Author Archives: pinnacleadv
September 10, 2015 2:39 pm Comments Off on Rhode Island Economic Outlook 2016 – by Rachel Roginsky, ISHC
Presented by Rachel Roginsky
July 16, 2015 1:15 pm Comments Off on Outlook 2016 – Greater Boston Convention & Visitors Bureau
Presentation given by Matthew Arrants, ISHC
1:10 pm Comments Off on Outlook 2016 – Rachel Roginsky, ISHC
Presentation given by Rachel J. Roginsky, ISHC
April 1, 2015 7:13 pm Comments Off on Airport Hotels: Predevelopment Planning
Presented by: Allison Fogarty
The number and type of hotels that can be supported around airports varies widely by market, and while airline passenger movement is an important consideration, it is not the only hotel demand driver. Local and regional development and transportation patterns also influence the need for accommodations. In some cities, major office submarkets have developed around airports and local business activity fuels much of the local lodging demand. Passengers with early morning flights frequently seek accommodation near airports to avoid traffic delays in congested urban areas or in rural areas where long drives to the airport are common. In addition, major airports frequently serve as central meeting destinations for various groups. And of course, airlines contract for rooms for their crew and passengers stranded due to overbooking or mechanical delays. Although occupancy levels in airport locations are frequently above the industry average, the ADR in airport locations is frequently somewhat lower than downtown locations or overall industry averages. As a result, the RevPAR of airport hotels as a group is similar to that of the US Hotel industry as a whole.
Hotel developments are under consideration at a number of airports around the country as airport managers seek to diversify revenues and enhance the passenger experience. Airport officials typically seek to balance the interests of a number of constituencies including airlines, local business groups, political leaders and regulatory authorities in developing their master plans which provide a framework to manage growth and development over the next twenty years. As a result, the development process for on-site airport hotels tends to be glacially slow, as airport real estate personnel are required to evaluate in detail the future impact of their decisions, and approvals processes, although they vary by municipality, are invariably protracted.Issues that airport authorities wrestle with include:
While well-maintained hotels that are physically connected to airport terminals generally achieve higher occupancies and ADRs than their off-site competitors, this locational advantage must be weighed against possible future airport expansion – and the likelihood that a hotel site will be the best location for new terminal gates, runways or other priorities. Several airports proceeding with terminal or runway expansion projects have been forced to reacquire hotel properties in the path of these improvements (frequently at a premium), through eminent domain or buyout negotiations; a process that is easier to contemplate on a thirty- to forty-yearold structure than on one that is still relatively new.
Hotel developments can be structured in a number of different ways from an ownership perspective; with ground leases and management contracts being the most common. The advantage to airports of a ground lease structure are that the lessee bears the risk of development cost overruns and operating shortfalls; however the development team requires a substantial reward for the assumption of this risk. In addition, the airport must relinquish control of the property for a lengthy period, and financing sources require robust non-disturbance agreements. Conversely, some advantages of airport ownership include long-term control over the asset, shorter management agreement terms and potentially higher returns. If the hotel site is needed for redevelopment, it will be far easier to redevelop an airport-owned property. Airports that own hotels generally contract with a hotel operator to manage the day-to-day operation of the hotel. Since few airports have the internal capability of evaluating, and if necessary, challenging operating budgets, capital improvement plans and marketing strategies, we recommend that airports retain third-party asset managers to oversee the operation. Many airports finance airport-owned properties through airport revenue bonds, which enhance the feasibility of projects through lower debt service. However, airports that finance through revenue bonds are precluded from using the hotel industry’s traditional performance-based management compensation structure, which emerged as an attempt to align ownership and operator objectives.
Airports generally issue Requests For Proposals (RFPs) incorporating the airport’s standard terms and requirements, along with a brief description of the project. Some airports struggle with RFP development, and provide potential developers with very little information regarding the proposed project and site and minimal guidance in structuring their proposals, thus generating submissions that are difficult to compare and evaluate. During negotiations, we recommend that airports seek specialist legal advice to ensure that important issues are specifically addressed in hotel contracts including maintenance and operating standards, buy-out provisions if the hotel site is required for redevelopment, and interpretation of rent adjustment provisions. Some airports have tied renewal terms to capital expenditures, recognizing that as lease terms expire, tenants have little incentive to maintain the facility and are inclined to “run the property into the ground.”
