Diverse offerings can help offset downturn

NEW YORK—During a week last month in which the U.S. unemployment rate hit 8.1%—its highest level since 1983—and the Dow Jones Industrial Average fell below 7,000 for the first time in 12 years, participants gathered in New York at the Radisson Lexington Hotel for the annual HOTEL BUSINESS® Management Company Roundtable.
Not surprisingly, the mood of the 11 participants at the event—which was hosted by Carlson Hotels Worldwide and sponsored by Arthur J. Gallagher Risk Management Services, Inc.—was downbeat as occupancy rates, ADR, and RevPAR have fallen across the board while the national recession has deepened. Meanwhile, pressure from owners has only increased.
Yet most of the participants in the discussion— which was moderated by Stefani C. O’Connor, executive news editor and managing editor of Roundtables for HOTEL BUSINESS®—have been through previous downturns and so they have a longer-term perspective, which they noted is sorely needed during such times.
“Revenues have definitely been off this year compared to 2008, though February was off less, year over year, than January. This is a positive development, though we’re hardly optimistic we’ve seen the bottom of the downturn,” noted Mark Rosinsky, senior vp of hotel investments at Dow Hotel Co.
The most serious drop in revenue at Hospitality Management Corp. has been on the group side of the business, though the firm also saw an improvement in February compared with January. “The biggest reduction in revenue has been in the large group bookings in our downtown properties,” HMC’s president and CEO, Leo Spriggs.
Other participants at the session estimated that revenues had fallen an estimated 12% to 15%.
While traditional management fees are down, a number of management companies have expanded their businesses into consulting. “Management fees have fallen this year, but the consulting piece of the business has actually increased,” said Kirby Payne, president of HVS Hotel Management. “Interestingly, most of the properties we third-party manage are mid-price, yet we consult mostly for luxury sector properties.”
James Evans’ firm, Ardent Hotel Advisors, has found a niche managing distressed properties. “The hotels typically need to be stabilized before the owners decide how they want to proceed, so that’s become an opportunity for us. The basic lessons we’ve learned from past downturns still apply to a large extent,” said Evans, who’s principal and CEO of Ardent.
And with so many hotels in distress across the country, lenders are increasingly hesitant to foreclose. “The banks and other lenders are under pressure because once they take over the distressed assets, there’s a good chance they won’t be able to sell them,” Payne noted.
Lenders are holding onto the assets as long as they can, confirmed Nancy Johnson, executive vp and chief development officer of Carlson Hotels Worldwide. “Everyone is waiting to see when the bottom is reached. Consequently, there’s little activity in the transactions market. Everything has ground to a halt,” she reported.
With revenues falling and many owners not able to make their debt service payments, hotels that opened in the past two or three years are the most vulnerable, according to Mike Marshall, president and CEO of Marshall Hotels & Resorts. “Owners of these hotels are likely to lose all the money they invested upfront,” he explained.
For Hersha Hospitality Management, the firm is receiving more inquiries this year from people seeking management expertise, which tells its executive vp, Naveen Kakarla, that owners are either questioning their ability to manage their own properties successfully in this economy or they’re dissatisfied with the management firms they presently are using. “Because of the market we’re in, management companies’ performance is being much more closely scrutinized than in the past. There’s much more visibility than in the past,” he said.
Even though it’s certainly a difficult time for owners and operators alike it can still apparently be a learning experience. “As a management company, it’s an opportunity to take a fresh look at how we operate and try to improve our processes going forward,” Kakarla noted.
While managing a traditional hotel carries one set of challenges in the current environment, managing a mixed-use development that includes both lodging and residential components carries an even more daunting set.  And with the residential market struggling badly and many markets overbuilt, condominium sales have been stalled for a while. “Now with demand for hotel rooms on the decline as well, many of these projects are going over the waterfall,” noted Charles Peck, president of Destination Hotels & Resorts.
As with traditionally financed hotels, lenders are seeking the expertise of successful managers of these mixed-use projects, where the upfront sale of the condo units provided the initial overall financing. “They want our expertise on whether to sell or hold. We’ve been involved in conversations about taking on some of these projects, but it’s difficult,” Peck explained.
