Full-service hotels: High demand, high profits
Full-service hotels: High demand, high profits
23 JANUARY 2017 8:30 AM

Limited-service hotels may dominate the development landscape, but existing full-service hotels are here to stay.

REPORT FROM THE U.S.—While the greater hotel industry is presently focused on building new limited- and select-service product, there’s also a market brimming with existing full-service assets that could appeal to a wide range of investors.

Sources said strong industry fundamentals and a steady return of group bookings since the 2009 recession continue to fill full-service hotels to robust occupancy levels. With minimal new competitive supply in most markets, demand is expected to remain relatively stable in the sector.

“If (gross domestic product) growth continues, and if group demand continues, then full-service hotels should be doing pretty well,” said Jan Freitag, SVP at STR, parent company of Hotel News Now. “We’ve seen year-to-date through October that the absolute levels of occupancies for luxury and upper-upscale hotels are in the mid-70s, selling three out of four rooms every night, so that’s certainly very healthy. I’d expect that level of occupancy to maintain or go down slightly as new supply comes in.”

The key part of the demand equation for many full-service assets is banquet space, according to experts, because banquet meals are often more profitable than restaurant-based food and beverage. As long as group business remains strong, the larger meeting-friendly hotels will always serve a specific need, experts said. As group demand grows, in most cases, the same pre-existing hotels are still the only full-service options in a given market.

“I think that the industry’s painting itself into a corner, because as group demand continues, we’re not building anymore group houses,” Freitag said. “The winners will be the existing properties with ballroom space.”

Banquet space is key to full-service hotels’ profitability, sources said. Shown here is the Grand Ballroom of the Diplomat Beach Resort Hollywood in Hollywood, Florida. (Photo: Hilton Worldwide Holdings)

Despite beliefs to the contrary, the traditional notion of doing business in person has not gone completely out of fashion. While alternatives such as videoconferencing seem to perpetually darken the outlook for meetings demand, groups are still gathering at hotels in robust numbers, seeking the far more personal interactions that can only be conducted face-to-face.

“There’s still a market out there for it,” said Mike Marshall, president and CEO of Marshall Hotels & Resorts. “There’s still a need to have meetings and face-to-face conversations and networking. It’s important to get out there, talk to other people and realize, ‘Hey, I’m not the only one that has certain issues, or certain hopes and aspirations.’

“Why do we have all these hotel investment conferences? So you can go out and network with people. You can’t just do it on the phone all the time, so there’s a need.”

Serving that need is expensive, however, with labor costs in full-service hotels far exceeding those of limited-service hotels. In some markets, such as New York City, that labor cost is so high that full-service assets may actually be valued less per key than select-service hotels. In other markets, though, these labor costs can be offset by a variety of revenue generators, including F&B.

“We like full-service in cities (other than New York) because there are more levers we can pull to increase value and change the business operating model,” said Lee Pillsbury, founder, co-chairman and CEO of Thayer Lodging Group. “At the Diplomat Beach Resort in Hollywood, Florida, we’re in the process of putting in 11 or 12 F&B outlets.

“This is a 1,000-room hotel that we think we can drive an enormous amount of value for our customers and good returns on our investment by developing a lot of F&B alternatives. We couldn’t do that in New York or San Francisco, but in Hollywood, Florida, we can. It’s market by market.”

If it’s often prohibitively expensive to staff a full-service hotel, it’s even more costly to build one, which is a main reason behind the relatively low new supply in the sector, compared to the constant influx of new-build, limited-service hotels. Instead, investors generally look to acquire existing full-service assets, as evidenced by the steady stream of deals that have been made this year.

“If you look at 2016, first of all, there have been a number of full-service resorts that have sold, and there’s no shortage of other full-service hotels that have traded,” said Dan Lesser, president and CEO of LW Hospitality Advisors. “The country’s littered with lots of full-service properties that are 20 to 30 years old at this point, that fundamentally sit on great real estate, and there are opportunities to do something with these assets.”

There’s also a wide pool of potential buyers out there seeking full-service assets, he said, which helps keep the marketplace vibrant. Institutional investors, private equity firms, sovereign wealth from the Middle East and other foreign buyers from nations like China and Russia, are all frequent players. Looking ahead to 2017, he said, all are expected to continue their buying sprees.

“The Chinese, maybe you’ll see a little bit of a pullback from them, but there’s no shortage of private funds. There’s public money out there, and then overseas capital,” he said.

Lesser said overseas capital is now going into secondary, and sometimes tertiary, markets.

“So, with $10 million deals in the middle of the country, I think you’re going to start seeing more foreign capital chasing those opportunities,” Lesser said, “because they’re chasing yields, and it’s hard to find yield at this point.”

Many hoteliers are also optimistic about the economic changes predicted to occur under the Trump administration and what those changes will mean for group demand. Marshall said increasingly positive attitudes among the business community in the wake of the presidential election will likely result in more aggressive sales efforts—and more meetings—in the coming year.

“(The new administration) is going to create more business group travel,” he said. “I think people are going to feel better about the economy, and at the end of the day, you’ve got to get out there and chase business. … You can’t wait for your website to snag somebody. You can’t wait for your new marketing guru to send out a whole slew of new email messages saying, ‘Hey, come see us.’ That just doesn’t work.”

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