High-Flying Hyatt

Hyatt Corp. plans to make a big mark in a big market, Texas, with Grand Hyatts in Dallas and San Antonio.

The time is right for the Grand Hyatt DFW, the only Grand Hyatt at an airport, and for the Grand Hyatt in San Antonio's Riverwalk, according to Hyatt Hotel Corporation executives.

The Grand Hyatt DFW opened July 1 in conjunction with opening of the $2.8-billion International Terminal D at DFW Airport. The San Antonio Grand Hyatt, the first Grand Hyatt in San Antonio, is scheduled for completion in early 2008.

George Vizer is general manager of the Grand Hyatt DFW and eager to run “a first-class hotel, which is not something that you're accustomed to seeing in an airport environment.”

A former vice president of f&b for Hyatt Hotels, Vizer has participated in numerous Hyatt openings. This one, however, is special.

“It's very sophisticated, very cosmopolitan, and something you're accustomed to seeing in city centers and in the business districts of primary cities,” says Vizer, a native of Czechoslovakia who speaks five languages. “In the international market, the Grand Hyatt brand is very well-established and very well-defined. This (hotel) is synonymous with what we're doing internationally with the Grand Hyatt brand.”

The 298-unit hotel has 12 levels, eight with guestrooms. Forty-five units are suites. It features a ballroom/banquet/meeting space, the Grand Met restaurant (a nod to the Dallas-Fort Worth Metroplex) and the M, which Vizer calls the quintessential “martini and pate bar.”

Each unit boasts a 32-inch flat-screen TV, deluxe bedding, oversized bathrooms with a free-standing shower and soaking tub, a granite-top work desk, high-speed wired and wireless Internet access and two in-room telephones.

The Grand Hyatt DFW has been in the works for five years and cost more than $70 million to build, Vizer says. It aims to be international, which means Vizer had to hire staffers from European hotel schools. It wasn't easy. “I wanted to create a truly international hotel, where we have more than 25 languages represented,” he says. “I want to create a complement to the international traveler who is going to be coming through this terminal.”

The hotel will access directly into Terminal D and to Skylink, the new transit system that connects all six DFW terminals. Designed to be a magnet for international travelers seeking an overnight stay, the hotel also will cater to the North Texas business community; Vizer says 17 Fortune 500 companies have headquarters in the Dallas-Fort Worth area.

Below the International Terminal D Concourse are a ballroom level with 34,000 square feet of ballrooms and 45 meeting rooms with state-of-the-art technology and HVAC. In addition, the hotel will offer a full-service business center.

DFW Airport owns the hotel and Hyatt manages it.

“I think this will complement the profile of the airport,” says Vizer. “It is a corporate business traveler hotel, so there's definitely a natural tendency to market to this community and work with it and hopefully be able to provide a great venue for people to do business and conduct social events as well.

“This is clearly not an airport brand,” he adds, “but there was a compelling reason to put this brand here.”

There are Grand Hyatt hotels in many gateway cities including New York, Seattle, Washington, DC, San Diego and San Francisco.

There will be synergy with other hotels, too, including the 811-room Hyatt Regency across the street. Although Hyatt has the only two hotels at the airport, numerous other brands are represented in the area, Vizer says, citing product from Marriott, Hilton and Embassy Suites. A Four Seasons is in nearby Las Colinas, the Gaylord Texas in Grapevine.

“There's clearly a very solid hotel community here,” Vizer says. “There's no need for any more growth at this point in time.”

BABY BOOM

Hotel construction, demand thriving

Hotel construction is booming in Las Vegas, thriving in major coastal cities and their suburbs and flat in the Midwest. We're in the beginning of a new construction cycle that will last through 2010. For now, the action is in midscale without f&b and demand is outstripping supply, largely due to a modest growth rate.

The hotel field is healthy, the outlook robust, say hotel executives and consultants. The only challenges are the costs of construction, particularly for steel and cement. If there's a downside, it's a vague one: One hotel executive suggests there's something worrisome about a market so energized the guy pouring cement for a high-rise residential building is the same guy pouring cement for an office building — and for a hotel.

