Are We At the Top?

Are We At the Top?

The stock market has corrected some, but things are still frothy in the financial world. Unfortunately, when things are frothy, the economic forces of gravity come into play at some point, and the pain ensures. Why do I think things are at the top?

I believe t is several things. First, the Fed has flooded the economy with funds through the CARES Act, the Main Street Lending Program, to name a few. The money has to go somewhere, and there is FOMO – Fear of Missing Out – so everyone is piling into the leading tech stocks. Further evidence is:

1. Junk bond debt issues, as shown above. The demand for yield is high as government debt, and AAA debt is offering such low yields. Thus record amounts of questionable paper have been issued to meet this demand.

2. SPACs. Look no further. Everyone and their dog is jumping into the SPAC space. These blank-check companies have raised about $41 billion, year to date, which is more than the last ten years combined, and Since July 1, about $29 billion. Currently, I understand that over 40 SPACs are looking for merger partners. As I have mentioned before, SPACs tend to overpay, reducing the returns for investors. Given that there are so many buyers right now, we can expect the prices of merger partners to rise and the quality to fall. Of course, the people who make the real money buy the founders’ shares and get the “promote.” Take the case of Alec Gores, who put just $25,000 into his SPAC when went public in January. Once their acquisition is closed, their 0.6% stake will be worth $96 million. Not bad work if you can get it. However, if the founders are doing so well, my advice is to stay away. The SEC is concerned that investors don’t understand how the incentives relate to pay in a $PAC compared to a traditional IPO. There may be regulation.

3. Is Palantir the latest WeWork? According to the Wall Street Journal, bankers have told investors that shares may start trading at $10, valuing Palantir at almost $22 billion when it goes public through a direct listing on September 30. Valued at $20 billion in 2015, Palantir has seen some increase in value. However, in the private markets, it is trading below $20 billion, and this month PitchBook valued Palantir at just $8.8 billion. As I mentioned last week, Scott Galloway in PalanThiel: The Uncola pointed out that “But at 17 years of age, and after raising $3 billion, the ‘start-up’ has never made money. In 2019, Palantir lost $580 million on approximately $740 million in revenues. The idiot client they serve (U.S. government) lost 25 cents on the dollar ($1 trillion deficit vs. $3.5 trillion in revenues) in 2019 vs. 78 cents at Palantir. The firm spent $911 million in marketing over the last 24 months, roughly half of what Tide detergent spent over the same period. The firm has 125 clients, 3 of them accounting for 28% of revenues. Palantir feels more like a services firm, with tech at its core (e.g., Accenture), but one that, unlike a services firm, is massively unprofitable.” Driving all that success if CEO Alexandar Karp, who paid himself $12 million. If the market is valuing this at $20 billion, we must be close to the top!

 

The Housing Market

For those that haven’t noticed, the housing market is booming. Many of us stuck inside have realized that we don’t like our homes are moving. In August, new-home sales increased at the fastest rate since 2006. All this demand is causing a supply and demand problem driving up prices.

However, not for long. As I predicted in April, many people are straining to pay their mortgages. Industry analyst Keith Jurow expects “several million” people will have gone nine months without making a payment when the Federal Housing Finance Agency’s foreclosure and eviction moratorium expires at the end of the year. In July, 17% of FHA-insured mortgages were delinquent, according to the Department of Housing and Urban Development. In NYC, 27.2% of mortgages were delinquent in July.

With so much new supply coming online soon, prices may drop, and those that bought now may find they purchased at the top.

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Need to Escape, Flights to Nowhere!

Need to Escape, Flights to Nowhere!

As I have discussed several times, we are struggling in the COVID world of working more hours, with more conference calls, little time to turn off and recharge. However, breaks are more critical as we need downtime from deadlines and stress and to recharge. Burnout is becoming a large factor and causing falling productivity among all of us. We work longer but are less effective. Thus while overall productivity may be ahead, the cost is enormous.

