Tariffs, Unfolding Travel Trends, and San Francisco’s Comeback - Zach Demuth, JLL

Josiah: Zach, thanks for making time to chat. I always appreciate our conversations. We recorded about four months ago. It's crazy. It feels like time has flown so quickly, but also the world has changed a lot. I wanted to bring you back on the show to talk about some of the things that you are seeing, some things that you're thinking about. We'll include links in the show notes to some of those past conversations that we've had, but to start out at a very high level, what are some of the things that you're seeing and thinking about over the past couple of months?

Zach: Yeah, no, first, Josiah, again, thank you so much for having me. I can't believe that was four months ago. In some ways, it feels like yesterday. And in many ways, to your point, it feels like a lifetime ago. You know, if I think back to mid-December and kind of my personal frame of mind and where I think the industry was, there was a lot of optimism, right? We were coming from a transactions perspective. The last year had been, has been a challenge, you know, 2023 and 2024. We finally started to see interest rate cuts started in September of last year. And we were seeing some real positive momentum on the transaction side simultaneously. We were seeing performance continue to be strong and really excited from an urban perspective. We were seeing this return of international travel, increased group and business demand. Not that we're not seeing that today, but obviously there's been a lot of geopolitical announcements or escalating possible trade wars or so many different things that I think have just put this cloud of uncertainty around where we're headed. You know, if I think back to December of last year, and I think back to our hotel investment outlook, which we published at the beginning of the year, we were kind of of the mindset, as many were, that we don't exactly know where things are heading, but there's this level of certainty around interest rates are at least going down, travel is continuing to remain robust, and all these things. I'm not saying that that's not necessarily true today, but there's just a lot more uncertainty. I mean, I think with the recent announcements, whether it's around tariffs, which obviously could trigger a trade war, we don't really know whether it's various immigration announcements, right? All of that could lead to higher inflation, which could lead to higher interest rates. Again, just lots of unknowns. I mean, again, we've discussed, I'm not an economist, I don't know, but I just think today we're in a place of unease and uncertainty and uncertainty could be good. It could be bad, but it's not where we were four months ago.

Josiah: I'd love to dig into that a little bit more because I've heard uncertainty brought up so many times in so many contexts over the last couple of weeks and months. And I'm curious how you think about navigating it. Are there things that you look to? Are there conversations that you have? I guess the reason for asking is I want our audience of hospitality, you know, investors and operators to be better equipped to navigate uncertainty. So how do you think about navigating this world? Kind of what are you looking at and thinking about?

Zach: Yeah, I mean, I think first it's important to recognize where are you in the value chain or in the industry, right? If you're a hotel and whatever hotel, whether you're an operator or an owner, at the end of the day, what matters most is the success of your hotel or collection of hotels. So I've said this a lot, but no matter what is happening in the world, and again, I'm not trying to minimize any of the possibly negative impacts, whatever is happening in the world. At the end of the day, the success of your individual hotel or hotels is really dependent on your market. Yes, there are external factors that will influence your market, right? Trade, of course, particularly from a construction perspective, immigration, possibly from a labor perspective, possibly some impacts on macro travel. But at the end of the day, the success or failure is really up to your market. So I would say first and foremost, And this is true in times of certainty, in times of uncertainty. And I would argue during times of uncertainty, it's more important to know your market, whether that's literally getting on the ground and figuring out what drives demand to your market, you know, touring new buildings, touring office buildings, looking at new hotels opening. I think there's some really great third party resources out there, again, depending on where your market is. Obviously, our friends at STR I think are always great and CoStar is great. There's some really interesting other tools, right, that look at booking channels, that look at sources of demand, convention demand, things like that. But again, I think no matter where you are in the value chain, you have to know your market. I would say when you take a step back, and again, for those particularly, I'd say more on the ownership or investor side that really are more influenced by macroeconomic trends, you know, again, I think it's really understanding like we hear these headlines around tariffs, and obviously there is some pretty negative, possible negative impacts there on a macroeconomic perspective. But on a day-to-day perspective over the next 30, 60, 90 days, is that really going to impact whatever your investment criteria is, the hotel that you might be buying, the hotel that you might be selling? Again, I'm not an economist, but the answer is probably no. And so again, I know it's very easy to get caught up, and obviously there are some negative impacts. We've already started to see some declines in travel from Canada because of reciprocal escalating trade wars, and there's some uncertainty around Americans traveling overseas and vice versa. And again, all that matters and may have bigger impacts, but in the here and now, in the 30, 60, 90 days, even maybe year outlook, Is that really going to impact whatever investment decision you may or may not be making? Sure, it adds a level of uncertainty, and I'm not trying to discount that, but is that actually going to have an impact in what it is you're trying to accomplish?

