If a classic movie could reflect the current hotel market, it wouldn't be "Grand Hotel," but rather "Psycho," whose Bates Motel was dark, foreboding, and had plenty of vacancies. More fitting would be "To Have and Have Not," the movie adaptation of Hemingway's novel about a group of people riding out a hurricane in Key West, Fla.
For hotels, the storm is the total development pipeline for projects, which in the second quarter of this year fell to an all-time cyclical low — 53% below the record high of the third quarter of 1998, according to a survey of developers by Lodging Econometrics, Portsmouth, N.H. Projects in the pipeline fell 5.2% from the first quarter, down 91 projects, totaling 13,384 rooms.
Even with financing more available, developers continue to be are reluctant to move projects along due to the uncertain economy and the industry's continuing slow recovery. This is causing a portion of the pipeline to become stalled, Patrick H. Ford, Lodging Econometrics president, said in releasing the report. Data from the survey shows a "bunch up" of projects that were due to move forward from one stage to another — from projects starting construction within 12 months to those under construction, and from projects in early planning to starts within 12 months.
The clogged pipeline is an ongoing concern among developers and industry brand managers alike, Ford said.
Thanks to the start of four casino hotels, the total number of projects under construction in the second quarter declined by only 34 projects from the first quarter. Casino hotels aside, few hotel segments are proving hospitable to Building Teams. Very few stand-alone hotels, such as the new Westin New York, are being built.
"If you believe in demographics, the construction of ground-up hotels is off — the worst in 10 years," says Pope Bullock, executive VP and director of the hospitality group for Atlanta-based designer Cooper Carry.
But some areas of the market are setting out the welcome mat. "It's a busy market for people focused on the industry," says Don Davies, a principal with structural engineer Magnusson Klemencic Associates, Seattle, who says his firm is forming alliances with architects to obtain hotel work. "The one-offs are not happening. The generalists that have done a hotel here or there aren't there anymore. They've fallen way off."
In addition to new construction in the U.S. and abroad, design firms such as New York-based BBG-BBGM are busy providing feasibility studies and due diligence work for acquisition and repositioning, says Ted Brumleve, AIA, BBG-BBGM's managing partner, business development.
Business may be off, but unlike the last downturn of the early 1990s, the market is much better prepared to handle it. "The industry's profitability, while it may have tailed off, is still quite strong," says Brumleve. "What people are responding to is the lack of demand and the lack of incoming supply."
Rates are down. Occupancies are down. But by the first quarter of next year, Brumleve believes the hotel market will be back to 1995 levels in terms of occupancy and rate.
"In the early '90s, there was recession, over building, and hotel chains were over-leveraged," says Jeff Weinstein, editor-in-chief of Hotels magazine. "Now, the individual chains aren't as highly leveraged and they are better prepared to weather the storm."
In the mid-1990s, the hotel market became very profitable, registering $6 billion in profits, says Weinstein. Now, the industry's profitability rings up at $12 billion-$14 billion. This latest down turn has decreased profits by about 20%, says Weinstein. "But 10 years ago, the market was in the red," he says.
Here is a snap shot of six hot hotel trends.
1. Budget boutique hotels. Smaller, hip, up-scale boutique or life-style hotels (there's debate within the industry about what to call them) have done well in recent years, and continue to do so. But the newest trend is the budget boutique hotel.
Working stiffs want to feel as hip and cool as their white-collar counterparts. And operators like Starwood Hotels & Resorts and designers such as the Ian Schrwagers of the hotel world are developing and designing trendy, yet affordable hotels, for moderate-income consumers. "The trend started in the U.K. with the Dakota brand," says Weinstein. The larger U.S. hotel brands are developing the concept of the $100-a-night budget boutique that offers high-tech infrastructure and serves fast food rather than gourmet cooking.
The trend is in its infancy in the U.S., says Weinstein, but Marriott, which owns the rights to the Ramada name outside the U.S., is said to be at work on the budget boutique concept in China.
2. Hotels as part of mixed-use developments. Though financing has become more readily available recently, given the economy and lagging numbers for corporate business and recreational travelers, developers still are finding it difficult to convince lenders that a stand-alone hotel is a good risk. One remedy is combining hotel projects with single- and multifamily residential, office, and entertainment mixed-used projects.
Financing for hotel projects became very difficult after 9/11, says Bill Reed, director for hospitality specialist Wimberly Allison Tong & Goo (WATG), Honolulu. "It also became difficult for primary developers to find hotel developers," he says. So developers began combing hotels with retail entertainment, commercial, and residential components. "Mixed-use projects often are constructed in phases because of difficulty in gaining financing for such large projects," Reed says.
"Mixed-use hedges the bets a little for lenders and developers," says Weinstein.
