Hotels Rake It In, Dish It Out

The current strong demand in the hotel market and the resulting high room rates surely sting meeting planners and attendees when they pay their bills. "We'll see occupancies escalate in 2006 to their highest level since 1996, and that will make this a year of record profitability," says Bjorn Hanson, global hospitality industry leader for PricewaterhouseCoopers.

On the other hand, a tangible payoff is developing: an avalanche of new and improved inventory. Construction will begin on more new hotel rooms in 2006 than in any year since 2000. At the same time, more money is being spent on renovation this year than ever before, according to PwC.

The current level of profitability boosts the appeal of building new properties—or, for some owners and investors, taking over existing hotels with renovation in mind. At times like this, Hanson says, "Everyone gets in [to the hotel market]—the lender puts its money to work, the developer can collect a fee, the hotel management company gets a fee, the franchiser gets a royalty, and the owner gets a return on investment." In short, says a related report by PKF Consulting: "The U.S. hotel industry is in a state of euphoria."

Anecdotal reports of development provided by hoteliers support that claim. "We have 300 projects in the pipeline now, so it's a huge difference [from prior years]," says David Scypinski, senior vice president of industry relations at Starwood Hotels & Resorts. As for improving existing hotels, he says, "There absolutely is more renovation." Among notable projects in the works is a $70-million rehab of the Sheraton New York.

Hilton is starting construction this year on big, bold hotels in San Diego, Orlando, and Baltimore, all adjacent to convention centers. "We're probably in the sweet spot of this current cycle in the hotel industry," says Bill Fortier, Hilton's senior vice president of franchise development. "There hasn't been much building in recent years because of high construction costs and fears about terrorism, so hotels have been able to push up rates, and will continue to do so into 2007 and 2008."

In terms of renovation activity, Hilton is doing "considerably more than we do in an average year," Fortier says. "More than half of Hilton and Doubletree hotels now have major product improvement plans in place." Further, Marriott opened 3,300 rooms in the first quarter of 2006 across its Marriott, JW Marriott, Renaissance, and Ritz-Carlton brands. The company has 25,000 rooms in its pipeline for this year.