Josiah: It's so interesting. I want to kind of build out the bear and the bull cases a little bit, just to help people understand some of the factors we're dealing with. As you mentioned, you're not being an economist, but you're very plugged into what is happening in the world of hospitality globally. And I guess on the bear case a little bit, you talked about potentially declines in demand from different sources. I wonder if we could talk a little bit about tariffs for people like myself that are kind of new to that whole, this whole world. What are potential downsides of this? What are implications for owners and operators?

Zach: Yeah, I mean, I think the most obvious implication, and we already saw this during the first Trump administration, and we've seen it during other periods of history with tariffs or taxes, however you want to phrase it, is the impact on construction, right? It inherently, first and foremost, makes construction more expensive, likely impacts some supply chains, whether that creates true disruption or not. And so if you're in the business of either developing hotels, renovating, again, depending on your level of renovation, I think there is some level of immediate impact. Now, that all said, new supply growth in the U.S. has been really challenged over the past two years for many other reasons, none of which have to do with tariffs. And so, yes, we're adding on another layer of challenge. But my personal belief and our belief at JLL is that it's not like this additional issue is going to create even less supply growth. It was always so limited to begin with, like it's not going to be any less limited, so to speak. But I think in the here and now, again, if you're in that business of sourcing materials, particularly from overseas, there's going to be an impact, right? I mean, we've seen it before. It's, there's really no way around that. And so we would say for those individuals or those groups that are focused on that, if you can source from other places that are less impacted, obviously that's really important. If you can change the way, right, we always talk about value add renovation, right? Is there really, are you really adding value here? Is there a way to change it or do something differently? So, again, I think there's ways to mitigate, but that's really the biggest impact here now. If you take a bigger step back, you know, one of the possible impacts of tariffs, right, is that it adds increased pricing to consumers, right, on so many different things. We hear about automotives, I think that's like in the headlines, but it really can impact everything. I mean, yesterday I heard that there's possible tariffs on wine, and so consumers that buy wine, I mean, really across the entire spectrum. And so if consumers have to spend more on either daily purchases or bigger purchases, that means they possibly have less to spend on discretionary purchases. We all know that travel is historically one of the largest discretionary purchase. And so again, a possible impact is that consumers have less to spend, and so they end up spending less on travel. I would say, again, that's all possible. And if we look back in history, there have been times when that has happened. Travel, as we know it today, is very different than it was a decade ago. People have prioritized travel over pretty much everything else. Last year, we saw more spend on travel than we did health care. And we could argue that's maybe not the best thing, but I think it shows people are willing to spend on travel. Maybe they spend a little bit less. And so maybe we see, as we have in past cycles, more spend on select service hotels, a little bit less on extravagant vacations. But again, we see that. So I think that's a possible impact. And then the last one, and everyone's talked about this, is the possible reciprocal tariff, which can lead to escalating trade wars, which can lead to animosity amongst nations, which has the potential to spill over to its citizens. We've already seen places in the northern U.S. that share a border with Canada. Again, these are generally somewhat smaller markets, but we've already started to see some declines in inbound Canadian travel to these markets and outbound U.S. to Canada. Again, whether that's really due to this tariff situation, some sort of animosity, some fear, it's hard to say. And then there have been talks about, will we see something similar between the US and Europe? I think we're a ways away from seeing that. The reality is that if you look for the first two months of the year, and I get it's not a huge sample size, but it's something inbound European travel to the US. reach basically an all-time high, and outbound US travel to Europe continues to increase year over year. So, is it possible? Sure. But again, I think, hopefully, in all those things that I said, there's a lot of what-ifs, and it's hard to say, other than increased construction costs, that there's a definite anywhere.

Josiah: Well, I feel like you did a pretty good job of building out the bull case and some of the tailwinds behind this. And I think the overall message I'm taking away from this is to look at your business, right, where you are in the ecosystem, your market, understand what you can control. I think that's been a theme in our conversations about thinking what is in your control. And in our last conversation, we talked about technology, we talked about AI. We're also, we have this other factor that could make operations a lot more efficient, right? So I think this focus on what you can control is important, but it's good to be realistic about what is unfolding. And so that's why I think it's very helpful to get into that. I guess like moving forward, is there anything else that you're going to be focused on or looking at to get a sense of what's going on? Any data points or things you're looking at?