Furthermore, with Zoom, Skype, Teams, Hangout, etc., there is a belief that since you are at home, you are always available. One executive I know has been in the Azores for a couple of weeks with his wife as she is from there. A board he is on just rescheduled its board meeting, and he is facing a board meeting from 12 am to 3 am, which in my opinion, is ridiculous. We all need to understand that many of us are no longer where we were during regular times. Some are at vacation homes, some are with elderly parents, some are stuck in other countries, and some are homeschooling kindergarteners first thing in the morning. Thus, we need to adopt a much efficient approach and ask if times are convenient for all the call’s potential members.

The assumption that everyone is available at all times so we can put meetings on their schedule at any time is causing even more chaos and exhaustion. Further, while the new time might suit the most senior member of the call, if they need input from the others who cannot provide it due to the time, then the meeting is a waste of time, and burnout increases.

I took a week’s vacation about three weeks ago and failed miserably. The best I managed was one day with only one call and four hours of work. Looking at my falling productivity, burnout, and listlessness, my wife and I agreed on a do-over. This week we took another vacation, and I have done much better with little work and meetings. I can already feel my energy levels and thinking improve. We all need a break, and like on airplanes, when the oxygen mask comes down, take care of yourself first, so you can then take care of others.

Thus, finding time to create that quiet space where you can reflect and recharge your batteries is a battle that many of us now face.  Many executives say the most significant thing they miss in our new world is that time on aircraft when they were effectively out of reach and had that quiet time.

Naturally, markets responded, and some airlines, none in the U.S., are offering “Flights to Nowhere.” Thousands of people have booked flights in Brunei, Taiwan, Japan, and Australia that finish where they started and are called either “scenic flights” or “flights to nowhere.”

  • Royal Brunei, since mid-August, has flown five of these flights. As Brunei has had very few coronavirus cases, passengers are not required to wear masks, but staff members are.
  • EVA, the Taiwanese airline, sold all 309 seats on its Hello Kitty-themed A330 Dream jet for Father’s Day.
  • Japan’s All Nippon Airways had a Hawaiian-resort-themed, 90-minute-flight with 300 people on board.
  • Qantas sold out its flight to nowhere over Australia in 10 minutes last Thursday. Tickets ranged in price from $575 to $2,765. The flight will go around Australia, flying over the Northern Territory, Queensland, and New South Wales.
  • Qantas has also brought back its popular sightseeing flights to Antarctica that don’t land in Antarctica but allow passengers to walk around the aircraft and have different Antarctica views.
  • Starlux, the Taiwanese airline, is working to make the flight-to-nowhere experience a luxurious one by allowing people to buy packages for the flight and a hotel stay. Since August, the airline has run six flights to nowhere and has about a dozen more scheduled through October, and most of them have sold out within 10 minutes of being announced. The airline requires masks and social distancing on all fights.

For those that see flying more than as a method of getting from A to B, these flights provide either the exciting flying experience or the quiet time they have missed due to COVID. For those who need to escape being online always. I can appreciate the quiet time flying provided. I loved long-haul flights with no WiFi and considered them a great time to read and get “thought” work done. But the idea of a “flight to nowhere” has little appeal. I have my first cross country flight since March next month, and while I may change my view, I doubt it.

However, for those executives who cannot manage to find a quiet time without getting on a plane, I would suggest revisiting your priorities and finding that peaceful time once a week of at least two hours. Make sure that:

  • You have blocked out the time on your calendar, so you cannot be disturbed;
  • You have turned off your phone;
  • If using your computer, you have turned off your email; and
  • You are somewhere where you will not be disturbed by a spouse, partner, kids, or pets.

Furthermore, start considering all the others on your multitude of video calls to ensure that the times suit them and that they will be in a position to provide the most significant input. Otherwise, you are just increasing stress and burnout and doing nothing productive.

I believe quite times to be of great value, and if you can create that habit and space now, it should serve you well after COVID has ended without a need to fight your way through airports, security, and eat lousy food. I think we all would benefit from more of this time, especially as we are “busier” than ever but are questionably productive.

