Just because the U.S. hotel industry is doing well doesn’t mean it is above looking for ways to cut costs.
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During the 110-month economic recovery since the last U.S. recession, there have been 109 months of increasing revenue per available room, or RevPAR, a key hotel performance metric. The only decline came the year after Hurricane Harvey struck Houston, when hotel occupancy and rates soared to an unprecedented high that was all-but-impossible to match the following year.
Even with the strong performance streak, hotel developers and operators are looking to combine flags under the same roof and even pair hotel rooms with condos to give projects more financial stability.
“People say we can’t go on like this forever,” Valencia Group Executive Vice President John Keeling said Wednesday at the 2019 National Association of Real Estate Editors conference in Austin. “There’s always something that causes that downturn.”
It is yet to be determined if geopolitical tensions with China or fickle business confidence surrounding the 2020 presidential election would hinder the hotel sector. Keeling — a Houston-based hotel developer — said there are measures developers are taking more frequently to protect against soaring construction costs impacting the industry today.
Dual-brand, or even triple-branded, hotels are a relatively new concept and put multiple flags at different price points from the same hotel company under the same roof. Rather than two 300-room Aloft and Element hotels next to each other, developers will often put two 150-room versions of each flag together on the same property.
Hotel experts originally said the trend’s driving force was the ability to cut down on labor costs due to the ability to have the same back-of-house operation service both brands behind the scenes while the front-of-house operations, like check-in and amenities, remained separate.
Keeling said rising land costs, often around $300/SF in markets like Austin and Nashville, have spurred interest in dual-brand and triple-branded hotels. It would typically take a 500-room hotel to absorb such high costs, but there is less consumer demand for a single hotel of such a size. Instead, it is easier to fill up the property with several smaller brands able to meet demand.
“Now you’ve got two or three properties at different price points and appeals, so it’s easier to absorb on a very expensive piece of land,” Keeling said.
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Even the developers of ultra-luxury properties are looking to trim costs, and that often means adding a residential component to the hotel.
Five-star properties increasingly feature condos to subsidize room rates and pay off the development.
In pricey markets like Boston and New York, rising land and labor costs have gotten to the point where it takes as much as $1M per room to develop a luxury hotel. That would translate to a $1K nightly rate, something one-percenters might be able to afford but would rather not pay.
By adding condos, which hotels like Boston’s just-opened Four Seasons One Dalton or the Mandarin Oriental at Manhattan’s Time Warner Center have, developers and operators can use front-end residential sales to help bring down room rates by not relying solely on hotel revenue to pay back debt.
The condos are typically on top of the hotel component, giving the residences a view for which buyers are more willing to pay a premium. They are also able to utilize the amenities of the hotel, like housekeeping and concierge services.
“Those two things add to the value,” Keeling said. “That premium can be used to pay down the basis of the hotel, so everything works.”
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