“Business is good,” says Mike Leven, president of Hyatt-owned USFS, which develops Microtels, Hawthorn Suites, AmeriSuites and Americas's Best Inns & Suites. “It's particularly good in the major cities and it's improved in the suburbs around the major cities. But there are still plenty of areas where improvement is okay but not great.” Some urban areas are experiencing double-digit RevPAR gains, others rates of only 3.5 or 4 percent.

His company has more than 20 projects in California, where entry costs are higher. So are rates, which makes the state attractive. “The gap between the rate you can sell Microtel at and competing midmarket hotels can be $15 to $20,” Leven says. At the same time, the prices of steel and concrete are up, driving the per-key construction cost of some select-service to $85,000 without land. At Microtel, per-key cost is $32,000 to $35,000-plus, minus ff&e and land.

“The toughest challenge is to get the hotels built quicker before the costs run away with themselves,” Leven says.

“Prime real estate areas are booming and the middle of the country is very flat, no pun intended,” says Steve Goldman, executive vice president of acquisitions and development, Hyatt Hotels Corp. For full-service hotels, the biggest issue is cost, he says. “It's an interesting environment now. There's a lot of building going on and the primary labor costs are very high because of basic supply and demand.

“The guy who's pouring cement for residential high-rise is the same guy pouring cement for a hotel and an office building.”

Tom Storey, executive vice president of development for Fairmont Hotels and Resorts, also takes a moderate approach to construction. For now, Fairmount is being cautious, trying to align construction costs with potential ROI. It's proceeding particularly deliberately regarding U.S. development.

“We're looking at a combination of key resort destinations where we we not located” incuding Orlando, southern California, possibly the west coast of Florida, along with several city-center locations, Storey says.

By The Numbers

Although they differ in methodology and predict different numbers, experts Bjorn Hanson, global industry leader, Hospitality & Leisure Practice at PricewaterhouseCoopers, and Patrick Ford, president of Lodging Econometrics, agree the big picture is a bright one.

According to Hanson, the amount of construction in luxury is about 2.4 percent of current supply, twice the national average of about 1.2 percent. In upscale, it's about 3.4 percent and extended-stay is growing by 2.5 percent; meanwhile, midprice with f&b is minus 1.1 percent, meaning stock in that segment is dwindling. Midprice without f&b is the big gorilla, up 3.8 percent, while economy is up only 0.8 percent. That adds up to an overall new supply of 1.3 percent predicted for 2005, “which is good news, because demand is growing by 4.3 percent,” Hanson says.

“The brands leading new construction are well-established, high-performing brands,” Hanson says. “They create a challenge for some of the less mature brands because growth, especially in the midpriced segments, creates more performance and more distribution the more powerful the brand.”

The largest increase will be in midscale without f&b, as in Hampton Inn, and in high-price segments like Marriott and Courtyard by Marriott, PricewaterhouseCoopers says. PwC predicts that U.S. room starts in 2005 will increase by 21.5 percent to 98,000, the largest increase since 1997 and the highest level since 2000, when room starts were 120,000.

Ford is more restrained. He predicts a net supply increase of 1.2 percent, with 691 openings representing 70,251 rooms. In 2006, Lodging Econometrics foresees a 1.4-percent supply increase of 770 hotels representing 83,000 rooms.

“Those numbers are very, very modest,” he says. “You go to New York (to the International Hospitality Industry Investment Conference) and everybody's positive because we have demand in the hotel industry in ‘04, ‘05 and ‘06 improving at a very good clip and very little supply coming on line.”

According to the latest Lodging Econometrics report, 12 of the top 25 lodging markets will have fully recovered by the end of the year. They are Los Angeles, Orlando, Philadelphia, Phoenix, Saint Louis and Washington, DC, joining 2004 recuperators Anaheim, Miami, Norfolk, Oahu, San Diego and Tampa. New York City is expected to fully recover to 2000 levels next year.

Ford says he expects the second quarter of this year to be the sixth consecutive one of growth. But, he notes, only in the first quarter of 2005 did growth in the construction pipeline begin to quicken. “We are still a million miles away from the construction pipeline peak of 2000,” he says, noting that 12,000 of the 36,197 new rooms posted in the first quarter of 2005 were casino rooms. That attests to the strength of the Las Vegas market and the growth of Native American casinos.