 

Copyright (c) 2020, Marc A. Borrelli

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A Different Mindset

A Different Mindset

As someone who didn’t grow up in the U.S., I have a different view of time and certainty. When I arrived, I was always amazed at how people planned for longer and longer events that were way out into the future, but with a certainty that everything would go to plan, e.g., in estate planning, using generation-skipping trusts.

For me, the U.S.’s long-term view reminded me of Issac Asimov’s trilogy, the Foundation, when the Mule appears, unforeseen, and topples the Foundation contrary to expectations. In the U.S. I see the overwhelming belief that everything will fine in the long term, and while there are outlining events, everything reverts to the mean. However, there are always unforeseen events that can disrupt the trend and cause it never to return to the prior norm.

I grew up in South Africa, and many of my parent friends had done the long constant migration south. They lived in the Republic of the Congo, today the Democratic Republic of the Congo. With independence in 1960, the military revolt, the succession of Kantaga, and the influx of mercenaries and paramilitary troops to protect mining interests, they fled, many moving to Zambia where their mining skills were in demand. Zambian independence in 1964 and the fears over privatization starting in 1968, they moved onto Rhodesia, now Zimbabwe. With Rhodesia’s Unilateral Declaration of Independence “UDI” from the United Kingdom in 1965, the civil war began, which lasted until 1980 with free elections.

Many decided to move further south to South Africa, a country bound to be stable and prosperous. These moves were often made in a rush, as power structures changed, and in most cases, they lost everything they had during each relocation. Unfortunately, in South Africa, the 1976 Soweto uprising was the beginning of the end for the minority white government; it would take nearly twenty years for that to occur. My parents knew many of these people were too old to move once more and stayed on, seeing wealth evaporate with a declining economy, currency, and sanctions.

I know of a family in Zimbabwe where the patriarch was a multi-millionaire. On his death, he left everything in trust for seven beneficiaries – each receiving over a million, with the trustee’s stipulation to invest the funds in Zimbabwe. As Zimbabwe’s economy collapsed in the 2000s, with hyperinflation hitting its peak of at an estimated 79.6 billion percent month-on-month in November 2008, the value of the trust’s assets declined. The trustee, a corporation, could not move the funds overseas due to currency restrictions and would not disburse the funds to the beneficiaries because of the terms of the trust. Today each beneficiary’s interest will buy them less than a tank of gas for their car.

Finally, I attended boarding school in Switzerland in 1973. A Lebanese friend of mine’s father had interests in Lebanon and started a new business in Iran because he thought diversification was a good idea. In 1975 the Lebanese Civil war started, which was to continue to 1990, but the troubles continue. That war cost them nearly everything they had in Lebanon; however, the Iranian business did well. Having seen what had happened, he bought properties in New York, London, and Cayman as further diversification and protection. January 1979, his father was in New York watching the Shah leave and the riots and saw the bank, which held his accounts, burn. They never returned to Iran, but thankfully the portfolio of properties kept them financially afloat.

Why these stories, well, we have seen in the six months with COVID, how the world has changed. What we took for granted is no longer sure. When will return to “normality,” who knows, but according to Dr. Fauci, sometime in late 2021? As I have said in this newsletter many times, your old business plans, strategy, and financial models need to go out the window, and new ones prepared in light of what is happening.

I would add to that, as you consider the long-term outlook and your business and investment portfolio, I would look for hedges to protect for large unforeseen events. Following Nassim Taleb’s barbell strategy – you avoid the middle in favor of a linear combination of extremes across all domains from politics to economics to one’s personal life.

There is talk of the dollar falling in value and possibly losing its reserve country status. How long it takes the U.S. to recover from COVID is another uncertainty as we have yet to find a strategy. Will the U.S. and China go to war over Taiwan? What will these events do to your business? Thus, I would consider other parts of the country, other countries in supply chain protection, concerning investments, international assets as a hedge.