Individual condo owners, for their part, have a lot at stake. “Understandably, they’re trying to maintain the value of the asset,” said Steve Hedberg, vp of operations and implementation for Carlson Managed Hotels & Resorts, who estimated that the value of condo units has fallen an average of 25%.
Faced with large numbers of unsold condo units, some developers have opted to convert them wholesale to hotel rooms. “It can be hard at times to see a condo unit that was selling for millions of dollars working as a nightly rental,” Peck added.
The amenities incorporated into the design of these developments were intended for a certain mix of owners—who may not be in residence all the time—and guests. So it’s hard to reconfigure this balance and still have the operation run smoothly. “It’s fraught with problems,” confirmed Atul Patel, chairman and CEO of HMB Management, Inc.
“Given all these factors, mixed-use projects are a particularly difficult segment to manage right now,” Hedberg added.
Meanwhile, the significant drop in large group bookings has had repercussions that have rippled through the industry. “We’re seeing attrition rates of 15% to 35% in our group business and, as a consequence, the forecasting model has really changed,” said Tom Conran, vp of business development for Richfield Hospitality Services.And with the residential market struggling badly and many markets overbuilt, condominium sales have been stalled for a while. “Now with demand for hotel rooms on the decline as well, many of these projects are going over the waterfall,” noted Charles Peck, president of Destination Hotels & Resorts.
As with traditionally financed hotels, lenders are seeking the expertise of successful managers of these mixed-use projects, where the upfront sale of the condo units provided the initial overall financing. “They want our expertise on whether to sell or hold. We’ve been involved in conversations about taking on some of these projects, but it’s difficult,” Peck explained.
Individual condo owners, for their part, have a lot at stake. “Understandably, they’re trying to maintain the value of the asset,” said Steve Hedberg, vp of operations and implementation for Carlson Managed Hotels & Resorts, who estimated that the value of condo units has fallen an average of 25%.
Faced with large numbers of unsold condo units, some developers have opted to convert them wholesale to hotel rooms. “It can be hard at times to see a condo unit that was selling for millions of dollars working as a nightly rental,” Peck added.
The amenities incorporated into the design of these developments were intended for a certain mix of owners—who may not be in residence all the time—and guests. So it’s hard to reconfigure this balance and still have the operation run smoothly. “It’s fraught with problems,” confirmed Atul Patel, chairman and CEO of HMB Management, Inc.
“Given all these factors, mixed-use projects are a particularly difficult segment to manage right now,” Hedberg added.
Meanwhile, the significant drop in large group bookings has had repercussions that have rippled through the industry. “We’re seeing attrition rates of 15% to 35% in our group business and, as a consequence, the forecasting model has really changed,” said Tom Conran, vp of business development for Richfield Hospitality Services.
Meetings are drawing fewer attendees now and those that do attend are more cost-conscious. “People are spending less once they get there on restaurants, room service and the spa, compounding the problem,” Payne added.
In addition, because the large convention hotels are suffering, they’ve begun lowering rates in an attempt to attract more transient leisure bookings. “As a result, small hotels are being forced to compete with the big boxes,” Evans noted. “They’re coming after our business.”
Internet third-party booking sites have become a major factor again as they were during the last industry downturn following 9/11. As was the case in 2001, Internet technology has made rates much more transparent than they ever were before. Meeting attendees need only go on the Web to search for a lower rate than a group rate. “Given the widespread drop in demand, lower rates are likely to be out there, allowing people to drop out of the group block and still attend the meeting,” Hedberg explained.
Hotel companies’ best available rate guarantees on the Internet have kept a bad situation from getting worse. “Franchisors have mostly kept franchisees from going below the best available rate, which has helped the overall situation,” Spriggs noted.
As has been the case for a number of years, the hotel business today has become a commodity business, according to Peck. “It’s due to the transparency of the Internet,” he said, “so we can either embrace it or we can become a dinosaur.”