Where Do We Go From Here?
Asset managers may have the best perspective on the lodging industry. As representatives of hotel owners, they work closely with operators, brand companies, designers, vendors, lenders and, of course, the owners themselves. The best ones, such as those who belong to the Hospitality Asset Managers Association, have years of experience in all facets of lodging development, operations and marketing.
In late September, Lodging Hospitality gathered some of the officers of HAMA on the eve of the group's fall conference to discuss a number of important industry issues:
The panel included:
Chad Crandell, president of Capital Hotel Management and president of HAMA;
Rob Tanenbaum, principal with Madison Hotel Advis-ors and HAMA treasurer;
Rick Swig, president of RSBA & Associates and HAMA secretary;
Jill Johnson, vice president of asset management for LaSalle Hotel Properties and HAMA communications chair; and
Kevin Mahoney, chief operating officer of Stonebridge Companies and past president of HAMA.
Lodging Hospitality: How has the asset management profession changed in the last couple of years?
Jill Johnson, LaSalle Hotel Properties: The expectations of ownership have become more amplified because everyone knows these are good times now. The brands, in particular, are trying to capitalize on that environment. The tension between the owners and the brands has escalated because the brands are trying to make the most of the good times, as are we, but our perspectives are a little bit different.
LH: How have industry issues changed in the past couple of years?
Chad Crandell, Capital Hotel Management: The fundamentals are a lot better than they were a few years ago. We're finally seeing significant growth in RevPAR, which is being pushed not just by occupancy but also by rate, which is generating better positive operating results. Just a few years ago, you were hearing about Internet RFPs in which hotels had to bid for business against each other in an Internet format. You were also hearing about discussions with some of the travel companies who felt they provided better access with their web pages than the brands did and as a result were taking business away from the hotels or were really commoditizing the hotel guestroom. What we're looking at today is a lot different. The brands have stepped up, they understand the Internet a lot better, and they control their inventory significantly better than they did a few years ago.
Johnson: One of the other changes I've seen is that our operators are trying to change the mindset about pricing. It means translating the empowerment we now have in pricing rather than being held to the mandates of our customers and groups and corporate bidding.
Rob Tanenbaum, Madison Hotel Advisors: It's interesting that some of the operators are a little slow to arrive at that point of view. They don't want to harm customer satisfaction and guest-client relationships. They don't want to tip the scale too much in the other direction.
Rick Swig, RSBA & Associates: Labor isn't even available in some places because of competition from jobs that pay much higher hourly rates. The wages we pay in the hotel business are really awful for line employees in general. And then there are the politics of immigration. As pressure intensifies on immigration, we're going to have challenges getting fundamental services provided for our guests.
The other thing is guest service, or the expectations of the guests versus service delivered. We've gotten very skilled at managing labor, very skilled at structuring our service departments, but some guests expect a lot more.
LH: There has been a huge frenzy of acquisitions in the hotel business. Will the level of transactions continue, and what effect does that have on your businesses and individual properties?
Kevin Mahoney, Stonebridge Companies: We'll see a slowdown when the investment appetite for this product, vis a vis alternative investment options, starts to change. Most professionals recognize this is a cyclical industry and the pace will continue in the short term but not necessarily in the long term. We're starting to see a few signs of slowdown in job growth in certain markets, interest rate upticks, pressures on labor and utility and insurance costs. There are significant players in the industry I would characterize as more short-term financial players that aren't in the industry for the long run.
Crandell: With raw material costs and labor costs so high, it's too expensive to build new, so the value of existing hotels will continue to improve. It's a cyclical industry and it will eventually turn down. It's hard to say whether we're at the top or near the top. One might suggest we're coming to the crest. The question is how long will that go before we head down the other side.
Swig: Would-be developers are asking why they should build in secondary locations when they can buy in primary markets for 20- to 40-percent discounts, albeit at a price that is at very low cap rates.
LH: If you're an owner in it for the long term and don't have your real estate in play, what are the ramifications of this brisk transaction market?
