Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
|by Rick Swig, December 2007
Speculating on whether to buy or build is very challenging. Looking back over 2007 offers a mixed bag of predictive indicators. The first quarter brought warnings of occupancy slowdowns from astute sources like Smith Travel Research, yet acquisition activity surged and continued through the first half. There were continual questions about “What’s the right cap rate?” But establishing the “right” cap rate did not seem as important as purchasing the right strategic property.
Nevertheless, there are solid reasons to buy hotel real estate even at premium prices, particularly when the asset’s makeup includes quality location, solid destination, diverse and consistent demand generators, solid brand affiliation and market barriers to entry. Meanwhile, several factors have quickly slowed a development pipeline that in past cycles would have run rampant. Competition from other real estate sectors, along with other factors, has reduced the opportunity for expansion, therefore making existing hotels sites with these components extremely rare and valuable.
For a while, it seemed that at least in major urban and resort markets there would be a proliferation of super-luxe hotels, residential mixed-use projects with a hotel component and condo-hotels, if all the proposed developments were to be realized. It has turned out in many cases, however, that sites have gone to “better uses” or projects that in the end were not financially feasible. Construction costs versus potential yields were simply not attractive, while the consumer market for condo hotels was weaker than expected. Maybe the hotel sector should be thankful to the residential sector for sweeping potential hotel sites away for pure residential use and thus pre-empting an oversupply situation.
Another dynamic to emerge this year to impact development was the limited availability of solid brands to stimulate financially necessary short stabilization periods for a new hotel project. The big brands with the most powerful guest recognition programs clearly rule the business. Although there are many developers willing to join up with brands to build more hotels, prime destinations and the best locations are already dominated by the most popular brands. Although owners of existing branded properties are most likely doing well (at least in this environment), there is little chance that they will warmly welcome new competition in the form of a brand’s latest model and certainly will review their geographic protection clauses.
Yes, there are new brands that do not have the critical mass or geographic crowding of the established names that could fill potential development voids. Lack of critical mass, the strength and dynamic nature of their customer loyalty programs or their ability to generate adequate returns on investments do not make them the most viable alternatives, however.
Then there are the mercurial debt markets, which are expected to continue to tighten the flow of funds for both acquisitions and certainly new development. At the same time, projected hotel revenue growth of less than 5% for 2008 and beyond do not exactly auger well for significant enthusiasm from the lending community. But lenders would be extremely unwise to shut off the hotel sector completely. There is still significant growth and strength in the majority of markets, while the anticipated slowdown of new construction will certainly underpin the competitive power of existing hotels.
So, what’s a hotel investor to do? Now may be the time to buy, if good fundamentals are in place. There will be continued competition for prime locations; good brand affiliations within the best locations will become more difficult to come by; and barriers to entry, whether due to lack of site availability or development cost reasons, will become more exaggerated. This should stimulate the value of hotel real estate under the right circumstances.
The views expressed in this article are those of the author and not Real Estate Media or its publications.
Rick Swig is president of RSBA & Associates, a hospitality industry consulting firm based in San Francisco. He may be contacted at firstname.lastname@example.org.
RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
Tel: (415) 541-7722
Fax: (415) 541-5333
|This Year’s Critical Issues Will Escalate If the Hotel Industry Doesn’t Address Them Now / Rick Swig / September 2007|
|CapEx Discussions Require Balancing Brand, Owner Needs; The current fervor of standard compliance may simply be a reasonable process to catch up on postponed necessities / Rick Swig / June 2007|
|Lack of Human Capital Is Becoming Serious Issue for Hotel Owners, Operators / Rick Swig / December 2006|
|Successful Hotel Brand Differentiation Means Connecting With Customers / Rick Swig / RSBA Associates / June 2006|
|Shortage of Sites, Rising Expenses Should Keep Hotel Development in Check / Rick Swig / RSBA Associates / February 2006|
|In Today’s Hotel Acquisition Market, How Much Do Cap Rates Matter? / Rick Swig / RSBA Associates / January 2006|
|Lodging Business in Transitional Year, But Challenges Will Remain After ’05; A Hotel with Truly Unique Attributes Is Worth a Premium / Rick Swig / October 2005|
|Despite Lack of Long-Term Data, Hotel Developers Favor Hybrid Projects; The Fractional and Condominium Component Not a Proven Solution to Development Prosperity / Rick Swig / June 2005|
|Travelers Prefer Innovation, Creativity Over Predictability, Discount Pricing / Rick Swig / March 2005|
|Recent Occupancy, ADR Growth Still Do Not Spell Post-9/11 Relief; Total 2% revenue growth over four years has not kept up with national annual average inflation growth of 2.5% / Rick Swig / RSBA Associates / November 2004|
|Hotel Success Hinges on Relationship Between Owner, Asset Manager, GM / Rick Swig / August 2004|
|Hotel Operators Can Gain Market Share Through Distinctive Brand Images; A 100-room boutique hotel can develop more identity within a market than its 1,000-room competitor through customer impact points / Rick Swig / May 2004|
|Hotel Operators Must Share Blame with the Economy for Stagnant Performance / Rick Swig / RSBA Associates / January 2004|
|Investors Seeking Opportunistic Hotel Buys Are Likely to Come Up Empty Handed / November 2003|
|Hotel Sector Remains in the Game Despite Reaching Strike Three; Occupancies are now beginning to improve compared with last year and a poor first half of 2003 / September 2003|
|Some Stability Has Returned to the Hotel Sector, But Its Staying Power Is in Question; The Plundering of Lower Market Tiers Has Cost Upscale Hotels / May 2003|
|New Business Practices Essential to Lodging Companies’ Success / February 2003|
|Unreliable Market Trends Yield an Uncertain Direction / October 2002|
|The Bigger They Are, The Harder They Fall / September 2002|
|News of Boutiques’ Demise Is Greatly Exaggerated / May 2002|
|Management by Spreadsheet Erodes Full-Service Hotel Core Values / Feb 2002|
|Hotel Lenders Face Challenges In Tough Climate / October 2001|
|Where We Are Now Depends on Starting Point / Summer 2001|
|Solid Management Practices Can Improve Franchise Value / May 2001|
|Hotel Market Stagnation To Continue / January 2001|
|Here Today…but Tomorrow? / November 2000|
|Ready, Willing, and Unable? / August 2000|
|Independent Hotels: The New Brand Alternative / June 2000|
|Ankle Biter Syndrome / January 2000|
|Redefining a Mature Hotel Sector / November 1999|
|Focus On Operations Is Not Enough / August 1999|
|What’s Next?? / May 1999|
|Growth Through Management / Feb 1999|
|Expect a Subdued Market in 1999 / Feb 1999|
|Hotel Real Estate: Back to Fundamentals / Nov 1998|
|The Hotel Investment Barometer For Institutional Investors / 1998|
|The State of Independents / 1998|
|Success (or Survival) of Boutique Hotels and Resorts / 1998|