As for looking outside the U.S., I would not claim the authority to recommend any particular country. I definitely would not follow the Englishman’s steps in 1980; deciding the world was unsafe, moved to the Faulkland Islands as he determined the safest place to be. Less than two years later, the Argentine invaded, and the Falklands War got going.

However, realize nothing is certain! Trends don’t last forever, and while things revert to the mean, there will be a new mean after massive disruptions. Take the lesson from COVID to reexamine everything and do it regularly. Complacency has enormous costs. As David Mitchell put it so well in Cloud Atlas, when two people are discussing revolutions,
“Fantasy. Lunacy.”
“All revolutions are until they happen, then they are historical inevitabilities.”

I am not saying revolution is coming, but large, unpredictable things are, and like revolutions, most will all be historical inevitabilities, as COVID was!

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Why We Suck at Planning for Catastrophic Events

COVID has disrupted everything and is bringing about unprecedented changes. However, while many say that we could not have expected COVID, that is not the case. Many people raised the alarm over or planning for a pandemic, from Bill Gates to George W. Bush and Obama administrations. And this is not the first time.

If we look back at the Financial Recession, that was not entirely unexpected. Several people saw the problem and were either raising the alarm or trying to profit from it. As Nassim Nicholas Taleb has stated on several occasions, these are not actual Black Swan events, they were predictable, and the probability of them happening was far more extensive than we recognized.

Finally, even when these calamities are bearing down on us, we tend to do little to avoid them until it is too late. The Administration’s response was lacking in preparing for COVID, even though we knew about it coming out of China. How many times do we see a hurricane bearing down on the coast, and even though there is a mandatory evacuation, people refuse to leave, often paying for such decisions with their lives?

It seems there are some reasons.

 

Economic Behavior

Why we prepare so badly is basic economics. In our continual pursuit to improve efficiencies and be either more profitable or less wasteful, it becomes harder to justify spending money on events that we are uncertain will occur. Thus companies moved to just in time systems with no redundancies or excess inventory, which failed them when COVID hit and disrupted shipping. Companies had moved production to lower-cost centers overseas, which caused huge issues when COVID shut down operations in those countries. Finally, I think we have seen the failings of our economic priorities in the U.S. healthcare system, which is not designed for dealing with a public health care crisis, but rather for making a return to investors.

Former Governor Arnold Schwarzenegger invested $200 million in three mobile 200-bed hospitals deployable to the scene of a crisis within 72 hours. Each hospital would be the size of a football field, with a surgery ward, intensive care unit, and X-ray equipment. Medical response teams would also have access to a massive stockpile of emergency supplies: 50 million N95 respirators, 2,400 portable ventilators, and kits to set up 21,000 additional patient beds wherever they were needed. As Schwarzenegger told a news conference, “In light of the pandemic flu risk, it is absolutely a critical investment, I’m not willing to gamble with the people’s safety.” However, in 2011 facing a recession and budget deficit of $26 billion, Former Governor Jerry Brown cut funding for the program.

Thus in our continual drive to be efficient, investments in backup systems and redundancies quickly get cut. For governments, there is always the demand of current situations that take priority over planning. Thus, our economic behavior leaves us vulnerable to the crisis when it arises.

However, once a crisis hits, we are terrible at dealing with it, and that is due to three psychological issues: normalcy bias, optimism bias, and our herd instinct. 

 

Normalcy Bias

Normalcy bias is a cognitive bias that leads people to disbelieve or minimize threat warnings until we are overwhelmed and cannot respond. Thus, individuals underestimate the likelihood of a disaster, when it might affect them, and its potential adverse effects. Normalcy bias causes many people to inadequately prepare for natural disasters, pandemics, war, and calamities caused by human error. During a disaster, about 70% of people reportedly display normalcy bias. Normalcy bias is also called analysis paralysis, the ostrich effect, and by first responders, the negative panic. 

Throughout history, there plenty of examples of normalcy bias.

