NEW YORK—With lodging heading into what’s expected to be a more positive second half, many of the industry’s major players are honing their tactical skills and turning a sharp eye to what the landscape will look like for the rest of the year.
During a recent panel at the 34th Annual New York University Hospitality Investment Conference, held here at the Marriott Marquis, a panel composed of James Abrahamson, CEO, Interstate Hotels & Resorts; Joel Eisemann, chief development officer-The Americas, IHG; David Kong, president/CEO, Best Western International, Inc.; David Pepper, SVP-global development, Choice Hotels International, Inc.; and Vasant Prabhu, vice chairman/CFO, Starwood Hotels and Resorts Worldwide, Inc. outlined some of the situations they’ve been observing as they consider market conditions, particularly when it comes to fundamentals, new development and growth.
“Rate is not there. Not just in nominal terms; it’s clearly not there in real terms,” said Prabhu. “You can’t have five years with rates below nominal peaks, because despite all our efforts at productivity, there is wage increase, there is energy cost increase, etc. Until rates go up, it really isn’t that attractive to be building new, full-service hotels.”
He added that financing remains a concern. “You’re not going to get the same level of financing as you might have 10 years ago. If you get the rates, you’ll get the investment. Today, you can buy hotels cheaper
NEW YORK—With lodging heading into what’s expected to be a more positive second half, many of the industry’s major players are honing their tactical skills and turning a sharp eye to what the landscape will look like for the rest of the year.
During a recent panel at the 34th Annual New York University Hospitality Investment Conference, held here at the Marriott Marquis, a panel composed of James Abrahamson, CEO, Interstate Hotels & Resorts; Joel Eisemann, chief development officer-The Americas, IHG; David Kong, president/CEO, Best Western International, Inc.; David Pepper, SVP-global development, Choice Hotels International, Inc.; and Vasant Prabhu, vice chairman/CFO, Starwood Hotels and Resorts Worldwide, Inc. outlined some of the situations they’ve been observing as they consider market conditions, particularly when it comes to fundamentals, new development and growth.
“Rate is not there. Not just in nominal terms; it’s clearly not there in real terms,” said Prabhu. “You can’t have five years with rates below nominal peaks, because despite all our efforts at productivity, there is wage increase, there is energy cost increase, etc. Until rates go up, it really isn’t that attractive to be building new, full-service hotels.”
He added that financing remains a concern. “You’re not going to get the same level of financing as you might have 10 years ago. If you get the rates, you’ll get the investment. Today, you can buy hotels cheaper
NEW YORK—With lodging heading into what’s expected to be a more positive second half, many of the industry’s major players are honing their tactical skills and turning a sharp eye to what the landscape will look like for the rest of the year.
During a recent panel at the 34th Annual New York University Hospitality Investment Conference, held here at the Marriott Marquis, a panel composed of James Abrahamson, CEO, Interstate Hotels & Resorts; Joel Eisemann, chief development officer-The Americas, IHG; David Kong, president/CEO, Best Western International, Inc.; David Pepper, SVP-global development, Choice Hotels International, Inc.; and Vasant Prabhu, vice chairman/CFO, Starwood Hotels and Resorts Worldwide, Inc. outlined some of the situations they’ve been observing as they consider market conditions, particularly when it comes to fundamentals, new development and growth.
“Rate is not there. Not just in nominal terms; it’s clearly not there in real terms,” said Prabhu. “You can’t have five years with rates below nominal peaks, because despite all our efforts at productivity, there is wage increase, there is energy cost increase, etc. Until rates go up, it really isn’t that attractive to be building new, full-service hotels.”
He added that financing remains a concern. “You’re not going to get the same level of financing as you might have 10 years ago. If you get the rates, you’ll get the investment. Today, you can buy hotels cheaper
than you can build them. So why would you build them?”
Eisemann agreed, noting hoteliers are looking at how the traditional, midscale property could replace a full-service hotel. He cited New York City as an example, where new-build, mid-block, moderate-tier hotels have been increasing. “We’re going to continue to see that,” he said.
Kong said developers have expressed concern about the “uncertainty” of the economy, tax rates, government regulations such as new health insurance costs and efforts by the National Labor Relations Board, particularly around unionizing.