Swig: It's a wonderful thing because it sets a new valuation. The hard part is how long-term owners can monetize the value of their assets. The only ways are to sell or refinance.
Crandell: There is a lot of competition right now in the refinancing marketplace. Although interest rates have risen as LIBOR has gone up, the spreads are still quite reasonable relative to long-term interest rates for the hotel industry. And the loan-to-value ratios for existing hotels go anywhere between 70 and 75 percent of the value with senior debt, and then there are mezzanine opportunities if you want to take it up to 85 or even 90 percent. The money is available to realize the value in your hotel without necessarily doing a transaction.
Swig: There are other advantages to not selling. If someone buys a property across the street at a much higher cost per room, that new owner can't afford to be discounting rates very much. They're going to be pushing rates, which is the most wonderful thing as a competitor you can have.
LH: Despite the rising rates, there has been a lot of pressure on costs in some areas, particularly in hard-to-control items like insurance, energy and others. As asset managers, what can you do to help your owners and operators control some of these seemingly difficult to control costs?
Tanenbaum: One way is to work with third-party energy consultants who understand the various markets in which you operate. It can save you a quite a bit of money. Also, doing some of the basics of energy management helps, such as changing light bulbs in the back of the house to more efficient ones.
Mahoney: Just paying attention to your bills and communicating to your general manager and your supervisors of the consequences of simple things has a tremendous effect.
Johnson: You hear a lot about amenity creep, but we have really been watching FTE (full-time equivalent) creep. As properties make more money, all of a sudden employees are added back that were cut four or five years ago. We keep close watch on FTE counts and productivity measurements relative to payroll and overtime. It's a very worthwhile exercise.
Mahoney: Actually, it's difficult right now to maintain your employee counts because of the problems in finding the right kinds of people. I would much rather have a fully staffed hotel than an understaffed hotel.
LH: Since there is generally less rate resistance in the marketplace, are you spending more of your time on the cost side of the business versus the revenue side?
Johnson: We still spend a ton of time on yield management. Although rates are good and we do have some pricing power, optimizing your position in the market relative to your competitors should be an ongoing exercise and an ever-evolving process, regardless of what rate resistance may or may not be in the marketplace.
Swig: The real question today is what is a rate increase? No hotel has a rate card, so rates are what you wake up today and decide you're going to put up for sale tomorrow or six weeks from now. You look at the marketplace and the various tools that enable you to look six weeks down the line and see what your competition is doing and you set your rate according to your strategic positioning.
Crandell: A few years ago you couldn't yield manage. Now you have enough core business that you can begin to yield, change your market mix, look at different segments and sources of your business and try to push up overall yield. It's not just necessarily charging more for your transient business; it's determining where the business is coming from and what are the various channels you have within that segment.
LH: What kind of long-term effect is union activism going to have on the industry, even for those properties and markets not directly affected by unions?
Swig: This past summer, the unions kicked the hotels' asses, pure and simple. The unions have paved the road for representation, at least at the brand level, which is going to cost the hotel industry in major markets a lot of money. The unions set themselves for greater membership and tied up the brands so as brands take on management of new hotels, at least in San Francisco, those properties automatically will be subject to card check if they're not already union. Or if a new hotel is built and a brand wants to manage that hotel and they're currently managing a union hotel in that city, that hotel will be subject to card check, which means there will be an 80-percent chance it will be a union house.
Johnson: As an industry, we can't get all the owners on the same page, let alone the owners and the operators on the same page. We have a very fractionalized front against union activity and until that systemic problem is changed, it's going to cost us a lot of money.
LH: There's been a lot written about a new generation of travelers who have different needs and wants. Do Gen X and Y travelers really have different expectations about hotels?
Tanenbaum: Service is paramount. You can give all the gadgets and toys you want, but guests really want to be acknowledged and appreciated. There may be a need for high-tech gadgets, but at the end of the day we all want the same basic things and that's being appreciated.
Johnson: The younger travelers are much more in tune with design. Design can be a differentiator among hotels, and it's something that interests travelers in that demographic. There is panache and cachet to staying at a cool hotel.
