Meeting coordinators are all too aware that the current hotel sellers' market is tough to navigate, mainly because of higher room rates and less availability. But they may not realize that the sellers' market has created another, more drastic effect: The shift of full-service hotel ownership away from traditional hotel companies into the hands of real estate investorsa phenomenon that's adding to planners' burdens, now and in the future.
In the United States, 2006 marked the third consecutive year of record hotel sales, reaching more than $35 billion, a two-thirds increase over 2005 and triple the volume of 2004, according to a late 2006 report by Jones Lang LaSalle Hotels (JLLH), a Chicago-based real estate investment advisory and management company. "Throughout 2006, a shift in global ownership patterns saw the transfer of billions of dollars of hotel assets...into private equity and REIT (real estate investment trust) ownership," says JLLH. And the stampede into hotel real estate by new players will likely continue throughout this year as well. "We expect 2007 will continue to propel more non-conventional, yield-focused entrants to the market," adds JLLH.
Now, some in the industry say the shift in ownership improves hotel brand standards, because hotel management companies often enforce their standards more vigorously on other owners than on themselves. But at the same time they and others also say it contributes to the higher rates and less availability.
Most importantly to meeting planners, these insiders even question the traditional value of chain brands to groups, because new owners of hotels are striving for the biggest revenue gains within the shortest time horizons possible, blunting the argument that a relationship with a chain gives a meetings client leverage on rates and contract terms.
Private equity firms, even more than the REITs which are publicly traded, fit that description. "Some analysts are concerned that the priorities governing private equity, with their aggressive drive for short-term returns, may prove an uneasy fit with the long-term brand values of the operating companies," says JLLH. This is an understatement; friction between hotel owners and hotel management never makes planners' lives easier.
Robert Mandelbaum, research director for PKF Consulting, a hotel advisory firm in Atlanta, says it more clearly. "A traditional hotel company has more sentiment for guest service; it's in the company's personality," he notes. "If you're a real-estate owning company, it might just look at revenue and profits as one would any other real estate investment. But hotels must be much more client-service oriented than office or apartment buildings."
Those on the front line of hospitality are indeed feeling the friction. Bill Hanbury, chief executive of the Washington, D.C. Convention and Tourism Corporation (WCTC), says he's seen less client-oriented service from hotels owned by real estate investment companies. "They don't have the same sensitivity as their predecessors to help a city and its convention center," says Hanbury. "They're more go-it-alone. Hotel managers have called to tell me that we should take our four sales managers who work on convention business and redeploy them into corporate business that convenes within a year. There's a lot less emphasis on long-term business now."
John Graham, chief executive of ASAE and The Center, the main organization representing association executives, adds, "Planners need to appreciate the dynamic of the current hotel business model. Hotels are not as accommodating as in the past; they're less flexible and they're holding people to their contracts. That's the reality."
What They Want
Private equity firms typically target returns from their hotel investments to be at least 20 percent per year, according to JLLH. The profit calculations are based on a combination of net operating income and a property's sales price at the end of a certain time period. The firms may hold the properties for as long as five years, but they may also turn them around in as few as 18 months.
By contrast, traditional hotel companies that own properties might look for annual operating profits in the range of six to eight percent, with no obligation to shareholders to sell hotels within a given time period. REITs, too, feel less pressure to sell properties within a given time period. But like private equity firms, REITs also look to property appreciationand the sale that would reap the profits from appreciationas a critical part of their business.
As demonstrated by the recent record sales, the increased profits realized from the strong travel market also increased hotel values; JLLH says that "many investors who bought U.S. hotel assets in late 2005 saw their equity double in the following 12 months." Thus, hotel companies saw an opportune time to sell their hotels and re-create themselves more purely as hotel managers, following the lead of Marriott International in the early 1990s.
Two of the country's biggest hotel companies, Starwood Hotels and Hilton Hotels, did just that beginning in 2005. Hilton, of Beverly Hills, CA, has sold or agreed to sell more than $4.5 billion in assets since 2005, mainly from Hilton's acquisition last year of Hilton International. Starwood, of White Plains, NY, was involved in the biggest U.S. hotel deal of last year, selling 28 hotels to the REIT, Host Hotels of Bethesda, MD, for more than $3.5 billion.
Hotel companies that sell properties, however, often negotiate long-term management contracts as part of the sales agreement. And they may use the money from the sales to buy more hotelsbut only as a strategy to win more management contracts. Hotel operators bought just over 21 percent of the hotels that sold for more than $10 million apiece last year. "It is likely that several of these assets will be re-sold in the near term, with hoteliers more concerned with securing management rights of those hotels on favorable terms," says the JLLH report.
What They Don't Want
Until recently, the chain hotel companies tended to own full-service, urban hotelsthat is, meetings and convention propertieswhile managing or franchising hotels assigned to their limited-service brands. Among the hotels sold in the Starwood-Host deal, for example, were four Sheraton hotels, each with more than 1,000 rooms, including the flagship Sheraton New York, with 1,746 rooms.
But with real-estate investors as hotel owners, groups holding conventions may find no room, or at least not enough room, at convention hotels. In Washington, DC, for example, the guest room commitment to groups was until recently a sticking point in the effort to build a 1,400-room headquarters hotel adjacent to the city's new convention center.
RLJ Development, a hotel real estate investment firm, which plans to develop the hotel with Marriott International, reportedly intended to allocate up to 40 percent of rooms overall to groups, but balked at the city's demand for a much larger commitment to big conventions. The Bethesda-based company, which was the buyer in the fourth-largest U.S. hotel deal of last year, wanted to hold more rooms for higher-paying transient guests when Congress is in session. "We may not need a lot of convention-generated business then," Thomas J. Baltimore Jr., president of RLJ Development, told The Washington Post.