Pepper said he’s seeing construction in urban markets, “from the Beltway and in. The reason why is because of valuations. The money’s come in, people are buying assets, driving up values.” In Washington, DC, for example, he noted a Cambria Suites is going up for $240,000 a key. “Everything around it is selling for $330,000 per key. People are going to be interested in that story. You’re going to get financing for that type of development,” he said.
Pepper added secondary markets also are starting to see some traction, as well as areas where oil is part of the market mix. “Follow the oil,” he said. “North Dakota is exploding. I can’t tell you how many applications we have for new construction in those types of markets.”
Abrahamson concurred there is a market for midscale and below in terms of development, but turned attention to the upper-upscale and luxury segments and what other factors besides financing might have impact in this development area.
“I really don’t think any of the upper-upscale or luxury hotels that were built in the last cycle were really [able to be financed]on their own. It was residential driven; there was a mixed-use component to it where there were large city subsidies. So on the luxury and upper-upscale side it’s got to be the other factors. Tell me when the luxury condo market—outside of New York and other locations like that—when that’s going to come back, when will mixed-use come back, subsidies come back. I just don’t see it coming back.”
Some hoteliers are looking to convert full-service hotels with limited meeting and restaurant space to select-service properties, Eisemann indicated, and are considering tactics like curbing the size of such spaces to get a better economic return and potentially higher sales. “I think we’re going to see some of that also,” he said.
With the industry moving further away from the most severe aspects of the recession, those on the panel agreed it was important for brand franchisors to push for properties to implement CapEx programs and PIPs that may have been deferred.
While Best Western has members as opposed to franchisees, standards for the properties under the BW umbrella are on par with comparable franchisors and viewed as key by the organization’s CEO.
“There’s a strong business case for hotels to upgrade their product,” said Kong, noting the correlation among quality product, the guest experience and the intent to return can’t be denied. “It builds guest loyalty, it builds guest satisfaction, it increases RevPAR and it enhances the asset value.”
He added the brand has to communicate what it stands for as well. “If there’s a product out there that’s not projecting the image of the brand and it detracts from the brand image, then the brand has to do something about that because the brand has to protect its brand promise…hotel[iers]that belong to the brand, most of them have invested [in their properties]. It’s just not fair to them that some others don’t.”
Starwood’s Prabhu indicated the brand itself needs to be proactive. “Clearly, brands have to be responsible about this because if our owners aren’t making any money, then there isn’t a brand. We own a lot of real estate so we do wear both hats—the fact is that owning hotels is a business that needs capital. If you’re not putting something in to maintain the hotel, you’re creating a wasting asset. The best owners don’t have to be persuaded that it needs to be done on a regular basis.”
He also indicated that change for the sake of change is not a wise route to take with franchisees. “If you’re [the brand]coming up with new ideas, you have to make the case for it. Very often, we will try out [something new]in our own hotels and you often have a few owners who will come along with you and try it, too, like the Sheraton Link. We had no trouble persuading our Sheraton owners to have the Link.” (The Link@Sheraton is a dedicated lobby space that offers wireless and wired Internet access, printing and faxing services, light food and beverages and complimentary newspapers and weekly magazines and encourages guests to network.)
Eisemann said many times owners themselves “really want the brand to maintain the standards. They’re investing in the asset…they want consistency for the value of the brand. The discussions over the years that we’ve had with owners and franchisees has them saying: ‘We want a tight system. We want you to really work on the tail and eliminate the tail of the properties that are not keeping up, and we want to continue to move up in terms of quality.’”
He added it’s also important to see what program could be eliminated when something is added so that programs don’t just keep piling up within the same budget.
Choice’s Pepper felt franchisors have done “a pretty decent job in not requiring a lot of upgrades” over the past four years. But he pointed out as the industry is starting to push rate, “this is where we do need to start upgrading the assets.” Pepper noted as ADR increases the intent to return decreases so it is important for guests to feel they are getting something for their money.
“With a brand program, what we try and do is gradually put it in; it’s not all at once. We also try to align ourselves with other finance resources to provide financing for our franchisees to help them in doing their upgrades.”
As the largest operator of all the major brands, Abrahamson said Interstate is seeing “a lot more options and flexibility. So we can go to an owner with different solutions,” such as exploring different brand options within a franchisor’s stable of brands where costs might be less in order to get the best ROI for owners.
As programs move forward, Abrahamson said it was also important to watch for “expense creep” so that companies can achieve robust ROI, owners can invest and “make all the brands all the much better over time.”