  • When Vesuvius erupted, the residents of Pompeii watched for hours without evacuating. Thousands of people refused to leave New Orleans as Hurricane Katrina approached.
  • At least 70% of the 9/11 survivors spoke with others before leaving. 
  • Officials at the White Star Line made insufficient preparations to evacuate passengers on the Titanic.
  • Passengers on the Titanic refused evacuation orders because they underestimated the odds of a worst-case scenario and minimized its potential impact.
  • Experts at the Fukushima nuclear power plant believed that a multiple reactor meltdown could never occur.

So how do we overcome Normalcy bias? Amanda Ripley, author of The Unthinkable: Who Survives When Disaster Strikes – and Why explains that there are three phases of response:

  1. Denial. People are likely to deny that a disaster is happening. It takes time for the brain to process information and recognize that a disaster is a threat.
  2. Deliberation. In this phase, people have to decide what to do. If the individual has no plan, the problem is serious. The effects of life-threatening stress on the body (e.g., tunnel vision, audio exclusion, time dilations, out-of-body experiences, or reduced motor skills) limit an individual’s ability to perceive information and make plans.
  3. Decisive Moment. Here a person must act quickly and decisively. Failure to do so can result in injury or death.

According to Ripley, the faster we can get through the Denial and Deliberation phases, the quicker we will reach the Decisive Moment and begin to take action. 

 

Optimism Bias

Optimism bias is a cognitive bias that causes someone to believe that even though bad things are happening around me, I will do better than everyone else. It is also known as unrealistic optimism or comparative optimism. Optimism bias is “Even if bad things are happening around me, I will do better than everyone else.” Optimism bias is common and transcends gender, ethnicity, nationality, and age. Four factors cause optimism bias in people:

  1. their desired end state,
  2. their cognitive mechanisms,
  3. the information they have about themselves versus others, and
  4. overall mood. 

A typical example would someone diagnosed with aggressive cancer, and ten specialists tell them they have little chance of survival. However, an eleventh tells them they will be ok, so they believe the 11th. Other examples are:

  • smokers feeling that they are less likely to contract lung cancer or disease than other smokers,
  • first-time bungee jumpers believing that they are less at risk of an injury than other jumpers, or
  • traders who think they are less exposed to potential losses in the markets.

 

Herd Instinct

We are social animals, and we take our clues from those around us. If we know a tsunami is coming, but no else is leaving, we figure it is safe to stay, even though we understand a tsunami will cause a calamity.

 

So what to do?

From an economic behavior point of view, we will have to bear additional costs and waste to maintain preparation. I would expect that for a while, at least a decade or more, we will ensure we have back up lines of supply and more inventory than we need. However, once all memory of COVID has passed, and there is another generation making decisions which did not experience it, costs cuts will return with our move to efficiency.

Concerning our biases, we need to understand them and be prepared. With normalcy bias, we need to have plans on what to do in the case of an emergency. Luckily for the economy, the experience of the Great Recession was still fresh enough that governments knew that had to provide financial support in large amount to stop the economy collapsing, which they did. However, for a lot of emergencies, we will not have the benefit of a recent crisis to fall back on as a guiding example.

Unfortunately, like the generals, in planning for crises, we tend to “fight the last war.” However, each situation is different. What will out next problem be, A.I. went amuck, climate change? Who knows, but it may be something we have not experienced yet, or even if it is, e.g., a public health crisis, the disease may be very different, requiring a different response.

A great example of our failure is Climate Change. We know that climate change is coming, and a recent report by the U.S. Commodity Futures Trading Commission (CFTC) starts by saying climate change “poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.” The report, “Managing Climate Risk in the U.S. Financial System,” was written by a group of 35 advisors from major banks such as Morgan Stanley and JPMorgan Chase, environmental groups such as The Nature Conservancy and Ceres, energy firms such as B.P. and ConocoPhillips, several investment firms, and experts from several universities. According to it, regulators “must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks.”