Zach: Yeah, I think the other big piece, and this relates pretty much exclusively to U.S. domestic travel, is government-related travel. Obviously, there's been a lot of cuts across the U.S. government. We all know what's happening from multiple agencies being slashed. Recently, I think yesterday, I read that the government's reevaluating its Accenture contract. Accenture does something like $300 million in government-funded consulting. Obviously there's some questions around what happens with the remaining money for the CHIPS Act. And that has recently generated quite a bit of travel related spending. That's an area that we're paying very close attention to. Government travel was still pacing down about 30% to 2019 over the last two years. Again, for many different reasons. So it's not like we were back at those numbers and yet we all know Repar broadly was back. I still think there's some level of forgiveness there and we'll be able to mitigate some of the possible impact. But that's an area we're paying very close attention to, right? Because direct government travel spending has historically been one of the larger U.S. segments of travel, not only in D.C., but also across the country, places that are close to Navy bases, airport spaces. subsidized travel, conferences, right? A lot of these research institutions hold pretty large events three or four times a year. Again, that obviously impacts not just that individual city, but the compression opportunity. So I think that's an area we're paying very close attention to. You know, there's a couple of examples where we've seen some impact, but really on a broad basis, like I said, because it's not like we were recovered anyway. It's not like we're seeing this massive decline. That's a big focus. And clearly that impacted D.C., possibly first and foremost, you know, the DMV broadly, but it also impacts a lot of other cities and particularly smaller markets across the country.

Josiah: Fascinating. Now, I want to go back to something that you mentioned around really understanding your market, right? And I think some listeners obviously will be operating across multiple markets. Some will be in a single location. You recently published some excellent research around San Francisco, which obviously is a city that I care a lot about. I've talked a lot about on the show over the years. The challenges San Francisco has faced have been well documented and talked about. I think there's also been some misconceptions about what's going on in San Francisco, but there have been difficult things as well. And you've been watching this closely. You recently did some fascinating analysis of this. Maybe we can kind of link to in the show notes where people can learn more about this. But I wonder if you could share a little bit about what you have seen take place in San Francisco, because for me, it's interesting, you know, going through those challenges, San Francisco, this is actually part of their marketing campaign, I think, for the city is that it's where things happen first. So I'm curious if San Francisco, going through these challenges, and then there's an environment here that may or may not play out in other areas, but it's interesting to look at. What have you seen unfold in San Francisco over the last years?

Zach: Yeah, I mean, I think you touched upon a lot of it, right? San Francisco struggles have been exceptionally well-documented. And I think coming out of COVID, right, many urban markets, both here in the U.S. and globally, were impacted pretty severely. You know, urban, as we know, broadly speaking, was impacted more than resorts and has taken a lot longer to recover. I think, unfortunately, San Francisco got hit with multiple issues. It was almost like a perfect storm, right? You had, obviously, conventions essentially dried up. The city was coming right out of its convention center renovation, had lost some conventions to other markets, and then people didn't necessarily want to return because of perception issues. And I think some of that political, some of that just perception, some of that reality. Obviously, we know what happened to the tech space. A lot of the major tech companies either moved or stopped having office presence and that really impacted the market. And then that whole perception challenges just created a lack of interest in leisure travel. Not to mention that inbound international travel, particularly from Asia, has been very slow to recover. And historically, San Francisco generates about 30% of its hotel demand from inbound travel from China, particularly in broader Asia. So again, Not necessarily different than any other urban market, but it's like every single possible negative impact hit the market all at once. So I think that was really a big thing. Most other urban markets in 2023 and particularly 2024 saw a massive acceleration in performance. San Francisco did not. 23 was worse than 2022, and 2024 was worse than 2023. I think it was one of the only urban markets in the world that had a worse performance. From our perspective, the city hit its bottom. And as we've seen really for the first two months of 2025, again, small sample size, the first two months, really strong performance. We're seeing a lot of major events return to the Moscone Center. Of course, the city hosted the NBA All-Star Game, has a really strong convention calendar over the next two years, obviously gonna host some major sporting events. We're seeing inbound Asian travel, again, broadly, still struggling, but starting to come back slowly, and San Francisco is really that first point of entry. Tech, we all know some of the challenges, but broadly speaking, tech has returned to office three, four, five days a week. We're starting to see more tech return to San Francisco, particularly AI-focused. Obviously, that's a big trend. And so with all that said, our belief is that the city is finally heading in an upward trajectory. Again, perception issues may persist for some period of time, but it seems, and you probably know better than I do, but it seems like it's getting more positive. And I think most exciting is we're seeing investors really return to the market. Again, there were some pretty well-documented challenges, you know, two big Hilton hotels that were owned by Park, that effectively went to foreclosure, and then Bank took control, which is very rare, particularly in a city like San Francisco. We're starting to see international capital return to the market, some Korean capital, some Middle Eastern capital. U.S. domestic investors, again, there's a real basis opportunity. You know, if you told somebody that you could acquire, take a hotel in New York City for $200,000 a key in 2008, today that would be worth at least five times that. That's the area we're in in San Francisco. And so sure, is 2025 going to be a banner year? No. 2026, our belief is we'll get back to 19, probably about equal. And then we'll really see that acceleration. And investors are, I mean, it's a huge opportunity, right? Like, if you could buy these, these are quality hotels in our belief, a forever city, just falling on some challenging times. And we really see a huge, huge upswing and a huge upward trajectory for the market.

