The cycle would begin to repeat itself and travel managers and corporate purchasers would be able to breathe a little easier.
The cycle would begin to repeat itself and travel managers and corporate purchasers would be able to breathe a little easier.
Some even said that the hotels would once again plunge into a desperate search for enough guests to break even.
Perhaps the hoteliers were paying more attention than was expected. For while the market has cooled a little, there are few — if any — locations where there is a glut of hotel rooms and the corresponding bargain basement room rates. Investors are still buying into the market, albeit with a little more forethought than might have been exercised in earlier cycles.
What's spinning out of this cycle is a broader choice of hotel types - something to fit every need and preference in nearly every corner of the world. Service models are internationalizing so that travelers will find an element of the familiar no matter where they go. It will be a time-saving comfort level for experienced, and often road-weary, business travelers.
Concurrently, radical new brands are targeting the emerging generation of business travelers.
But cheap? Well, "cheap" is a relative term. But, yes, even the budget brands are rising to the occasion. If your travelers will forego true opulence for comfort and convenience, they can be made happy even with a restricted program.
Luxury In New Settings
Not that they will give up as much as they would have a few years ago if they move to many budget hotels. "Luxury is being driven lower," says Milton S.F. Curry of Cornell University's Department of Architecture. Developers are asking if they can "make that Best Western a W," he says, as the influence of boutique hotels permeates the industry.
The trick is to add that touch of luxury without losing the image of no-nonsense basics, which now often include complimentary breakfasts, free morning papers and free wireless Internet. Thus Choice Hotels' announced in May that it was upgrading the bathrooms of its Econo Lodge budget hotels with a new line of "energizing" body care products, hookless shower curtains and fluffier towels - but no brand-name lotions, spas or matching bathrobes were mentioned.
A lot of the pressure to drive luxury lower in the US appears to be is coming from Europe. There are several good explanations. Budget brands are expanding into markets where the basics are defined differently. US businesses with smaller budgets are entering the international market. More European tourists are expected in the US and familiarity in an unfamiliar setting breeds business.
Whatever the driver, several hospitality analysts and investors returning from a fall conference in Italy have commented on Best Western, Quality Inn and Hilton Garden Inn hotels in the area of Rome's airport that were "much higher-level" than their contemporaries in the U.S.
It's not happening only in Europe. China's getting a lot of attention too for the same three reasons: growing domestic travel, an influx of small-budget international business travel and a growing outflow of visitors to the U.S. Holiday Inn Express has been prepping that third group for several years. Florida-based Vantage Hospitality is just entering the Chinese market with its Best Value Inn and Lexington Collection brands. China's Best Value Inn, in the budget category, has opened in Shanghai and Suzhou. There's a Lexington in Shenyang and will soon be another in Wuhan. China is also among the target markets (Central America is another) of a new brand, Hotel Pure, created by Oriens Travel & Hotel Management Corp., based in Las Vegas. Oriens' goal is organize independent mid- and lower-end hotels under a single brand and make them recognizable among budget-conscious business and leisure travelers. "Economical accommodations in China were virtually non-existent until the recent emerging of Home Inns and Jun Jian Hotels," states CEO Ken Chua in the company's investment brochure. "As a foreigner, traveling into a particular city in China and arranging accommodations has been challenging unless one can afford to stay at the top-end hotels." Chua describes the concept's interior as "Miami South Beach inspired" with minimal furnishings and lots of white, including white porcelain flooring.
Meanwhile the Best Value model —which has grown to nearly 800 hotels in eight years across the US — has entered Canada, and is looking at India, Great Britain, South and Central America, and Europe under the leadership of Bill Hanley, formerly senior vice president of Cendant's International Division.
The Price Is Right
Those in investing in the budget area are there because it is what they can afford. Investors from the Middle East are looking at the high-end luxury markets because they have large sums of money to invest and that's hard to place, says C.A. Anderson, executive vice president of development and acquisitions at Interstate Hotels & Resorts. "The US, over history, has continued to return a fair amount on the investment and it's a safe haven — there's no worry about [what will happen with] a change of government."
The search for high-end investment properties seems to be pushing everyone farther afield. While Taj Hotels and Resorts has gone outside India to find properties in the US, Amsterdam's Golden Tulip is opening in Jaipur. (The Dutch chain is also rumored to be looking for property in the U.S.)
But no matter which end of the spectrum they look at, they're in hospitality because it is something they are familiar with — "They look at what they know," explains Anderson, pointing out that the logistics industry is hot now too but "more people know about hotels than warehouses."
About a quarter of the large dollar sales are concentrated in gateway markets like Boston, estimates Charlie Fritsch, current president of Hotel Brokers International. He agrees that familiarity is one of the major reasons. But he also points out that the gateway cities harbor a heavy concentration of the high-end hotels most big-dollar investors are hunting.
"If you asked us, we know the larger cities best — the top 25 MSAs in the US, everybody knows. But not so many have been to Cedar Rapids, IA, or Minot, SD," says Anderson. For those who know the smaller cities, there's opportunity to invest those big purses in collections as opposed to single sites.