However, our economic behavior justifies us doing nothing since the costs of prevention are so high. The vested interests of doing nothing spend an enormous amount to ensure nothing changes. Of course, the price of prevention is high compared to what? We always underestimate the expense of the crisis, as COVID has dramatically shown. The annual costs of climate change continue to grow, as we experience more significant fires, hurricanes, and damage to crops. 

Concerning normalcy bias, we have one denial and not enough deliberation. Concerning decisive movement, the Republican chairman of the CFTC, Heath Tarbert, acknowledged the risk of climate change. Still, he said, “The subcommittee’s report acknowledges that ‘transition risks’ of a green economy could be just as disruptive to our financial system as the possible physical manifestations of climate change, and that moving too fast, too soon could be just as disorderly as doing too little, too late.” Basically, we don’t have a plan!

Concerning optimism bias, we have a situation where 97 percent of actively publishing scientists believe human activity is causing global warming and climate change. However, we cling to the three percent who are deniers.

Finally, herd instinct, we don’t want to be the first or do something that we are not sure others will do.

However, if you wish to protect your business, it would be worth investing time in understanding the effects of climate change on it and developing a plan to protect yourself. Start follow Nassim Taleb’s advice and build “antifragility” into your systems, which provide robustness to black swan events. An application of the least fragile risk management approach, according to Taleb, is the “barbell strategy,” which seeks to avoid the middle in favor of a combination of extremes. How that applies to your business will be different, but planning should start now.

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Five Ways to Attract Prospective Employees

Five Ways to Attract Prospective Employees

There is a war for talent. How do you attract talent to your company and have them apply for jobs there? You have to show why they should consider you, who you want, what you offer, and how your current employees feel.

Are you killing your firm’s WFH productivity?

Are you killing your firm’s WFH productivity?

Productivity remained during WFH with COVID. However, further analysis found that hourly productivity fell and was compensated for by employees working more hours. What was the culprit – Meetings. Want to increase productivity, have fewer meetings.

EOS is just that, an Operating System

EOS is just that, an Operating System

For those of you who are not aware of EOS, it is the Entrepreneurial Operating System. It seeks to improve businesses by getting six components aligned to enhance business operations. The six are: the vision the people the issues traction - meetings and goals...

What has COVID done to Company Culture?

What has COVID done to Company Culture?

COVID has affected everyone. However, companies need to examine if they have lived their core values during COVID, how they are reinforcing them in a WFH environment, and especially with the onboarding of new hires.

Profit ≠ Cash Flow

Profit ≠ Cash Flow

Knowing how much cash you generate is essential for planning for growth. Too many companies don’t know and when they grow they find they are continually running out of cash. Understand your cash flow generation and how to improve it through improvements in your Cash Conversion Cycle and using the Power of One.

What Are Your Critical and Counter Critical Numbers?

What Are Your Critical and Counter Critical Numbers?

The key to achieving long term goals is to define short term goals that lead you there. Focusing those short term goals around a key metric is essential. However, ensure that the metric will not lead other areas astray by having an appropriate counter critical metric act as a counter balance.

Do You Truly Know Your Core Customer?

Do You Truly Know Your Core Customer?

Knowing the profit of your core customers is key to building a growth model. Many companies have identified core customers that are generating a sub-optimal profit and so they cannot realize the profits they seek. Identifying the correct core customer allows you to generate profits and often operate in “Blue Ocean.”

The Greatest Own Goal or the Greatest Collapse

The Greatest Own Goal or the Greatest Collapse

The European Super League collapsed within days of launch due to hubris and the founder forgetting the key parts of their business model, value creation, sales, and value delivery. The collapse might bring a high price.

The Hotel Market – COVID Is At Work

The Hotel Market – COVID Is At Work

For a long time, the middle market hotels have been the growth behind the U.S. hospitality market. The established brands like Hilton Garden in and Courtyard by Marriott have led the way, followed by many new brands that have started, e.g., Aloft, and element. The key to these products was:

  • Good business location;
  • Good clean rooms with complimentary wifi;
  • Free breakfast;
  • Happy hour or a bar where you could get a drink; and
  • Some form of shop that provided snacks.