If properties are ground leased the airport is generally not responsible for direct oversight, although well-managed airports will ensure that all lease provisions, particularly with respect to maintenance and operating standards are enforced. Savvy airport managers employ either a staff or third-party hotel asset manager. Effective asset managers have the skill and experience to question operating budgets, annual marketing plans and operating results, and can ensure that renovation funds are spent most effectively.
Hotel facilities are an important amenity around most major airports and for those airports with on premise hotels, overseeing their development and effective operation can be a major challenge. Ensuring that the right team is in place to assist with market analysis, project development and finance, legal advice and asset oversight is a key issue to the short-term success of a project; however it is important to provide some flexibility to allow for unforeseen future needs of the airport, and a mechanism for addressing changing needs or conditions. For an expanded discussion of issues concerning Airport Hotels, please refer to Pinnacle Advisory Groups website at www.pinnacle-advisory.com and click on the article entitled: Airport Hotels: Laying the Foundation for a Synergistic Experience.Allison Fogarty is the Managing Director of Pinnacle Advisory Group’s Florida Practice. Ms. Fogarty has extensive experience in hospitality development. Her activities have included site selection, property inspection, contract negotiation and review and due diligence. As a consultant, she has directed and completed market and financial analysis engagements for hotels, resorts and mixed-use projects throughout the United States and the Caribbean. Pinnacle Advisory Group, with offices in Boston, New York, Washington, D.C, Florida and Southern California, is a hospitality consulting firm that provides consulting and asset management services to several airport clients. Pinnacle’s services include development counseling, appraisals, acquisition due diligence, asset management and litigation support. In addition to several major airports, Pinnacle’s clients include leading hotel companies, REITs, universities, major banks and municipalities. Ms. Fogarty can be reached at email@example.com.
February 17, 2015 7:08 pm Comments Off on Hospitality Market Overview
Presentation given by Rachel J. Roginsky, ISHC
January 1, 2015 5:59 pm Comments Off on Delayed Gratification in Energy Savings
Written by: Jenny Lee
ENERGY COST FORECASTS
For a full-service hotel, energy costs are usually between 4 to 6 percent of revenue, but historic and luxury properties may see energy costs exceeding 10 percent. For many hotels, electricity prices have been increasing almost as fast as the gasoline prices were decreasing.
However, relief may be in sight. Wholesale natural gas prices are falling, due to the forecast of a mild winter. And, for many areas in which oil drives electricity power plants, electrical rates should stop climbing.
Electricity accounts for approximately 46 percent of total utility costs in a typical hotel. On average hotels in the U.S. spent approximately $2,196 per available room each year on energy. With the anticipated increase by electricity companies, expect real dollar growth in electricity expense this year, but a decrease in natural gas bills. Hotels in the U.S. spent an average annual per square foot of $1.05 on electricity and $0.25 on natural gas. However, most utility companies are replacing coal burning plants with natural gas. Depending on the pace at which this conversion is absorbed or passed through, the savings in Natural Gas prices should ameliorate the increase in electricity rates.
Natural Gas Savings
In late December, natural gas prices decreased to a near 2-year low as mild temperatures in the U.S. have caused natural–gas futures to fall. Record U.S. oil-and-gas production, which has played a major role in driving the crude oil prices down, is experiencing weak demand for home-heating fuels due to the recent warm spell. In December, the wholesale price of January national gas deliveries declined 30 percent.
The month of December 2014 may have been the 9th warmest month since 1950 , causing limited demand and allowing U.S. oil producers to work unimpeded. Unfortunately, consumers may have to wait for lower prices. Most customers are served by utilities, which buy most of their fuel in advance. If natural-gas prices remain low, most of those savings may not appear until next winter’s bills.
Natural gas for January delivery is down 32 cents at $3.144 a million British thermal units on the New York Mercantile Exchange. The price of the fuel has dropped 30 percent in December.
 U.S. Energy Information Administration and Infogroup ORC on Demand Research
 E Source Companies LLC.