Josiah: It's fascinating to hear you talking about that because it underscores the point you made earlier around, do you have to think locally too in many contexts? And so I think it's really interesting where I think on a national level or international level, there's things to be concerned about, but I also feeling in San Francisco, more and more momentum and things seem to be getting better. It's been really interesting over the last couple of months. I've gotten a bunch of emails from hotel investors I know asking about like doing projects here. I'm like, I don't work in investment. But I sense the interest is increasing. And I think, you know, broadly speaking, people are always talking about making moves when others are scared and kind of like thinking about that long game. And San Francisco is just an incredibly beautiful city. And I see what has played out here over the last couple of years is maybe an opportunity for people anywhere to think about because there's been work across politics, across cultural institutions, a lot of collaboration around the city. And I'll link in the show notes where people can kind of hear some of those conversations I've had. But it shows that by, you know, working together, I've had restaurants, owners and operators work with hotels, work with, you know, meeting planners, work with the city's tourism marketing organization, and that there is a flywheel that can be created on a local level. So I think, you know, for me, everything you mentioned at the beginning of the conversation, what you mentioned about San Francisco sort of comes together. It's like, yes, look at the global picture, look at the national picture, but also make sure that you understand what's going on in your market, in your business. Right. And so don't just get lost in maybe some news headlines on a national level.

Zach: 100 percent. And I think, you know, it's a real opportunity for the city to some degree to reinvent itself. Again, I think for a hotel perspective for years, it was very reliant on the convention center. And there's nothing wrong with that. I think obviously one of the better conventions, if not one of the best convention centers in the country, clearly that a massive renovation really adopted a lot of technology. But we've seen particularly post-COVID that markets that are overly reliant on a single segment do not do well. Even if that segment is performing well in that period, it's just a recipe for disaster. And so again, I think from a local perspective, like you said, we see businesses core band together. We see kind of this rethinking of what the market could and should be. And that takes time. And in some ways, having that ability to reinvent oneself or the city's perspective when things aren't going well, that's a great opportunity. And I think that's kind of the broad theme that I'm hearing and seeing is that uncertainty creates opportunity. Again, sometimes bad, but many times good. And I think we've seen it from an investment perspective. Investors that, I can't remember who said this, one of the private equity firms say like, when everyone zigs, we zag. And to me, that's genius, right? And I think the investors that have done that consistently over the last 10, 15 years, those are the ones that you look at now And you look at what they own or what they're buying or what they're selling. You're like, wow, that, that actually makes a lot of sense. It's almost like they had a crystal ball. They just didn't follow the crowd. And I think that's an exciting opportunity.

Josiah: I think it definitely is. It's a good note to end on because I feel like it's easy to say that looking into the past. It takes guts to do it in the moment. Yes. Right. And I think these things feel obvious when you look back. It's like, oh, of course we should have bought then. But it's difficult for a reason because there's a lot of smart people and other organizations that have decided not to do something. And so you got to stay informed. But, you know, sometimes it's time to act too.

Zach: For sure. And I think, right, I mean, we're talking about this upward trajectory. I think we'd be naive if we didn't acknowledge that it's not going to be easy. Right. I mean, many of these hotels are operating at zero cash flow, negative cash flow. So you still have to adopt a long game. But our belief is that, again, it's going to pay off. It's just a matter of when, not if. But again, that's not without its challenges, right? You have to have conviction. You have to have the right investor base. You have to be on the influencer team. You have to have the right team. I mean, there's a lot that goes into it. But yeah, to your point, I mean, look at investors that bought into Nashville 15 years ago when the market effectively had nothing and was all about bachelor and bachelorette parties and look at where they are today. And so at the time, people probably laughed at them, but they look back and a really incredible investment decision.

Josiah: Amazing. Zach, thanks so much for taking time to chat. Is there any specific place you would point people? Maybe we can link to some of these resources we've discussed in the show notes.

Zach: Yeah, that'd be great. Our website with JLL.com, Hotels Research, and happy to share the San Francisco research site that you referenced.