For travel procurement, this translates into higher rates, less availability and the need to expand hotel choices to meet program demands. It also presents the opportunity to better serve your travelers, diversify your portfolio and create an exciting, cutting edge travel program – if you know where to look.
There is no planned obsolescence in the hotel business because, first and foremost, it’s a piece of real estate and the mantra in real estate, “location, location, location,” still aptly applies. Whether the plans call for hoteliers to build, rebuild, refresh, renovate, rebrand or repurpose, location drives the decision. But there’s so much more to it.
According to Lodging Econometrics, a lodging industry real estate intelligence firm, hotels are seeing their average daily rates (ADR) and revenue per available room (RevPAR) exceed pre-recession numbers. The hotel construction pipeline is up, 13 percent in projects, and 15 percent in rooms year over year. According to LE’s research, the industry is in the recovery phase of a real estate cycle and pipeline growth is predominantly in smaller upscale and midscale projects.
Top cities for hotel development in the United States include New York, Washington, DC, Houston, Los Angeles, Chicago and Miami. LE data for the first quarter 2014, indicates that Marriott has the most rooms in the pipeline, 613 projects totaling 75,982 rooms, including 126 of their Residence Inn brand. Hilton has the most projects in the pipeline, 623 projects totaling 72,530 rooms including 104 of their Hilton Garden Inn brand. InterContinental Hotel Group’s Holiday Inn Express has the largest project count of any brand in the pipeline with 292 projects totaling 26,410 rooms worldwide.
Best Western has expanded their offerings to include upscale Best Western Premier, upper midscale Best Western Plus and now a new midscale extended stay brand. They have increased their development team with a goal of aggressively growing Best Western products across three chain scales.
Playing the Odds
Development in any industry is a high stakes endeavor, but the twist with hotels is the product itself. Whatever project investors decide upon must be able to withstand the ups and downs of a cyclical economy. It’s easy to manage a hotel when clients are knocking down the doors to get in. Throw a terrorist attack, declaration of war or a natural catastrophe into the market mix, and that’s when the real games begin. Those who are tasked with determining growth and expansion in the hotel business conduct their due diligence in overdrive.
“Every year our development feasibility and finance team rank orders more than 1,000 markets around the globe on a variety of economic, demographic and hotel supply and demand metrics,” explains David Tarr, senior vice president, real estate and development for Hyatt Hotels Corporation. “This ‘market ranking tool’ enables us to apply a consistent level of objectivity in determining the key markets demanding our focus – both development resources (for new projects) and capital allocation (for renovation). We seek a balance between strategic value and economic value with the highest ranked markets meriting a more aggressive posture financially in order to gain access to those markets.”
Tarr cited Park Hyatt, their luxury brand found in gateway cities around the world as an example of their ranking process, “It’s absence from New York City was perhaps the single most glaring omission for the brand and, given the importance of the Manhattan market from an international perspective, identifying an opportunity to introduce Park Hyatt was considered to be a development objective of the highest importance.” With this objective top of mind, Hyatt allocated the capital to satisfy this strategic brand objective and will be opening the Park Hyatt New York later this year.
“We use a variety of tools, both public and proprietary, to get a broad view of conditions in the markets we enter,” explains Jim Holthouser, executive vice president of global brands for Hilton Worldwide. “Smith Travel Research’s STAR report measures key performance indicators for our hotels and our competitors in each market including occupancy, ADR and RevPAR index. We also have an internal metric that measures guest satisfaction and loyalty, as well as individual product and service testing before we roll out new initiatives.”
Since guest satisfaction and retention is the ultimate measure of hotel success, development teams solicit feedback by every means available. “We routinely ask our guests about their experiences at our hotels to ensure we’re meeting their needs,” Holthouser says. “We monitor and use social media from guests post stay and engage with our loyal Hilton HHonors members regularly to garner their feedback on all aspects of the guest experience.”
Similarly, Hyatt’s Tarr explains, “We actively solicit guest input through our daily interactions at the property level as well as through targeted consumer research with guests, corporate travel executives and meeting planners. Our newest brands, Hyatt Place, Hyatt House and Andaz, are the result of consumer insight and are continuously being evolved as the needs of our guest evolve.”
Alphabet Soup Decoded
Of equal importance to consumer research and development is cultivating resources among investors, where the rubber meets the road. How investors choose to spend their money is top of mind for hotel development. And for investors, RevPAR is the gold standard for hotel brands. “In the brand business,” Holthouser explains, “the ultimate measure of brand strength is RevPAR index. That’s where it all comes together in our industry. That RevPAR number is what owners look at, particularly when they want to grow their business and add more hotels to their portfolio.”
