BOSTON—Unbridled growth for hotel brands is all but extinct as the construction pipeline has been stagnant for the past two years, and the growth that does occur often requires the brands to pony up money to make the deal happen.
Four brand representatives speaking during the “Brands in Partnership with Owners” general session Thursday at the Hotel Equity and Lender Perspectives conference agreed the landscape is dramatically different than what it was in the past.
“When you look at a strategic opportunity, we’re always going to be virtually prepared to have that dialogue,” said David Tarr, senior VP of real estate and development for Hyatt Hotels Corporation. “We are absolutely willing to bring our balance sheet to bear to get a deal done.”
Matthew Sparks, senior VP for luxury corporate development at Hilton Worldwide, agreed.
“What we would all characterize as strategic, part and parcel to any deal is what the brand is going to bring to the table,” Sparks said. “No luxury deal in North America is going to get done without some money from the brand. (The questions are) in what form and how much.”
Expectations elsewhere in the world are different and hotel owners and developers in the Middle East and Asia don’t have the same need for key money, he said.
Lynne Dougherty, senior VP of owner relations and franchise services for Starwood Hotels & Resorts Worldwide, said the most important thing is that owners understand what they truly need in terms of financial support before they approach the brand.
“It’s really got to be honest dialogue that’s not just looking for the short term,” she said. “We will sit down with the right partners and talk through anything. It has to be a relationship where it’s not just the brands, it’s not just the owner, it’s not just the management company that’s reaching into its pocket.”
Tom Papelian, senior VP of hotel development for Marriott International, said the type of financial support varies by project. It includes mezzanine financing, credit enhancements and key money on a case-by-case basis.
“It has to be a strategic brand in a strategic location,” Papelian said. “It’s very relationship-driven.”
Keeping numbers in line
Despite the lack of new construction, the brand executives said their companies are cognizant that some markets have reached their supply limits, and they work hard to not over saturate those markets.
“The fact of the matter is there are markets that are becoming saturated,” Papelian said. “We have declined a lot of opportunities that come our way because of that.
“It pains me,” he added as he and the audience chuckled.
Tarr said Hyatt has much more room to grow because it has 485 hotels across all of its brands—much fewer than the other companies represented on the stage at the Westin Boston Waterfront Hotel.
“In any individual market, our focus continues to be what’s the right brand for that opportunity,” he said. “We see opportunity in most markets.”
That includes deciding whether it’s a corporate-owned property or a franchised hotel. Hyatt franchises its Hyatt, Hyatt House and Hyatt Place brands but does not franchise its Grand Hyatt, Park Hyatt and Andaz brands, Tarr said.
Will the company ever franchise those three upper-end brands? “Since Andaz opened we need to make sure we get it right fundamentally before we let go of the reins,” he said. “We have to ensure there’s no difference between brand management and franchisee managed.”
Tarr said each year Hyatt looks at 750 markets and a variety of metrics to determine where it wants to grow. Currently, the trend is to expand outside North America—70% of the company’s 109 executed contracts are located there.
Dougherty said Starwood is happy in the hotel-management business and wants to ensure the business mix stays at appropriate levels for all sizes of hotels. The current mix is 70% franchised and 30% managed; Daugherty said the optimum level is 80% franchised and 20% managed.
“The challenge is hotels with fewer than 500 to 600 rooms,” she said. “Our concern is if we give up the right to manage some of those hotels in that space, you don’t get the growth opportunity for talent and rolling out new standards. It’s just as important to test them in managed hotels as it is in franchised hotels.”
2012 is shaping up to be a good year for the brands, according to the executives. Sparks said he expects 8% to 10% growth in revenue per available room for Hilton’s luxury hotels.