Pinnacle Advisory Group


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Improving Market Conditions Shift Focus to Improved Products

Written by: Sebastian Colella

Periodic refurbishments are essential for every hotel with the goal of the upgrades having a positive impact on guest satisfaction and average daily rate (ADR). As design trends and preferences change frequently it is critical for a hotel to stay current in order to meet guest expectations, compete effectively and drive market share. The industry’s traditional renovation timeline has changed over the years as a result of the changing economic environment and its business cycles.

Traditionally, it has been common practice for hotels to update soft goods every five years and case goods every 10 years. However, renovation work can often be deferred or postponed, to conserve capital during periods of economic uncertainty. As occupancy and ADR declined during the two most recent recessions, following both the 2001 terrorist attacks and the 2008/2009 housing crises, capital spending nationwide diminished greatly as owners’ cash flows declined. During those periods, franchisors showed leniency for their required property improvement plans (PIPs). In a conversation with Harry Wheeler, AIA, Principal at Group One Partners, Inc., an architectural, interior design, and purchasing firm which specializes in hotels, he said “brands were allowing owners to defer their PIPs and refresh programs due to the recession, but now that the market is improving and hotels are getting back on track, these PIPS are now being mandated, requiring large investments in the individual properties.”

According to an article by Dr. Bjorn Hanson, Divisional Dean of the Preston Robert Tisch Center for Hospitality, Tourism & Sports, $3.5 billion in capital expenditures was spent to refurbish hotels in 2011, a 30 percent increase over the prior year. Having experienced a strong 2011 and an even stronger 2012, with RevPAR increasing 6.8 percent nation-wide, owners and operators are optimistic that the rebound will continue through 2013 and 2014. Smith Travel Research has projected an increase in RevPAR of 5.7 percent in 2013 driven by strong ADR growth and another 6.0 percent in 2014 driven by increases in both demand and rate. As hotels become more profitable, renovations will become more prevalent. As shown in the graph below, capital expenditure (CapEx) spending in hotels throughout the country correlates directly with the industry’s annual RevPAR performance.

Fueling renovations further is hotel transaction activity which reached $12.5 billion in the United States in 2012. This was a 36 percent decrease from 2011 which was dominated by distressed sales and REIT acquisitions which have become less common as the economy strengthens. Hotel transactions are expected to increase in 2013 for the following three reasons:

  • Strong RevPAR growth projected for the next two years will result in higher profitability;
  • Supply is expected to increase only marginally as most major markets are experiencing high barriers to entry due to increasing construction costs and tighter zoning regulations; and
  • Financing has been more easily accessible as the economy recovers further.

Whether a hotel is purchased with the intent to be repositioned or remain with its current brand, there will almost always be a PIP required by the brand. After multiple years of postponement, these property upgrades can be quite costly. The scope of today’s brand required PIPs have escalated dramatically recently as brands seek to adapt to changing guest preferences, placing higher costs and brand standards on the owner. PIP schedules which once consisted of case goods and modifications to the lobby, can now include full restaurant concepts, front desks, significant exterior alterations, signage, software systems, etc. Many nationally recognized brands have recently implemented new design concepts, renovation guidelines and service standards. A few examples include:

Marriott’s Fairfield Inn brand, named after the Marriott family farm in Virginia, is completing the roll out of its generation four prototype and décor package called Perspective. The package is intended to connect the brand to its heritage and features a communal farm table, a “corner market,” and colorful new guestroom décor. Design specs for a new Courtyard by Marriott prototype are said to be in the works.

  • Choice’s Comfort Inn brand has developed the “Truly Yours” prototype, designed to “deliver an intent to stay” which was introduced in 2012 and is currently being implemented throughout the country. In addition, the brand is mandating redesigned front desk areas and front desk uniforms at all domestic properties, to improve the guest’s first impression. Choice’s midscale new construction Sleep Inn product, also has a new design scheme “designed to dream,” which was introduced in 2011 and is a part of all new hotels and offered through a renovation program for existing hotels.
  • With the goal of repositioning its Crowne Plaza brand from upscale to upper-upscale, in 2011 InterContinental Hotel Group launched “Freshen Up,” the first phase of a three-phase repositioning program, which is designed to raise product quality and consistency while launching a new modern look. Recently, the company rolled out phase two, “Move Up” which includes testing operational aspects such as mobile check-in, breakfast offerings and complimentary guestroom Wi-Fi which focus on guest satisfaction, and are designed to raise product quality. InterContinental has also worked extensively on refreshing its Holiday Inn brand standards
  • In 2012, Wyndham outlined its first prototype for its Days Inn brand in its 42-year history. The company also announced plans for a “nostalgic refresh” of its Howard Johnson brand.

Harry Wheeler explains that “overall costs to PIPs can vary significantly due to a variety of factors including, geographic location and labor costs, a property’s age and condition, the number of rooms and amount of public space, market dynamics, and of course the brand itself.” One trend Wheeler has seen in 2012 and expects to continue in 2013, is that “brands are inclined to negotiate the implementation of the PIP requirements as long as their standards are not sacrificed. It is understood that the performance of some markets may not dictate the high costs required by the brand” and companies such as Wheeler’s, Group One Partners Inc, “are able to create value for an owner’s investment by working within a property’s unique conditions and understanding the brand standards which are expected of them”.

Improved top-line revenue through occupancy and rate is necessary and a better flow through (NOI) must be realized for a hotel owner to get a return on such a large investment. Property owners need to ask and answer some difficult questions: Will a $300,000 PIP increase the rate and occupancy of a 60-unit limited-service hotel with a RevPAR index of 85 percent enough to pay for itself in five years? Will the PIP allow the property to get its fair share of the market? And is the market strong enough to warrant the additional investment? Similarly, how much will a $1,250,000 PIP ($10,000 per room) impact a 125-room, select-service hotel already operating with a 110 percent RevPAR index and a 35 percent NOI? While the brand standards are important and an owner must comply, an owner’s first priority must be his or her investment in the property and its eventual return. They may also wish to consider alternate affiliations that may provide either greater support or reduced investment requirements.

Many owners and operators will attempt to improve market share by offering newly refreshed guest rooms and public spaces, with the desired effect of driving rate and occupancy. Prior to investing substantial capital into a hotel property, ownership should analyze the overall market, the property’s competitive set, and quantify the potential benefit of having a refreshed or rebranded product. In many markets, an upgraded product may attract previously unattainable demand, enhance profitability, or even help entice new demand into the market. While a full feasibility study is often required for financing purposes, some owners may find it helpful to have a third party expert validate their internal findings.

About the Author

Sebastian J. Colella is a consultant based in Pinnacle Advisory Group’s Boston office. Since joining Pinnacle in 2011, he has completed work involving lodging supply and demand analyses, facility recommendations, brand assessments, and appraisals of both branded and independent hotels and resorts. Sebastian holds a Bachelor of Science degree from the School of Hotel Administration at Cornell University and his industry experience includes roles in sales and operations at hotels, resorts, and private clubs.