LOS ANGELES—Group business continues to provide the backdrop for a prolonged peak cycle for the hotel industry, and members of the Lodging Industry Investment Council said during two meetings last week at the Hotel Figueroa that there’s still room for growth.
With Jan Freitag, senior VP of strategic development at STR (the parent company of Hotel News Now), saying group demand has accelerated, the LIIC members were optimistic that it has yet to hit peak performance. The meetings were held in conjunction with the Americas Lodging Investment Summit.
“Having a strong group pace gives you and your revenue managers strong pricing power,” Freitag said.
“It’s not back yet, but we’re seeing it on the horizon,” said Steve Kisielica, principal and chief investment officer with Lodging Capital Partners. “We’re starting to see boondoggle bookings; we’re starting to see the average spend up.
“Booking windows (for group business) have started to lengthen,” he added. “(That recovery from the recession has) definitely been a much longer lag than the rest of the recovery.”
“It’s pushing, but it’s still not back to where it was before,” added Charlie Muller, VP of acquisitions & development for Omni Hotels & Resorts.
“Our group pace is good and numbers are getting better,” said Thom Geshay, senior VP of business development for Davidson Hotels & Resorts.
Abid Gilani, senior VP of the hospitality finance group for Wells Fargo, said the lender is “underwriting a lot of big-box hotels” in large part because of the increasing group demand.
“It’s a business that’s coming back,” Gilani said. “It’s going to push for the next couple of years. Group (business) is starting to come back; it’s going to backfill the business people haven’t seen the last couple of years.
“It’s reflective of Corporate America. … (which) is starting to hire again, train people, bring people together in groups,” he said.
Kate Henriksen, senior VP of investment and portfolio analysis at RLJ Lodging Trust, agreed that the strength of Corporate America has a direct influence on group business at hotels.
“A lot of studies I’ve seen suggest the hiring market is starting to get more competitive,” Henriksen said. “In order to retain, you have to train and incentivize your workforce. That means meetings and conferences.”
That at times leads hotel owners to be creative in finding ways to accommodate groups—even building new facilities at existing hotels.
“The return (on investment) on meeting space is tough … it’s pretty expensive to build, but it ensures success in the right location,” said Adam Valente, managing director of Rockbridge. He said Rockbridge has added ballrooms in a handful of its hotels and it’s been a home run in each case.
Even with the influx of more group business, it’s still a wait-and-see game in many instances, said Gary Stougaard, managing member of San Diego-based Chelsea Hospitality Partners.
“Everything is short term, even high-rated business,” Stougaard said. “For groups, in the year for the year is (standard operating procedure).”
Stougaard said San Francisco in particular is getting closer and closer to the landscape in 2006, 2007 and 2008 when hotels were in full control of pricing—including group pricing.
“We’ve gone a long time without having big-box (supply) growth, and that’s the key,” Stougaard said.
Some reservations about group reservations
There are still some reservations about calling group business a total rebound.
Russ Urban, executive VP of business development and acquisitions for Destination Hotels & Resorts, said that while he was surprised at the quick rebound his company had from the so-called AIG effect in 2008—it made big strides in group business between 2011 and 2012—he has been somewhat disappointed by the lengthy recovery for group business.
Forty percent of Destination’s business comes from groups, according to Urban.
“It might be truly a paradigm shift in the group market,” he said.
Kisielica disagreed. “This sleeping giant hasn’t awakened yet,” he said. “I don’t think it’s a paradigm shift.”
The LIIC members were clear that group business isn’t the only driver of the industry’s strong performance. Leisure business, while slowing, remains plentiful, they said.
“The good news is the leisure business has been on fire,” Urban said. “Our rate growth capabilities are getting better. We’re seeing a wealthier, younger client.”
“The strong leisure business landscape has proven so successful that some hotels are “not all that eager to go in and book special corporate rates,” Gilani said. “They’re living on higher leisure rate.”
While owners and operators continue to watch performance trends in group and leisure business, they also must be aware of external influences on their businesses, the LIIC members said.
Valente said the industry must be alert for the emergence of more disruptors to the hotel industry, and cited Airbnb and online travel agencies as past examples.
“Are we ignoring other disruptors?” Valente said. “Getting in that comfort zone is a real risk.”
Doug Dreher, president & CEO of The Hotel Group, said the increasing minimum wage is a concern for owners. In Seattle, wage rates have increased 30%, he said.
“If you do have (an economic) slowdown, you can’t unwind that very well,” Dreher said.
Henriksen said one silver lining could be that higher wages could potentially work to extend the current up cycle. “If there’s new pressure on the margins, that might reduce the feasibility of new supply,” she said.
Urban said property-tax increases two times or three times higher than their current levels are another potential disruptor. “That throws a wrench into underwriting,” he said.
Dreher concurred. “We’re appealing them aggressively, but there’s not a whole lot you can do,” he said.
Mike Cahill, CEO and founder of Hospitality Real Estate Counselors, said that in this type of transactions environment, it’s more important than ever for all parties to perform the proper due diligence to avoid property-tax surprises.
“The broker really should know if there’s potentially a property-tax situation,” he said.