Cost optimisers

The hotel, retail and office asset classes are facing rising costs on multiple fronts. Against a backdrop of weak consumer sentiment and high inflation, they are adopting a range of strategies to combat increased energy costs, personnel expenses, material costs and rents. By Kathinka Burkhardt

Steffen Fox will soon find out whether all the hard work of recent months has paid off. “At the end of summer, we immediately drew up action plans for our hotels with the aim of saving energy,” says the CEO of 25hours hotels. Restaurant heating was reduced, room temperatures were lowered and guests were asked to register in advance to use the sauna. It was a tricky balancing act between saving energy and keeping guests happy. “We’re pretty upbeat because we have fixed energy tariffs until 2024 for many of our hotels, and we’ve been able to build up reserves,” says Fox. “But we’ll know exactly where we stand when we receive our utility costs statement at mid-year.”

When the meetings and conference business and the Asian tourist trade have fully recovered, the hotel market will prove to be very robust in the current economic situation.
Andreas Ewald Managing Partner at Engel & Völkers Hotel Consulting

The same problems apply to many companies in the hotel, retail and office asset classes. Following on from the Covid-19 pandemic, the war in Ukraine has dampened consumer confidence, inflation is increasing and rising interest rates are making investment and new projects difficult. At the same time, wages, energy, materials and rents have become more expensive, meaning that businesses are trying to save money across the board. The cost crisis is affecting the three sectors in different ways, and smart strategies are required to tackle it.

After the collapse of global travel in 2020, the hotel industry is now on the upswing. “Sales have been recovering well since the last quarter of 2022, although occupancy rates still have a bit of catching up to do,” says Andreas Ewald, Managing Partner at Engel & Völkers Hotel Consulting. Germany’s Federal Statistical Office reported 450.8 million overnight stays in the country in 2022, a drop of 9.1 percent compared to 2019. “When the meetings and conference business and the Asian tourist trade have fully recovered, the hotel market will prove to be very robust in the current economic situation,” says Ewald.

The reason is simple: the desire to travel is so great that guests have accepted increased room rates. According to booking platform Idealo, the average price of a hotel room was €137.90 in December 2022, up from €99.20 in the same month of 2019. However, “despite an increased top line, GOP margins have declined by three to five points, depending on the segment. Clearly that’s a lot of money,” says Ascan Kókai, Head of Hotels at ECE Real Estate Partners. 

Energy costs previously accounted for three to five percent of sales; they are now nearly twice that in some cases. In addition, Germany’s minimum wage increased by €1.55 per hour to €12 last October. And it is difficult to save on staff costs in the hotel industry. “Many hotels are busy trying to win back employees who left during the pandemic, and are using incentives to retain their existing staff,” says Kókai. That costs money – as do indexation clauses in leases. “Tenants and landlords communicated well during the pandemic. We’re seeing that continuing in the current environment and there’s a will to find solutions,” says Kókai.

25hours Hotel The Trip Frankfurt
25hours Hotel

While the hotel industry’s daily flexibility on room rates always provides a certain degree of protection against inflation, weaker consumer sentiment is impacting retail at an already difficult time. In addition to digitalisation of brick-and-mortar retail, the sector is dealing with changes in shopping habits in the wake of the pandemic. “Customers are returning to brick-and-mortar stores, but in many places footfall is lower than it was pre-pandemic,” says Ulrich Schmitz, Director Center Management at ECE Marketplaces. This is partly due to the fact that the world of work has changed. Employees who work from home instead of urban offices use stores and shopping centres less than before. But Schmitz says: “Those who do come are spending money. Sales have picked up better than footfall.” Union Investment also reported sales growth in its shopping centres in the fourth quarter, continuing the trend from before the pandemic. 

Sales are thus heading back to 2019 levels, but costs are hurting profits. Whether in premium locations, shopping malls or away from downtown areas, nothing is off the table when it comes to saving money. “In consultation with our tenants, we have turned down lighting, switched off fountains and also adjusted ventilation and the number of open parking levels to customer volumes,” says Schmitz. Shorter opening hours are also being considered. “These are decisions that need to be made on an individual basis depending on the location,” says Schmitz. “Where it makes sense to do so, tenants can save an hour of operating costs and also staff costs.”

“Measures that were put in place well before the energy crisis are now paying off,” says Ralf Schaffuss, Head of Asset Management Retail at Union Investment. He points to Wandsbek Quarree as an example, where annual energy consumption has been halved over the past ten years. “No tenants are challenging service charges there,” he adds. 

The industry is also using digitalisation in stores to try and save energy and counteract the shortage of skilled workers. “Automated storage and stocking technology, self-checkouts for customers and even the use of robots in some instances can fill gaps and make work easier and more attractive for staff,” says Josefine Ulrich, Director of Retail Tenant Representation at JLL. 

The vacant properties that have appeared in retail over recent years give tenants greater opportunities to switch, with pressure on the landlord side increasing. “Going forward, there are many locations where we’re unlikely to see expensive leases like before the pandemic for some time,” says Michael Reink, Head of Location and Transport Policy at the German Retail Association (HDE). There are costs involved in new lettings, which is why many tenants and landlords are looking for compromises and considering index adjustments. The changed retail landscape is having an impact on new lettings. “Many retailers will only consider sales-linked leases in the future,” says Reink.

Measures that were put in place well before the energy crisis are now paying off.
Ralf Schaffuss Head of Asset Management Retail at Union Investment

A few retailers are trying to hand back some of the space within their stores to investors for reletting. Cost pressures are causing some chains to reduce the number of outlets. “Retailers are focusing much more on prime locations again instead of expanding into streets with less footfall,” says Josefine Ulrich of JLL. Major chains such as H&M, Zara, Bershka and New Yorker are seizing opportunities to expand in sought-after locations. 

There is also a lot going on in the office asset class. Office operators’ revenue is likewise impacted by energy and materials costs, but the industry’s prime concern is the long-term skills shortage and the associated staff costs. “In the office sector, it’s important to have qualified employees who generate enough income to cover their high costs,” says Stephan Leimbach, Head of Office Leasing at JLL. “But in order to retain highly qualified, efficient employees and entice them out of their home offices, companies need high-quality offices in prime locations,” notes Leimbach.

Retailers are focusing much more on prime locations again instead of expanding into streets with less footfall.
Josefine Ulrich Director Retail Tenant Representation at JLL

Unlike in the past, cheaper and more remote local offices are now often being abandoned, with companies preferring to rent high-quality office space in centrally located prime areas. “If capacity gets tight, companies rent additional space from co-working providers,” says Leimbach. As in retail, the office asset class is seeking to avoid index adjustments when signing new leases and is opting for predetermined rent increases instead, which also appeal to property owners. “Investors can look forward to rent increases, which can also boost the selling price of a building.”

“We saw this in many places across our German real estate portfolio in 2022. Properties in attractive locations experienced stable to high letting rates, including rent growth, thanks to the leases agreed for new and existing lettings,” says Sven Lintl, Head of Asset Management Germany at Union Investment. “For many tenants, it was about positioning themselves to appeal to employees and offering an attractive alternative as part of a hybrid working model.”

By Kathinka Burkhardt

Title image: 25hours Hotel

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