The two sides recently agreed that conventions booking more than five years in advance can receive 1,000 rooms per night, according to WCTC's Hanbury, who says RLJ's reluctance to commit more rooms to large groups is typical. "There's a hotel just a few blocks from the convention center," he says, "and we want a big block there for a future convention. The general manager says okay, but the revenue manager says no, since the hotel can sell rooms at higher transient rates. So forget about the big convention. That's happening all around the country. CVBs are struggling to find inventory to match the demand of big conventions, and they're struggling with rates, particularly in markets with a high transient business environment."
At U.S. chains' upper-upscale hotels, where the bulk of corporate and professional association meetings take place, transients paid about $10 more per night for a room than meeting attendees, $168 versus $158, during the first quarter of 2007, according to lodging industry tracker Smith Travel Research in Hendersonville, TN. The spread was twice that at hotels in the top 25 U.S. markets, $198 versus $178. The higher-paying, and thus more attractive, transient travelers accounted for 54 percent of guests in the first quarter versus 41 percent for groups, according to Smith Travel. (The rest were contract guests, such as airline employees.)
What You Can Do
To deal with the squeeze on group availability, ASAE's Graham says that planners organizing citywide conventions must book more hotels with smaller room blocks. That's not only inconvenient for attendees, who usually prefer to stay at the large hotels adjacent to or near the convention center, but also can increase ground transportation costs for the organization holding the convention.
While revenue (also called yield) management has been a fact of hotel life for years, Lisa Palmeri, vice president of strategic initiatives and planning for Caledonia, WI-based Meetings & Incentives, an independent meetings management firm, echoes Hanbury's comment about the increasing authority of revenue managers.
"The role of the revenue manager is much more noticeable than before," says Palmeri. "Often we hear from a sales manager or director, telling us, 'I wish I could do more but my hands are tied.' Today, revenue managers are dictating to them what the prices need to be to get to the right profit margin."
Palmeri says corporate preferred-supplier programs are now less about winning volume discounts from hotel companies and more about simply finding space. As a result, Palmeri leans more heavily on chains' national sales organizations for sourcing. "Lead times have shrunk, and we're not finding availability right away because of the seller's market," she says. "So we need the national sales office to ensure that we receive good-quality bids in a timely manner."
On the other hand, a situation in which hotel companies manage properties for a myriad of owners means that planners lose out in two important aspects: One, receiving favorable pricing and terms based on volume for a multi-meeting booking involving different properties; and two, canceling a meeting at one hotel and rebooking at another hotel without paying the full damages. "You will find limited success when negotiating at the chain level," says Palmeri.
Another planner, the head of a Fortune 500 company meetings department, is more emphatic about what national chain sales organizations can no longer do for her. "I ask for things but don't get much back," says the planner, who requested anonymity. "It used to be that if you spent $5 million, $10 million annually, the national chain paid attention to you and your need for special assistance with a property. But volume hasn't helped us in the past couple of years, especially the last six months. I attribute that to the national chain not being able to influence the properties. Now, I push my planners to go directly to the local contact."
Hoteliers Speak Up
David Scypinski, senior vice president of industry relations for Starwood Hotels, acknowledges that national chains leave concession terms to individual properties, such as the number of paid rooms planners must book to receive a complimentary room, in addition to rates and dates. But he contends planners are still better off with standard chain contracts that cover legal issues such as indemnification and force majeure. "There's a great time savings by negotiating contracts on a master basis," says Scypinski. "Buyers don't have to negotiate with a lot of different properties. They negotiate with Starwood, and the properties have to abide by that."
Scypinski argues that the ability of hotel companies to extend their brand reach, in part by selling off properties, benefits groups not only through standard contracts but also through confidence in knowing that more properties meet uniform brand standards. In fact, he says, the standards often improve because new owners usually pour money into renovations to upgrade their new properties.
In response to an inquiry by SM, Hilton replied in a written statement that "We have been very successful in obtaining commitments to include substantial property improvement plans to upgrade properties.During 2005 and 2006 our owners invested $380 million in improvements, confirming their belief in the strong brand values [we] represent."
Take the Hilton Anaheim Hotel, one of the largest hotels in California. Consisting of 1,572 guest rooms and 107,000 square feet of meeting space, it's located near Disneyland and adjacent to the Anaheim Convention Center. Makar Properties, of Newport Beach, CA, announced in April that it had acquired the property (though not from Hilton), and at the same time Makar CEO Paul Makarechian said he planned an extensive renovation. "Updating the property will elevate the hotel to a new level of quality and sophistication so that it can compete more effectively with other nationally recognized conference and convention hotels," he says.
likely also means higher ratesat least until the next downturn in travel, when once again market conditions will favor groups, regardless of who owns the property.
Contact Marshall Krantz at [email protected]
Lisa Palmeri, vice president of strategic initiatives and planning for independent firm Meetings & Incentives, in Caledonia, WI, recommends that planners include the following information in their requests for proposal in order to have the most success with chain brands:
Present your potential business in the best possible light. Include any information beyond the usual spending histories that would help properties understand the benefits to them of hosting your event.
If meeting dates are flexible, include alternative dates and patterns in the event of limited availability.
If the meeting location is flexible, include first, second, and third choices of destinations, or if you're unfamiliar with alternative destinations, seek advice from the chain's global sales organization (GSO); that's one of the key benefits of using a GSO.
Be as detailed as possible about meeting requirements; for example, meals must take place in a room separate from meeting rooms, or rear screen projection is required in the general session.
Outline and, if possible, prioritize your expectations for particular concessions.
Tell the sales managers when they can expect your decision.
Originally published June 01, 2007
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