Example: most investors haven't heard of Mahwah, NJ, either, but it's the site of one of the four hotels purchased by Interstate and its joint venture partner, Ireland's Harte Holdings. It's Harte's first venture into the US market. For $207.8 million, Harte and Interstate are buying the Sheraton Mahwah, plus the Sheraton Frazer Great Valley, near Philadelphia; the Latham Hotel Georgetown in Washington DC, and the Hilton Lafayette in Lafayette, LA. They'll invest another $30 million for renovations.
From Interstate's perspective, the portfolio "was attractively priced, at or below replacement costs, and aligns well with our portfolio of wholly-owned and joint venture real estate holdings," says CEO Thomas F. Hewitt.
The fact that three of the hotels carry upscale, full service brands is attractive. But each also has its own story, says Anderson. The Latham is a famed independent Georgetown hotel that will be repositioned. The Hilton Lafayette, he continues, "is having an exceptional year with RevPAR growth in excess of 20 percent." It evaded Katrina's reach and derives much of its business from being at the seat of state government. Frazer is in the Philadelphia MSA. And Mahwah ... there's a big shopping center being built at near the hotel's site at the north Jersey crossroads linking New York City, Albany and New England.
It's all part of Interstate's stock-in-trade: "We have someone in Moscow who has that kind of local knowledge."
Stability's The Key
Regardless of where the investment originates, investors are looking for growth potential. In the US, that potential exists alongside the current weak dollar, but it doesn't depend on it — "it's only made it more attractive," explains Fritsch, who heads his own business — MBA Hotel Brokers — as well leading the HBI association. The investments are likely to last longer than the current level of exchange: "they know what the exchange rate is today but it won't necessarily last."
If the exchange rate is of only minor importance in their projections, so too are tightened US borders. "Though investors are worried about it a little, and talk about it a lot," says Fritsch, "it doesn't seem to be seen as a long-term restriction."
In general, hotel investors appear to be disciplined in their approach and therefore more optimistic about the market. While one speaker at a November 13 forum sponsored by the Cornell University School of Hotel Administration maintained that "a huge amount of European capital coming into the US and those guys are getting killed," an investor from Germany asked in some disbelief "You are a huge country. How is it that a recession can occur so fast?"
"It's all perception," he was told. "It's a strong economy. There are no delinquencies or defaults in the hotel sector. There is no real risk right now. We're going forward with loans on good products."
Perception, yes. But observation too, with New York City the favorite crucible. "We will soon learn more about how this market behaves at a peak in the cycle," writes Cornell's John B. Corgel in his recent report "Eight Rules for Competing in Hotel Real Estate Markets."
So if stability is the key to attracting investors, it's also what's likely to maintain many ADRs at high levels. "In the absence of softening demand," writes Corgel, "it now appears that the US hotel markets will remain at the peak for a prolonged period because steadily increasing development costs are stalling supply growth. ... the strong recovery of hotel markets since 2002 dispels the position held by some experts that lodging demand can be permanently disabled by catastrophic events and war."
During the International Hotel/Motel and Restaurant Show in November at NYC's Javits Center, Fritsch notes, a Comfort Inn in New York was at 94 percent occupancy.
International Trades
Foreign investment into the US market appears to be coming from all quarters, even from India where hotel construction is booming as it tries to keep pace with demand. A year ago, Indian Hotels Company (ICHL) paid $170 million to Millennium Partners for the Ritz-Carlton Boston and renamed it Taj Boston, adding it to the portfolio of Taj Hotels, Resorts and Palaces. The hotel was already profitable, divested by Milllenium only because it was contractually restricted from owning two Ritz-Carltons in the same market. ICHL was extremely satisifed with its acquisition; Ariil Goel, senior VP of finance, cited a huge potential in the Boston market as well as an "immense scope to increase the profitability, increase rates and occupancy levels."
Even Japanese investors, many of whom withdrew from the US market after being the big spenders of the 1980s, are expected to return. "They're starting to buy in Hawaii and Guam," says Anderson, "and they'll be coming east."
To some degree, the renovated and new-build US hotels could show their foreign investors' stamps, especially if they expect to attract foreign visitors as well. "The Taj has it's own look," observes Fritsch "You'll see more of the European style — more wood floors as opposed to carpeting, more upscale bath amenities — I don't think they'll go as far as installing bidets though."
"Every country has its own culture," says Anderson. "We assess the best of what goes on and adopt that. But we won't be relying on international travel for a large part of the business at these [Harte investment] hotels."
Of course, for a hotel to be purchased, the owner has to be willing to sell. That's not always happening. Indian Hotels Company, the buyer of the Millennium Boston, might have preferred to invest that money in the Orient-Express Hotels. But Orient-Express keeps turning them down. Likewise the directors of Sonesta International, after "spending considerable effort evaluating alternatives" for its portfolio of deluxe hotels, decided to stay independent.