CHICAGO—No hotel is an island, but the markets in which they operate look vastly different from the industry as a whole. That’s why underwriting based on specific market dynamics is crucial when committing to any new project or deal, owners and operators said.
“Through the euphoria of the past decade before two years ago, we all got very used to this concept of growth being inevitable everywhere. … The last two years have been incredibly sobering,” said Russ Urban, senior VP of acquisitions and development for HEI Hotels & Resorts. “… There are many markets and submarkets out there that will never recover to anywhere near what it was in ‘06 and ‘07.”
senior VP of acquisitions and development
HEI Hotels & Resorts
Urban was one of five panelists who discussed the changing investment landscape and ways to cash in on the anticipated rebound during a general session at the Midwest Lodging Investors Summit last week. Speaking in front of a crowd of approximately 300 at the Sheraton Chicago Hotel & Towers, they urged the crowd to gauge specific market drivers before underwriting any new project.
“What are their big employers? What can happen in that market that can change the demand activity? … Did the demand fundamentals change permanently (during the downturn)?” said Bill DeForrest, president and CEO of Lane Hospitality and incoming chairman of the IAHI.
You can’t just look at industrywide fundamentals and projections, he said. “It’s market by market.”
Finding the right deal
When targeting new deals, it’s also important to understand the various levels of motivation within the capital stack, Urban said.
Borrowers, special servicers, junior lender, mezzanine lenders—there can be quite a few parties involved, each with their own strategies and agendas. Throw your skin into the game without first understanding the players at the table, and you might not get dealt the hand you were expecting.
HEI Hotels & Resorts, which owns and/or operates 36 hotels in 16 states, fosters a bit of a home field advantage by staying within familiar confines to make the job more manageable, Urban said.
“We’re fairly old fashioned in how we approach deals. … We are finding it much different in this cycle to actually approach the acquisitions. The key is, we spend a lot of time researching which markets we want to be in. We have 15 markets that are our top-list markets.”
The company also focuses on three brand families—Marriott International, Hilton Worldwide and Starwood Hotels & Resorts Worldwide—and avoids rushing into flash-in-the-pan opportunities.
“Deals these days are very complex,” Urban said. “We’re willing to be patient to get the right deals at the right price, and we’re also willing to walk when the pricing gets crazy.”
DeForrest and his team at Northbrook, Illinois-based Lane Hospitality, which manages 19 hotels throughout the country, focus their market analysis on secondary destinations.
“We’re sometimes looking in markets where other people aren’t looking. We can’t compete in some of the top markets with the pricing that’s out there,” he said. “… Our goal is to always have the best asset in a secondary or tertiary market.”
Creativity and innovation
Whether entering into a new deal or managing an existing asset, owners and operators must always be thinking of new ways to make money, said Bill Morrissey, president of Saint Paul, Minneapolis-based Morrissey Hospitality Companies.
In its full-service properties, for example, Morrissey offers on-site catering to bring its food and beverage to the customer. The company also provides in-flight services on corporate and private jets.
At one of its Hilton Garden Inn properties, Burlington, Iowa-based Hawkeye Hotels just completed a marketing push to attract more area residents to the property’s on-site restaurant, said Ravi Patel, the management company’s executive VP. The campaign was a success, fueling increased flow through and extra revenue, he said.
But whatever owners and operators do to make more money at the hotel, it’s important to keep in mind the crux of the business: fostering a hospitable experience, said Bernie Moyle, COO and CFO for Vantage Hospitality Group.
“It’s great that hoteliers are back. A lot of the investment community is getting washed out,” he said. “The business is still about product and service and value. Even with all of the technology … we still need to be focused on those things.”