Convention center hotels bring their own types of risks, but there are ways hoteliers can improve the profitability of these assets.
Convention center hotels are unique assets. Their success is predicated on business booked years in advance with the ability to set prices well beyond the reach of any crystal ball, all coupled with current market conditions. They are highly susceptible to cancellations and slippage, and their locations proximate to convention facilities don’t always put them in an “A” location with respect to transient demand. They must partner with local CVBs and offer pricing and inventory that supports visitation for the destination as a whole, while still generating a profit for themselves. It is a very difficult balancing act, yet convention center hotels continue to be developed and viewed as economic engines for many cities across the U.S.
With so many different and sometimes conflicting marching orders, it has become increasingly more important to treat this hotel asset class as the unique product that it is to ensure the greatest returns on investment. During my professional career, I have provided asset management services for headquarter convention center hotels located in Chicago, Detroit, Atlanta and, most recently, Cleveland. Here are some of the most important lessons we’ve learned thus far.
Closer monitoring of room inventory is key, particularly around citywide events: In some markets, group attrition has been greater than anticipated, particularly from citywide groups. This has resulted in both opportunities and risks. With sufficient lead time, hotels may be in a position to capitalize on newly released inventory by pursuing equal or higher-rated transient demand where demand exists. Conversely, last-minute attrition also can result in panic- selling by offering lower rates to fill the hotel. In discussions with hotel revenue management teams, the focus should be on pricing to the market and resisting the urge to sacrifice rate when these situations arise. Additionally, working with planners prior to a group’s release date may allow for earlier detection of surplus inventory.
Consider gross versus net ADR and cost of acquisition: While the focus of this discussion is more often centered around transient business, the implications on group business are just as important. Concessions and commissions come in many forms and, for large convention hotels, can represent a significant expense. Just as hotel management companies are challenged to present true costs of acquisition to owners and not just the expenses that hit the P&L, they are equally challenged in identifying how much group demand is commissionable (never mind management company cost allocations for selling this business) and what the true average daily rate (net ADR) for a group is after concessions are incorporated. Group commissions have increased significantly in the last 12 to 18 months. Not only is this an area that warrants attention and careful analysis to truly understand the “value” of the business, but it also is an area in which business practices may not be a one-size-fits-all. My favorite example is the commission on a family reunion that got paid back to the family member who had organized the event. Hotels cannot afford to give away what they don’t have to, and these situations are happening to those that don’t dig deep into this issue.
Focus on the ancillary revenue and meeting space utilization: Similar to guestroom occupancy, operating teams should be encouraged to focus on meeting room use. In some cases, this means going back to customers, particularly those whose demand and need for space may be uncertain, to see if they would be willing to free up space so another group can be accommodated. Additionally, traditional metrics such as revenue per group room night are being re-analyzed or broken into different segments to ensure revenue is being maximized.
Improve benchmarking for future year bookings: While management companies have historically benchmarked a prior year’s pace as a measure of relative success, in today’s market, this is not a prudent strategy. The focus in establishing group goals should be less about being X percent above (or below) prior year and more on “where should we be positioned optimally?” both in terms of business on the books and ADR. A common strategy today is to “group up,” relying on even more group business than in the past, rendering historical booking paradigms (rooms, pace patterns and rates) an ineffective means of tracking success against future goals. Breaking out of a history mentality will give way to a clearer path to the future.
Make sure stakeholder goals are aligned: The success of a convention center hotel does not rely solely on the hotel team. Other stakeholders, including convention center operators, destination sales and marketing (such as CVBs), and city officials need to come together, with mutual goals and frequent communications to make a destination and the hotel successful.
While there is no simple solution to operating such complex hotels, these steps are sure to put convention center hoteliers on much more solid ground as they work toward the most meaningful ROI achievable.
Larry Trabulsi is an SVP at CHMWarnick. He also serves as a HAMA board member. Trabulsi brings over 15 years of consulting and asset management experience and four years of hotel operations experience to CHM. Trabulsi has been involved in a number of land-uses, including hotels, resorts, restaurants, golf courses, marinas and other recreational assets. He currently serves on an asset management team for a hotel portfolio of 12 hotels with a total value of approximately $2 billion. He has also worked closely with a variety of government agencies on hospitality portfolio issues such as opportunities for financing assets, preparing adequate contract language to protect the public sector for hotel concession contracts, and providing tools, policies and training for contract oversight.
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