 MDA Information Systems LLC, December 2014
 Ira Iosebashvili, “Natural-Gas Prices Drop on Mild Weather”, Wall Street Journal (December 22, 2014)
US Lodging Electricity Forecasts
U.S. electricity rates increased after years of slow growth, driven by large increases in the Northeast. U.S. electricity prices experienced the largest jump in 5 years during the first 6 months of 2014.
The U.S. Energy Information Administration estimates residential prices in 2014 to have increased by 3 percent over last year’s levels. Average U.S. residential electricity prices are expected to grow at a slower pace at 1.7 percent in 2015.
For a state-by-state changes in the average retail price of electricity, go to:
Note that Hawaii has the highest average electricity rates, commanding more than triple the national average, while New York and California’s average electric rates are approximately 50 percent more than the national average. Washington D.C. and New Jersey command rates 20 percent more than the average.
As you are reviewing variance reporting, you will need to research your local energy company, or companies, to anticipate increase in rates. Utility forecasts for major markets are shown below, from worst to least:
- In New England, National Grid increased their rate by 37 percent in November 1, 2014 and NStar has requested a 29 percent increase effective January 1, 2015 due to the coal- and oil-fired power plants that have closed. Now the region is dependent on natural gas for generation but has limited infrastructure to get the gas to markets. No savings are likely until budget season next year
- National Grid, which supplies electricity to 3.4 million customers in northeastern US, is seeking to increase electric rates by 23.6 percent as of December 2014. Note that many regional utility companies have filed for increases because of constraints on the gas pipeline that strain the price of electricity generation. Ditto for waiting for any relief until 2016.
- Texas, which reaped the benefits of complete deregulation and variable pricing with four consecutive years of cost declines, will likely see substantial increases in rates during peak demand period. Its utility commission authorized a 40 percent increase in the highest demand period pricing in June, 2014, and will increase the rate cap by an additional 28.5 percent in June, 2015. Texas has a system whereby CenterPoint, the owner of the grid, prices its service separately from the energy generating company, for which it earns 30 to 40 percent of the amount billed. CenterPoint’s return is currently above the 10 percent guidance authorized by the utility commission and in October a number of Cities banded together to challenge CenterPoint’s return.
- Chicago based Com Ed also got out of the energy generating business, and now bills separately for electricity and the cost of delivering it across its power grid. The transmission cost accounts for approximately 40 percent of a customer’s bill. In order to finance a $2.6 billion grid modernization, the transmission component increased by approximately 38 percent, and the average consumer’s utility bill grew by 21 percent back in June. Increased transmission costs will cause the average consumer’s bill to grow by an additional 3.7 percent in January, 2015.
- In Southern California, Edison, which serves much of Southern California, increased residential rates across the board last month, with average users seeing their bills increase by 8 percent. An article recently published in the LA Times, cites a study that predicts the cost of electricity could jump 47 percent over the next 16 years, in part due to the state’s shift toward more expensive renewable energy.
- San Diego Gas & Electric seeks a 7.5 percent rate increase in 2016, according to filings submitted in November 2014.
- Xcel Energy, which serves Denver will charge 4.9 percent more in 2015 to recover the cost of replacing coal-fired plants and meet the state’s goal of an 80 percent reduction in emissions.
- Hawaii, which recently experienced a rate adjustment in mid-2014, has committed to no further rate hikes for the next 3 years until 2017. Almost all of Hawaii’s electricity is produced with oil, not coal. There may be some rate reductions in the future, if the Utility commission does not spend the windfall on its green (solar) energy goals.
- Florida Power & Light forecasts a decrease in commercial electricity cost of one percent for 2015.
What should ultimately result in savings may be wiped out by environmental compliance. Although, natural gas prices are decreasing, “we are now in an era of rising electricity prices“, according to Philip Moeller, a member of the Federal Energy Regulatory Commission. The problems confronting the electricity system are the result of a wide range of issues including new federal regulations on toxic emissions, rules on greenhouse gases, state mandates for renewable power, and technical problems at nuclear power plants.
