Muted supply growth fuels development engine

Muted supply growth fuels development engine
Marriott International continues to grow through acquisitions, including Canada’s Delta Hotels & Resorts, in a deal announced in January. The 38-property portfolio includes the Delta Ottawa City Centre.

Marriott International continues to grow through acquisitions, including Canada’s Delta Hotels & Resorts, in a deal announced in January. The 38-property portfolio includes the Delta Ottawa City Centre.

National Report – With 2014 turning out to be a banner year for the lodging industry and analysts forecasting that the current phase of the cycle is likely to last three to five more years, the development engine—both in the U.S. and internationally—is humming along at a healthy pace.

Adding to the positive development outlook is the state of the supply-demand equation, with STR forecasting that supply growth will be only 1.3 percent in 2015 and 1.4 percent in 2016, far below the anticipated growth in demand both years.

FULL-SERVICE FOCUS

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Industry metrics have been so upbeat that the major brand companies are beginning to see renewed interest in developing full-service hotels after years of interest being heavily weighted toward select service. “There’s interest in both new builds and adaptive reuse projects with the emphasis on urban locations,” said Noah Silverman, Marriott International chief development officer for North America full-service hotels.

Dual-brand projects remain an increasingly popular development model. The Hampton Inn/Homewood Suites by Hilton Chicago Downtown Miracle Mile (below) that opened last summer marked Hilton Worldwide’s 700,000th hotel room milestone.Public-private deals figure in the full-service mix, Silverman noted. “The 1,200-room Marriott Marquis we’re developing at McCormick Place in Chicago is a prime example,” he said. “We’re also prepared to use our balance sheet, depending on the deal.” The $400-million Marriott Marquis is scheduled to open in late 2016.

Choice Hotels International is another major brand company that’s on record for being prepared to use its balance sheet to foster development. “We’ve been especially active on this front with our upscale Cambria Hotels & Suites brand in the U.S. and the Ascend Hotel Collection in both U.S. and international markets,” said David Pepper, Choice’s SVP for global development.

There are various ways to grow brands in today’s positive environment, including acquisitions, explained InterContinental Hotels Group chief development officer Joel Eisemann, citing his company’s purchase of Kimpton Hotels & Restaurants Group, a deal unveiled in December.

Dual-brand projects remain an increasingly popular development model. The Hampton Inn/Homewood Suites by Hilton Chicago Downtown Miracle Mile (below) that opened last summer marked Hilton Worldwide’s 700,000th hotel room milestone.

Dual-brand projects remain an increasingly popular development model. The Hampton Inn/Homewood Suites by Hilton Chicago Downtown Miracle Mile (below) that opened last summer marked Hilton Worldwide’s 700,000th hotel room milestone.

“Kimpton has great customer awareness in the lifestyle segment in the U.S., but didn’t have the infrastructure of its own to expand the concept into international markets,” Eisemann said, describing in part UK-based IHG’s rationale behind the deal.

Mergers and acquisitions are also top of mind at Marriott. “Our M&A activities are driven by the opportunity to enter an industry tier or establish a presence in a market that we don’t already have,” Silverman said. “The most recent is our agreement in January to acquire Delta Hotels & Resorts—with its 38 properties—making Marriott the largest full-service hotel company in Canada.”

INTERNATIONAL INTEREST

International development also remains a focus at Starwood Hotels & Resorts Worldwide in terms of both new construction and conversions. Coming out of the downturn, the industry identified four markets pegged for hotel development: Brazil, Russia, India and China (known as the BRIC countries). Starwood president of global development Simon Turner has added a fifth market: South Africa (making the acronym BRICS).

“At the same time, not all the original four continue to see the same level of development interest. Russia, for example, has suffered serious setbacks in its economy,” he said.

France-based Accor continues to see considerable development opportunity in Europe and China. “While others may have reached saturation in China, we still see tremendous potential,” said Christian Karaoglanian, Accor’s chief development officer. In December, the company reached a development and marketing agreement under which it granted Huazhu (also known as China Lodging) master franchise rights to develop 350-400 hotels under a range of its brands, including Ibis, Mercure and Novotel. As part of the deal, Accor took a 10-percent equity stake in Huazhu for an undisclosed amount.

Choice Hotels International is focused on developing its Cambria Hotels & Suites and Ascend Hotel Collection brands. Recent additions include the Cambria in Washington, D.C. (top), and Ascend’s Hotel Blake in Chicago (above).

Choice Hotels International is focused on developing its Cambria Hotels & Suites and Ascend Hotel Collection brands. Recent additions include the Cambria in Washington, D.C. (top), and Ascend’s Hotel Blake in Chicago (above).

When Marriott decided to launch one of its recent new European brands, the upper-end select-service AC by Marriott, in the U.S. last year, the development community saw it as an exception to the rule. But following the debut of the AC Hotel New Orleans Bourbon, Marriott is repeating the pattern. In January, it unveiled plans to take its new European hip economy Moxy brand to the U.S., as well.

Already open in Milan, Moxy is slated to open in Munich, London, Copenhagen and other cities in Europe, while in the U.S., the company has lined up developers to take the concept to New York, San Francisco, Seattle and other top 25 MSAs.

In the U.S. and, increasingly, international markets, dual-brand projects have become a popular development model, particularly in downtown locations where available desirable sites come at a premium. In almost all cases, the two brands involved are part of the same hotel company.

“Dual-brand projects allow you to provide two types of accommodations, targeting two types of travelers, in one building. There are numerous synergies, but each brand has to be successful on its own terms and pencil out independently,” said Julienne Smith, SVP of real estate and development at Hyatt Hotels Corp. Hyatt has dual-brand projects in development involving its upper-end select-service Hyatt Place and extended-stay Hyatt House brands.

The basic concept continues to evolve. Traditionally, each brand in a dual-brand project had its own entrance, front desk and elevator bank. The dual brand Courtyard by Marriott and Residence Inn by Marriott at LA Live in downtown Los Angeles, which opened last year, took a different tack, according to developer Homer Williams, CEO of Williams/Dame Associates.

“We opted for one entrance, one check-in and one elevator bank. Two guests get off the elevator, the Courtyard guest goes to the left, the Residence Inn guest goes to the right, neither knows the other is entering a different branded room,” Williams said. “We felt the brand differentiation was more brand-centric than customer-centric.”

More “variations on a theme” will, no doubt, occur as more of these projects come out of the ground. “The critical question is, ‘What are the best brands available for that particular market’?” said Hank Jones, a partner in Kallenberger Jones & Co., hotel investment consultants.

Silverman, Pepper, Eisemann, Turner, Karaoglanian, Smith, Williams and Jones spoke on development and senior management panels at the 14th Annual Americas Lodging Investment Summit held in Los Angeles in January.

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