The Ritz Carlton at Lake Las Vegas, which opened earlier this year, is a good example of a hotel that's part of a mixed-use development, Weinstein says. Modeled after Italy's Ponte Vechio Bridge, the hotel is part of The Village of MonteLago, a Mediterranean-style lakeside resort 14 miles north of Las Vegas. The property includes a casino (of course), office space, luxury condominiums, shopping, and restaurants. Designed by the Friedmutter Group, Las Vegas, with WATG as design consultants, the property was constructed by Perini Building Co., Framingham, Mass.
3. Convention center hotels. Hotels constructed in association with new or existing convention center hotels are one of the market's hottest sectors. In recent years, as part of a drive to spur economic growth and capture lucrative convention and tourism dollars, first- and second-tier cities across the U.S. built convention centers, and still more are expanding existing facilities. "In the 1980s and '90s, studies said that second-tier cities needed to build meeting space, and they did," says Bullock. "Now, because of lost bookings, those operating conference spaces are saying they need guest rooms."
What have made these projects viable are the public-private relationships that have occurred as a result. "The nature of the work we're doing is public-private," says Bullock, who cites convention center hotels such as the Renaissance hotel in Portsmouth, Va., and a Hilton in Suffolk, Va., as recent examples.
Because cities consider hotel components as essential to the success of their convention centers, officials are willing to fund portions of the projects, such as parking garages and infrastructure upgrades, as well as give developers tax breaks and other incentives to build.
"The gestation period may be longer for these projects," says Michael Meagher, VP of marketing for James McHugh Construction Co., Chicago. "But the bottom line is that the convention and visitor activity that supports convention centers and convention center hotels is staying strong."
4. Renovations and expansions. Periodic renovations are part of a hotel's typical budget cycle. "Hotels are getting to the point where they've been cutting back and saving as much as they can," says Meagher. "They're running as lean and mean as possible on capital expenditures. But the time comes when operators need to upgrade their properties. What better time to change the carpet and wallpaper then when business is slow?"
Some large hotel owners, such as some of Cooper Carry's institutional clients, can afford renovations, even in a down market, says Bullock. The Marriott near Busch Stadium in St. Louis is an example of an older property that needed renovation. "Owners can justify capital expenditures — significant renovations that add an entrance, move a front desk, or reorient a three-meal restaurant," he says. "The Marriott has two towers and a connection between the two towers that are being improved."
5. Upgraded amenities and service. Many hotel operators, especially higher-end operators seeking to move up in class to a more affluent clientele, are adding upgraded amenities, such as spas, health-and-fitness centers, and telecommunications infrastructure and facilities.
"Wellness services, such as in-room massages, healthy menus in restaurants, and spas are big," says BBG-BBGM's Brumleve. "Everybody's got a spa. Some of them can be as large as 30,000 sq. ft. with up to two dozen treatment rooms."
Meagher says McHugh's Chicago clients such as the Four Seasons are adding spas to their properties. "Most hotels have a health club, but some are expanding them into spas services," he says.
Surveys say that the quality of the bed and shower are chief concerns for hotel patrons. As a response to the flashy-but-often-times-light-on-service boutique hotels, larger chains are marketing room amenities, such as Starwood with its Heavenly Bed and Heavenly Shower concepts for its Westin hotels. Sheraton also has a bed concept.
While physical amenities are being improved, telecommunications infrastructure also is being upgraded, says Meagher. The Durst Organization, New York, recently introduced what it calls a "cyber center," a 300,000-sq.-ft. telecom hotel that is supposed to be the first "from scratch" data center in Manhattan.
"It's interesting that what the Starwoods, Westins, and Sheratons are all about is luxury," says Bullock. "They seem to be very in tune with their guests."
6. Time-share hotels. "Time share components to hospitality design are a big component right now," says Magnusson Klemencic's Davies. "Hilton, Marriott, and Starwood are all introducing time-share components to their hotels. The Fours Seasons has contracted Magnusson Klemencic to engineer four time-share components, or what it calls its "fractionals."
Time shares in resort properties are especially popular. "Baby Boomers are moving out of the suburbs, buying condos in the city, and buying an escape vacation place," says Davies. "The time share is an avenue for that."
Investment ready and waiting
"There is equity out there looking for a home," says Weinstein. "But the interest is in mergers and acquisitions rather than new building. There's also a lot of dog inventory out there that could be made better use of."
Sectors, such as luxury hotels, one of the hardest hit in the market because of the tendency of high-end hotel travelers trending down to more moderately priced hotels, are beginning to show signs of life. "The luxury market lost its rate," says Weinstein. "It struggled last year. But this year is looking better."
While building teams wait for the storm to pass, hospitality specialists think that when the market returns, the edge will go to those firms who did not desert the market and kept in touch with those clients during the long, deep dry spell.
"On the up side, I think there will be benefits for those who have stayed in the industry and developed contacts," says Bullock.
Note: The editors are indebted to Geoff Weinstein, editor-in-chief of our sister publication Hotels, for his expert advice on this month's report on casinos and hotels.