About the author:
Jenny Lee is a Vice President with Pinnacle Advisory Group West based in Southern California. Prior to joining Pinnacle, Ms. Lee was the founder of Hospitality Research Solutions, and employed at Jones Lang LaSalle, and Economics Research Associates (“ERA”). Ms. Lee holds a Bachelor of Science degree from the School of Hotel Administration at Cornell University and a MBA from The University of Chicago Booth School of Business with coursework concentration in marketing and finance.
October 1, 2014 6:08 pm Comments Off on Four Tips to Selecting a Hotel Management Company
Written By: Matthew R. Arrants, ISHC
As published on HotelNewsNow.com
Selecting the right management company is one of the most important decisions a hotel owner can make. The financial implications are significant and wide]ranging. The selection process is a complex equation as there are numerous factors that should be considered to ensure the right fit. Before beginning the selection process there are several steps that every hotel owner should take:
1. Create a Competitive Environment . Owners often make the mistake of gfalling in loveh with the first management company they meet. They get invited to visit the companyfs nicest property, stay in a beautiful suite, enjoy a nice dinner with the principals of the company, and, the next thing they know, they feel committed. Unfortunately, management companies are not equal and management contract terms can vary dramatically. Creating a competitive environment from the start will force the manager to negotiate the best deal possible and result in a more favorable outcome for the owner. The most common method to create a competitive environment is through a Request for Proposal (RFP) process. Before developing the RFP, however, there are several critical steps that owners should take.
2. Get Help . Hotels are not like other classes of real estate. They are operating businesses and the relationship between owner and operator is a complex one. Most management companies have extensive experience negotiating management agreements and utilize both in]house and outside counsel. Ownership should be similarly represented by experts. All owners should be represented by legal experts that specialize in hotel management agreements. Owners with limited experience in hotel management selection should also hire an experienced hotel asset manager to assist them through the process and to work with management on an ongoing basis to maximize the value of the hotel. In the management selection process, the advisor will help ownership clarify their objectives and as result, provide recommendations regarding the best management company for their hotel. Ultimately, an experienced team brought on board early will provide better outcome for the owner.
3. Clarify Your Objectives . Maximizing the value of their investment is typically ownershipfs primary objective and is the basis for most of their decisions. However, maximizing value is not as simple as it seems, and profit is not always ownershipfs primary motivation. A developer building a fullservice hotel in a high barrier]to]entry urban market might be best served by keeping the hotel independent, negotiating the ability to terminate management upon sale, then selling it soon after opening to a strategic buyer that would pay a premium for the ability to bring in management and brand. That, however, could also be a fairly risky strategy. Other owners are not motivated by the profitability of their hotels, but are more concerned with the impact of the hotel on other nearby uses. For example, colleges and universities are often more concerned with protecting their relationship with the community and their brand image than with bottom line profitability. Whatever the goal, understanding the objectives is an important factor to consider when selecting a management company.
4. Know the Hotel . Every hotel is unique. Many share similarities, but none are the same. Hotels are not simply a function of their room count and physical product; they are also defined by their location, the demand in the market, and their competition. Savvy owners will have a thorough understanding of their hotel regardless of whether itfs an existing property or new construction. Criteria to consider in identifying management candidates include room count, food and beverage offerings, meeting space, location, brand, and market. In addition, ownership should have a good understanding of the hotelfs capital needs and projected financial performance. Lastly, understanding the hotelfs desirability to managers is critical. For example, a 1,000]room headquarters hotel in a gateway city is going to be a very high]profile property that will be very desirable to certain types of management companies and thus impact what companies might be interested in it and what terms they might offer.
Owners and developers preparing to select a management company would do well to begin the process as early as possible in order to allow ample time for thorough consideration of each of these issues. A variety of stakeholders should be brought to the table and outside experts may be called upon. Moreover, the actual selection and negotiation processes often take much longer than most anticipate. Depending on the type of property and its particular needs, the time horizon varies, so considering each of these points in turn will help ownership clarify a timeline and maximize efficiency at each stage of the process. After owners have taken these preliminary steps they can begin the formal selection process: Identifying and researching likely candidates; developing and issuing the RFP; evaluating responses; and ultimately negotiating an agreement.