Many boutique hotels and even branded hotels are departing from the same old standard to create an interesting look that's all about appealing to the demographic that finds design interesting and a part of their hotel purchasing decisions.
Mahoney: We live in an environment in which hotels and resorts are a stage. They're a fun and exciting place to visit. A hotel is a stage and a form of design, and Gen X and Gen Y absolutely must be listened to.
Swig: The traditional hotel business cannot become Detroit. General Motors and Ford are going out of business because they didn't evolve their designs and products. Meanwhile, Honda, Nissan and all the foreign brands changed their designs, adapted to the tastes of young America, and they're very profitable and successful. The hotel industry needs to look at the auto industry and ask itself if it wants to be Detroit or the successful car manufacturers that pay attention to design and to the customer by creating experiences that are contemporaneous with their lifestyles.
LH: As asset managers, how do you help owners and operators evaluate those amenities and services that are really necessary versus those that just add cost?
Swig: How much choice do you really have these days? I've been working on a brand conversion at a hotel that's taken about six months longer than planned, and during that time the brand changed the bedding standard twice, changed the TV standard twice, and it won't okay the conversion unless we're at those brand standards. For example, the television: six or nine months ago, they were requiring 27-inch flat-screen tube TVs. Today, it's 32-inch flat-screen sets. The difference is $600 times 300 rooms. It's very difficult to stay away from amenity creep when brand requirements change as frequently as they do.
Mahoney: Over the past three to four years ago the brands have gained significantly more leverage in being able to further the brand's standards and their philosophies in respect to the hotel industry.
Crandell: Generally speaking, those brands that also have an ownership interest in hotels they also manage offer a more sympathetic ear than those that are essentially just service companies. They know it's a process, and if we purchased something just two years ago that has a shelf life of five to seven years they try to work with you. When you're dealing with some brands that don't understand the real estate side, they can be unreasonable and unrealistic.
LH: How soon will new hotel development get back to the levels we've seen in the past?
Swig: If we're getting to a point in major markets where occupancies are above 75 percent and nearing 80 percent with 10-percent rate increases, that's always the catalyst for new construction. There will be a lot of stuff potentially coming onto the pipeline. However, when it will materialize is a completely different issue because you can identify the site, design the building and then when you bid it out to the contractor and it comes out 30 or 40 percent higher than even the projected business level five years out would support, the development will come to a screeching halt.
Crandell: The problem has been the cost of construction, which has gone up by double digits. Even on renovated items, prices are up 15 to 20 percent on a rooms redo. We've been told that on new construction those costs are closer to 20 to 30 percent higher than the last two years. Profitability in the industry in '06 will be comparable to our peak year of 2000, so from a business fundamental standpoint we finally got back to where we were back in 2000. We're about back to values that we had in 2000. We still have those six years to catch up with inflationary pressures and everything else to get the real present value to where it needs to be.
Mahoney: It also depends on the product segment. The new products being developed are not major market hotels. They're more mid-priced hotels. Yes, they're still $100,000 a key to build but that stuff is starting to come out of the ground now. The pipeline is building. There is now competition for sites with specific brands in primary markets. If one peeks behind the curtain, you'll see that new product is starting to emerge. It will take a little bit of time to bring it to fruition. We are getting closer to that equilibrium.
In this industry new sells. If you have a 15-year-old hotel with a major brand license that's going to expire in five years, it's not going to be renewed. It will come off the market or get downgraded or you're looking at a major redevelopment. We've seen a lot of dog hotels come back to life. You can buy old structures for relatively inexpensive prices and spend $40,000 to $50,000 a key and you have a new hotel.
Swig: Even in secondary markets, you can take a 20-year-old building that has failed and buy it based on its failure cost. You still have a good, sound skeleton and you can put 50 to 60 percent of the purchase price into that building and upgrade it from a minor brand to a major brand. You're still coming in significantly less than what it would cost to build that hotel new, and you probably have a better location than you could find.
For more information and related articles, go to www.LHonline.com
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