For those outside the hotel industry, the acronyms and concepts are unique and confusing. The three relevant terms in measuring hotel performance are occupancy, average daily rate (ADR) and revenue per available room (RevPAR).
Occupancy – How many rooms are occupied per night? This is a great statistic but used alone is not a true indicator of success. A hotelier can claim 100 percent occupancy if they sell every room…even if they sell every room for a dollar.
Average Daily Rate, ADR – The average rate paid calculated by dividing total rooms revenue by number of rooms occupied. This is also a great statistic but again, not a true indicator of success if used alone. If a hotelier sells only one room, but sells it at $1,000, they have an ADR of $1,000.
RevPAR – Blending occupancy and ADR yields the true measure of hotel success. Outstanding RevPAR means that the hotel has sold every room possible at the highest possible rate. RevPAR index is used for internal goal setting, external benchmarking and for hotel development potential in markets, sub-markets and within specific brands and hotel products. A hotel cannot achieve a commanding RevPAR index without the perfect blending of a variety of factors including financial management, physical asset, guest and associate satisfaction, demand generation and historical compression.
A hotel operates 7 days a week, 365 days a year. Corporate travel is only one piece of the occupancy puzzle. Typical corporate business fills up Tuesday and Wednesday with a bump on Monday and Thursday – known as shoulder nights – if the hotel revenue manager restricts inventory appropriately and allocates rooms at a minimum stay of three or four nights.
No hotel can survive on Tuesday and Wednesday business alone, regardless of how high the rate may be. Friday, Saturday and Sunday nights are critical to a hotel’s success and the demand generators for weekend or group/ convention business can vary greatly from market to market.
Hot Market, Cool Trends
Understanding RevPAR and the hotel or market’s competitive set means understanding where opportunity lies for growth and shifting market share. Hotels are real estate investments which, generally speaking, are considered long-term assets. A new company may swoop in, replace the flag and refresh the rooms in a failing hotel but the property’s long-term success is predicated on growing business, not simply cannibalizing existing business in the market. Hilton, Hyatt, Marriott, Starwood – all have similar sales engines and resources, but no hotel company can fill rooms without demand opportunity.
Once a project is identified, it’s full steam ahead for hotel development.
“We are willing to deploy our own capital to gain access to the most strategically important destinations through either ground up development or hotel acquisition/brand conversion. We evaluate deal valuation and financial returns as the underpinning for a corporate decision to proceed,” says Tarr.
“We’re always looking at new brands and new ways to serve our customers,” Holthouser says. “Essentially, where our customers want to go, we want to be and we want to have the right product for them to select.”
Hotel development, both domestically and internationally, has hit a fever pitch in the lodging industry right now. Emerging from the economic turmoil of the past several years, there are winners and losers. And because it’s such a hot market, there are lots of moving parts.
In addition to post-recession brand shuffling and property renovation, there’s also been a significant change in the traveler demographic as more and more Gen X and Gen Y travelers hit the road. Hotel companies are meeting those changes with new products tailored to meet this new generation of traveler, while maintaining their corporate roots and flagship brands.
For travel procurement, all this development means change, but informed change if you use your resources. Hotel companies are branching out, offering different brand choices at different price points and service levels to meet traveler needs. Trust that a hotel company’s new or expanding presence in a market has been thoroughly vetted by their development teams and investors.
So use their market research to your advantage. For instance, if a new “big box” hotel is opening in one of your top destinations, this is an opportunity for negotiation with your existing partners and the new-comers, particularly in the first few years when the market adjusts to absorb the new inventory. Established hotels want to hold on to their base while the new hotel wants to show their investors an immediate return on their investment. For you, a little market turmoil can be a good thing.
All major hotel companies have a sales force deployed against every market around the world. “Our global sales people conduct business in 42 languages, serving 25,000 customers in 91 countries from 34 offices around the globe,” notes Holthouser. “This allows us to truly understand the unique needs and opportunities of regions around the world, right down to the local level. We work to ensure we educate travel managers on our brands and distribution around the world.”
Work with the sales teams at your existing partners, and meet with the new players, particularly in strategic markets that can make or break your program. Grand opening invitations, familiarization trips, site inspections, customer forums, corporate business reviews are all tools to help travel managers get educated on new brands, emerging concepts and property renovations. Take advantage of every opportunity. An invitation to one of these events means a chance to help shape the future of the industry and ultimately better serve your travelers.
New brands, new concepts and new choices; the future of lodging development means hoteliers finding ways for common-sense expansion and evolution in a dynamic industry. If you understand the process, you have an opportunity to take advantage of the changes, to shake things up and to keep your travel program as dynamic as the market.