September 1, 2014 6:09 pm Comments Off on Payroll Pressure Ratchets Up
Written by Karen Johnson
LABOR COST FORECASTS
2013 marked the first year since 2007 in which the median household income increased, albeit at the almost imperceptible level of 0.3%. Employers added more jobs in the 12 months ending September, 2014 than in any rolling-twelve month period since 2006. Expect real dollar growth in direct payroll expense this year.
A recent survey by the American Hotel & Lodging Association (AH&LA) released a survey indicating that most hotel positions pay above minimum wage. So, why is this floor so important? Minimum wage is important because of the trickle-up effect. A highly regarded economist estimates that within a few years of the increase, four times as many employees have been affected, and the cost is generally three times the direct cost. The President’s proposal to increase the federal minimum wage to $10.10 is gaining momentum, but many states are not waiting. During the 2014 sessions, 34 states introduced legislating that would increase minimum wage levels.
- Connecticut, Maryland and Hawaii enacted three- to four- year staged increases to $10.10.
- Massachusetts will exceed the federal proposal by 2017 and Vermont in 2018.
- The legislatures of Delaware, Michigan, Minnesota and West Virginia voted to increase to between $8.25 and $9.50 by 2016, slightly below the federal proposal.
These legislative increases are relatively benign. Activists in have put initiatives on the ballot in five states: Alaska, Arkansas, Illinois, Nebraska, and South Dakota. And, in contrast to last year’s mostly single digit increases, the average of these statewide ballot initiatives is over 21 percent. The Wall Street Journal reported that, since 2002, there have been 10 statewide ballot initiatives, all undefeated. You should assume these will pass.
For a state-by-state list of known increases, go to: www.ncsl.org/research/labor-and-employment/state-minimum-wage-chart.
As you are reviewing budgets, you will need to research municipal initiatives, since cities have jumped into the fray. Fast food workers continue to demonstrate, and living wage ordinances have been passed or proposed in the following major cities:
- The District of Columbia (enacted, will raise to $11.50 by 2016)
- Chicago, proposed by the mayor’s office at $13 by 2018 after a March “advisory” ballot proposing a $15 minimum passed by 85%
- Los Angeles, proposed by the mayor’s office , at $13.25 for 2015
- Oakland, November ballot initiative, to $12.00
- New York, proposed to go to $10.10
- Seattle, enacted by City Council, at $15.00 by 2018, with credits for health insurance
- San Francisco, ballot initiative, could bring to $15.00 over next 4 years
Google early, and google often. In mid-August, San Diego’s City Council over rode the mayor’s veto of their motion for an increase from $9.00 to $10.50. By mid-September, the San Diego Small Business Coalition turned a petition with 56,000 signatures to put the action to a ballot initiative. The increase is on hold until June, 2016, the date of the initiative.
Health Insurance Costs
Fears regarding a rapid run-up in premiums due to enrollment of previously uninsurable parties may prove unfounded. The PWC Health Research Institute pegs the national average increase in premiums at 7.5%. Some states will be in excess of this: Arkansas, Iowa, Kansas, Tennessee, Vermont and Virginia are slated to see 10 to 15% increases. Arkansas is scheduled to decline 2.0%. In consumer-friendly California, 2015 premiums are only scheduled to increase by 4.2%. For specific states, click the link www.pwc.com/us/en/health-industries/health-research-institute/aca-state-exchanges.jhtml.
About the Author
Karen Johnson MAI, ISHC is Principal of Pinnacle Advisory Group West located in Newport Beach, California. Ms Johnson has been active as a hospitality consultant since 1981. In addition to providing asset management services, Ms. Johnson is an MAI and a member of the Urban Land Institute, sitting on the Entertainment Council. She was also admitted to Counselors of Real Estate (CRE), NCREIF, and the International Society of Hospitality Consultants (ISHC).
August 26, 2014 6:28 pm Comments Off on Economic Outlook – The State of the Hospitality Industry in Rhode Island
Presentation given by Rachel J. Roginsky, ISHC
July 11, 2014 6:41 pm Comments Off on Outlook 2015 – Greater Boston Convention & Visitors Bureau
Presentation given by Matthew Arrants, ISHC