

I wonder if we could speak just a little bit to the secondary effects of this. You mentioned earlier in your career working across many different destinations and a piece of your research was looking at the impact on transforming a destination, whether it's the Maldives or Costa Rica. Can you speak a little bit to that? What are some of the bigger implications of this trend that you see?

Zach: 20:43

Yeah, i think so. We brought up in the report, we used Costa Rica here in the Americas, madrid and Europe, and then the Maldives and Asia. You look, i think Costa Rica is a really great example. Costa Rica has always been known for its biodiversity. I think it has roughly 5% of the world's biodiversity, which is pretty incredible given the size of the country. It's always been known for ecotourism and has always had a really great following. But it really wasn't until the opening of the fourth season's Papagaia Resort in the early 2000s that the destination really got on the map for global travelers and global travelers seeking not just a authentic experience but a luxury experience. What you've seen is not only did this obviously benefit the fourth season's brand to benefit the owners, investors, etc. It benefited the destination. Costa Rica has seen one of the largest growth and inbound tourism spend of any country in the world. It's done so in a very thoughtful way. I think we all have to bring it back to that. Tourism has to be done sustainably. It has to be done thoughtfully. I think Costa Rica is uniquely positioned, but really it wasn't until the arrival of this well-known global luxury brand that it created this opportunity for the destination to showcase itself in a way that it previously wouldn't, as well as give broad consumers an understanding of what ecotourism could and should look like. I would argue that maybe, with some exceptions, costa Rica really was the forefront of this whole ecotourism movement, which is now, i think, very well known and possibly overused, but really has created this whole brand of tourism that I think is phenomenal, both for us as consumers and also phenomenal from a planet perspective.

Josiah: 22:22

That's fantastic, zach. in my mind this is a must read report. We're going to link to it in the show now. Let's make sure that everyone checks it out Before we go. is there anything else top of mind for you on this or anything you want to leave our listeners with?

Zach: 22:34

I might take a couple of things. You mentioned my background in hotels and I think I talk to a lot of students and that's one thing I'm very passionate about. I think my journey has been anything but linear. The one thing I would just always tell people is it's okay not to know what you want to do. If you find opportunities that seem cool, say yes to them. You never know where it could lead you. I think the hotel industry or the hospitality industry is broad, as we just discussed in the luxury report. as I can attest to in my career, and I'm sure you can as well, you just never know where things will lead. I would just say be open and really consider all opportunities that might come your way.