While new construction is moderate, the overall market is robust, Ford suggests. Not only does he expect the pipeline and the pace of new announcements to grow, “there's a tremendous freshening of lodging inventory going on,” he says. “You have a lot of properties closing and going off-market. You have a number of properties converting to alternative use and a number of properties being demolished. This is what new supply is supposed to do for you.”

According to Hanson, lodging companies will spend $4.8 billion on reinvestment in 2005, compared to $4.1 billion in 2004.

“Demand has recovered and is expanding, you have this whole freshening cycle taking place and there is record reinvestment into existing product and changing standards for brands,” Ford says. “It's all the things you would expect would take place at the bottom of a cycle and the beginning of a new cycle.”

Where To Build

Executives at Doubletree Hotels are careful about site selection, particularly when it comes to the new-construction hotels that make up about 20 percent of their development pipeline. For now, Doubletree is stressing conversions, because it's not yet clear whether the economics favors new-build full-service hotels.

In any case, what new-builds Doubletree is engaged in are part of urban complexes, a strategy Dave Horton, Doubletree's senior vice president of brand management, stresses.

Development is “all about economics and the cost of money relative to buying an asset or renovating or converting, versus building a new property,” he says. “Although some new-build is going on, the economic model generally speaking right now is not too much in favor of new-build.”

At the same time, a 600-room, new-build Doubletree has been proposed in connection with a new cruise ship terminal in San Diego, there's a new one next to the new Anaheim convention center, and there's the new Doubletree Resort Lodge & Spa overlooking Niagara Falls in Canada.

In addition, Doubletree just opened a 150-room new-build in Bay City, MI, as part of a project also involving a convention center.

The new-builds are connected to new, mixed-use projects, convention centers or major attractions, Horton says. “The challenge with new-builds is acquiring the land and the economics of making the investment work versus other options,” he says. “Otherwise, new-builds are great because they're a lot easier than conversions when it comes to trying to fit brand standards into an existing box. New-builds, from our perspective, are simpler. It's just that the deals are hard to come by.”

Site selection might be simpler for upscale projects, like a Fairmont to be built on the Palm, a manmade island off the coast of Dubai in the United Arab Emirates. The site is perfect for a resort destination, suggests Tom Storey, executive vice president of development for Fairmont Hotels and Resorts.

“Typically, we do a new development project with sophisticated partners that have prior experience in high-end development,” Storey says, “and in many cases they're partners we've done transactions with before. What typically happens is a site is identified — in many cases it's brought to us by our partner — that needs to have the quality of access we need to support a larger luxury hotel.”

Airline access is crucial, the destination already key or could be and infrastructure must be in place, he says. “What the government of Dubai is attempting to do is make the Palm a competing destination like Disneyland or Las Vegas,” he says. And Fairmont is not alone in wanting to build on the Palm. “Everybody is essentially in the same stage of development because the actual Palm itself is still being completed. They're taking granite blocks and building this palm-shaped island that juts off the coast. My understanding is they've put down enough granite to circle the globe three times.”

The trick is to align construction costs with rate projections. “It's the intersection between what you will ultimately be able to generate in return versus the costs per key,” he says. “The combination of land costs and construction costs in these high-quality situations is such that there is some risk in being able to achieve the kind of hotel rates and occupancies you need to justify the development.”

Like the 400-unit Fairmont Mayakoba on the Mexican Riviera, the 700-unit Fairmont in Dubai, expected to open in 2009, will have residential units. The property will be split between hotel and “for sale-residences that will be put back into the rental pool at the owner's option,” Storey says.

That seems to be a trend. According to Lodging Econometrics' Ford, there are about 160 hotels in the U.S. that are adding residences in addition to conventional hotel rooms. These are generally developing in central business districts and resort destinations; about 45 are “selling guestrooms as condo investments,” helping builders raise development money and giving condo owners hotel amenities and services.

All told, however, development seems rational, even measured. “There's a lot of talk about new-builds, but there aren't that many new-builds coming online yet,” says Fairmont's Storey. “If you really look at the growth in luxury supply, it's actually at its lowest growth rate in over a decade…I expect, and most of the analysts say, that supply probably won't come back until 2008 or 2009.

“That's why people are bullish: You've got demand growing, and supply growing at a slower rate.”

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