Well, COVID once more has sent a wrecking ball through the industry. Free breakfasts, elevators, and happy hours are out in the world of social distancing and COVID. Business travel is way down and how much it will return is debatable. Among my clients, the majority says that while they will start traveling again, primarily when their clients want to see them, they expect it to be at 50% of the pre-COVID levels. As a result, like the U.S. retail industry, we may have too much supply! As a result, I would expect rates and values to fall.

However, what is very interesting is what is happening at the two extremes of the industry.

 

Luxury Hotels

During June and July, many luxury resort and city hotels were catering to the wealthy who had their international travel plans disrupted. However, in August, unexpectedly, they found no one was ready to return home, and demand was increasing. Guests were all looking for a second, third, or fourth pseudo home, and finding luxury hotels met that criteria. As many of these hotels’ clientele can work from home and are schooling from home for the foreseeable future, there is no need to be tethered to their usual residences. Instead, they are interested in multi-month hotel bookings to bypass a cold-weather span of locked-down living stylishly.

Not only do these properties offer a change of environment, but many guests “do not feel safe in [their own] homes with staff members coming in and out, without proper protocols in place,” said Ed Mady, the regional director of the Dorchester Collection. The Beverly Hills Hotel and Hotel Bel-Air, managed by the Dorchester Collection, have seen an increase in 90-day bookings since the advent of  COVID-19, primarily from L.A. natives. The Dorchester Collection properties all have an on-site nurse and a dedicated director of risk management to ensure full compliance with CDC guidelines.

At Timbers Kaua’i’i in Hawaii, over 25 percent of the guests 30+ night stays booked. On the East Coast, Gurney’s Montauk and the Ocean House in Rhode Island have many guests staying for a month or more during the fall.

As a result, many hotels are pivoting to meet this new demand. Auberge Resorts, which owns 19 hotels worldwide, has experienced a 300% increase in the length of guests” stays. As a result, it is offering “Remote With Auberge” packages. Some of these packages for two months offer private tutoring services for children, personally stocked in-room kitchenettes, pet care, and laundry with a 30 to 40 percent discount.

However, even with these discounts, it is not cheap! A recently booked year-long stay at Rosewood Miramar Beach’s’s two-bedroom residence in Montecito, CA, costs approximately$1.1 million.

 

Economy Hotels

Meanwhile, at the bottom of the industry, motels are making a comeback. Initially, travel stopped for all but essential workers, truckers, doctors and construction, maintenance, food-processing, agriculture, and government workers who are always more likely to use budget-style hotels.

As the summer came, those that wanted to travel domestically and maintain social distancing by avoiding airplanes, elevators, crowds, and questionable HVAC systems turned to road trips and motels. Many of the middle-market hotels that were accepting guests had closed their spas, fitness centers, indoor dining rooms, swimming pools, and other amenities, but were maintaining their rates. Many travelers saw they now paying $250+ per night to get the same services they get for $100 per night at a motel.

Motels are typically one- to two-story properties with exterior corridors and parking lots in proximity to the 12 to 35 guest room doors, said Jan Freitag, senior vice president of Lodging Insights for the data and analytics firm STR. Often referred to a U2s because of their “U” shape and two stories. The benefits of such properties are:

  • Allow guests to avoid contact with others;
  • Don’t feature elevators;
  • No large common spaces; and
  • Each room has its own heating and air unit.

Thus, guests have a sense of control over their environment.

Besides, motels are benefiting from the nostalgia that COVID has released. Along with the demand for homemade bread, playing board games, and reading, staying in motels appeals to the fantasy of simpler times.

The perfect storm of COVID, which is damaging the middle market hotels, is saving motels from extinction, at least for the moment. Will the demand remain post-COVID is yet to be determined.

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