When kicking off a hotel development project and hiring an asset manager in the same time period, there is some strategy to when that hire should occur, and what that manager can help alleviate during the development process.
In the hotel industry, the asset manager is there to preserve and protect ownership rights, mitigate risks and implement strategies to enhance performance and optimize investment returns.
And while the hotel investment community has embraced the importance of this role and the value a qualified asset manager can bring to a project, there is less consensus as to the right time to bring an asset manager on board. For instance, in a new hotel development, bringing an asset manager on board earlier in the process is critical given the decisions needed and close oversight required to ensure a successful opening and operational ramp-up.
The hotel development process can be described in four key phases and the asset manager can be beneficial throughout: The planning phase, the development phase, the pre-opening phase and the post-opening phase.
There are many key decisions to be made for a successful hotel development project, one of which is the selection of an operator and brand. Asset managers, especially those with experience overseeing new hotels ramp-up through stabilization, can offer insight and exceptional benchmarking capabilities to validate projections submitted by operators, as well as often provide feedback on capabilities by group based first-hand experience. Similarly, the decisions surrounding the selection of a brand/operator versus a franchise and third-party operator have a lasting impact on a project, and asset managers can advise on the opportunities and challenges given the owner’s investment objectives. Once selected, key agreements need to be negotiated that will govern the future relationship and require careful thought and negotiation.
Asset managers frequently are asked to assist with project team selection, including recommendations for project manager, architect, designers, furniture, fixtures and equipment procurement, among other project consultants. Having the right advisor can assist an owner in finding the right partners for the owner’s goals. For many of these choices, there may be dozens of viable options for each position. An asset manager can also help sort through the options and qualify them in a timely fashion. As a hotel program gets defined/refined, an asset manager can assist in key decisions that can impact a project’s long-term viability and financing. Prime examples include facility programming such as guestroom configuration, food-and-beverage facilities and concepts and back-of-house layout, all of which have an impact on revenue potential, operating costs and value. Asset managers often find their role as a voice of reason among what may be many divergent interests, and ensuring that the implications of each decision are carefully weighed against overall investment objectives.
While it is often said that the key to success in real estate is location, a close second in the hotel business inarguably is people. Key elements in the pre-opening phase include interviewing key personnel, understanding the staffing chart and how it may fluctuate from year to year and monitoring the staff hiring progression to the construction schedule and targeted opening date. In addition to establishing the operating platform, other key tasks during this phase include ensuring the pre-opening sales plan is put into motion. This may include website set-up, key account introductions, progression to pre-opening group sales targets and establishment of initial rate strategies. A crucial area that continually sees a disconnect, even once budgets are established, is in opening rates. Offering low rates to induce trial at opening is not a strategy that most asset managers will recommend, as lower rates can serve to undermine market positioning and slow the ramp-up considerably.
The first year of operation for a new hotel presents additional challenges and opportunities, as the management team shifts from a “pre-opening” mentality to an “operational ramp-up” mode. Despite budgets and forecasts, the reality of opening will inevitably reveal unexpected operational issues, unique market dynamics and other challenges that will necessitate some level of adjustment in strategy and approach. It also is critical that performance during this period is carefully tracked so trends and challenges can be identified, and adjustments can be made. Examples include inaccuracies in forecasting that result in high labor costs, an F&B outlet that may be performing better (or worse) than expected, or a revenue management strategy that may need tweaking. While this occurs, construction budgets and line items such as operating supplies and equipment need to be reconciled and closed out, and construction punch list items need to be addressed. The asset manager can assist in the transition from the project team to the operations team in a seamless manner, support the operating team in identifying opportunities and hold them to task on required operational adjustments.
With operational intensity, hotels are often said to be the most complex form of commercial real estate, and that’s when they’re open! Planning a new hotel development can be even more daunting for owners, given the impact of decisions made during the pre-opening period are not realized until after the hotel opens. Surrounding yourself with an asset manager with the right expertise, at the right time, can help mitigate risk and establish a proven path for long-term success.
Larry Trabulsi is a Senior Vice President at CHMWarnick, a leading hotel asset management and business advisory services firm with over 8 offices nationwide. Larry serves as a board member of the Hotel Asset Managers Association (HAMA).
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