Roundtable: Developing hotels in a time of legislative action

A host of issues from midscale hotel development to advocacy in Washington formed the framework of a roundtable discussion sponsored by Choice Hotels International and conducted at the annual Asian American Hotel Owners Association convention, held this year in National Harbor, Md.

At the start of the roundtable, discussion focused on the Trump administration’s efforts to reduce regulations and tax reform. Chip Rogers, president and CEO of the Asian American Hotel Owners Association, said that despite a number of recent legislative victories on behalf of hotel owners, there is still a long way to go, and new challenges are cropping up every day.

Rogers listed four challenges of note: lawmakers raising hotel taxes to pay for government institutions, such as teachers’ salaries; a lack of accountability when policing home-sharing businesses; difficulties in educating lawmakers on what extended-stay hotels are; and the need to thwart human trafficking. Because of these concerns, he said, it is necessary for hoteliers to become involved in the political process.

“We see this type of lawmaking happening across the spectrum, where they just seem to find bits and pieces and cobble something together, and that’s not really the recipe for long-term success,” Rogers said. “No one would run their business that way.”

Tim Shuy, VP of owner & portfolio strategy at Choice Hotels, said one of the most effective ways for hoteliers to become active is to seek ways to educate lawmakers on the needs of the industry. The fact is, many of them simply don’t understand the struggles behind successfully operating a hotel. He spoke about a training program Choice put together with AAHOA to teach advocacy at a local level, which involved hoteliers meeting directly with their local congressman.

“They took a congressman and educated him about joint employer—which is still out there, unfortunately—and overtime and drive-by lawsuits,” Shuy said. “That’s a great example of how we can work together and focus on issues.”

Bijal Patel, VP of Coast Redwood Hospitality, said advocacy is important within the industry because it gives voice to smaller owners. It’s particularly important for AAHOA to be involved, he said, because the group has 17,000 members it can mobilize.

“Relationships matter,” he said. “We’re now at a point where they recognize who we are when we walk in.”

Chip Rogers, president and CEO of AAHOA, and Jayesh Patel, CEO of Athena Hospitality Group, discussed legislative challenges facing the hotel industry in 2018.

Life In the Middle

After the government-affairs talk wound down, discussion pivoted to the midscale hotel segment and what it is that makes this space so attractive for development. Brian Quinn, VP of franchise development at Choice Hotels, said increasing construction costs are driving attention away from expensive full-service, big-box hotels, but that’s not the only side of the story. Consumers have also taken an interest in midscale hotels, which is good news for Choice.

“The types of travelers that are traveling are looking for a bundle of services that can be delivered in that midscale space at a price that they’re willing to pay,” Quinn said. “Older travelers… [are] sensitive about their spend and, similarly, the younger folks that are getting out, going to every concert, they haven’t reached their peak earnings, so they’re also sensitive to value. We love serving those guests.”

To his point, Megan Brumagim, head of brand portfolio for Comfort Inn, Comfort Suites, Sleep Inn and Mainstay Suites at Choice Hotels, said the Sleep Inn brand requires an investment between $55,000 and $60,000 per key to build, one of the lowest costs to construct in the midscale segment. Brumagim said that savings occur in the prototype stage, with efficient design being a cornerstone of the Sleep Inn brand.

“One of the things that we did, for instance, on the Sleep prototype, is we reduced the number of goods in the room… we did away with the built-in closet and replaced it with a partially open closet,” Brumagim said. “We know that the design trends are going that way, consumer trends are going that way and it’s a smart investment for owners.”

Brian Quinn, VP of franchise development at Choice Hotels International, and David Eisen, editor-in-chief of Questex Hospitality Group, mull over the reduced number of full-service hotels under development.

Maintaining Integrity

While limited-service hotels offer fewer amenities and services than full-service hotels, this is not an excuse for operators to skimp on property renovations. Jyoti Sarolia, COO at Ellis Hospitality, said convincing hotel owners to invest in the brand they are attached to remains a challenge, but when a franchisee steps up and asks what it will take to be competitive in a market, brands will help them find areas to improve.

Sarolia shared one anecdote. “One person wasn’t getting good responses from her breakfast; it was a little outdated,” she said. “All she did was renovate the breakfast [area], didn’t change the breakfast [offerings]. The comments she received were, ‘Oh my God. They offer better this, better that.’ The food didn’t change, but the experience changed by just that one little thing. She became a believer.”

For Azim Saju, VP and general counsel for HDG Hotels, stories like these are necessary for operators to hear in order to maintain the integrity behind these brands and facilitate continued development.

“For brands like Comfort and Sleep, new construction is essential for their continued success,” Saju said. “If they are going to be long-term developers for these brands over and over again, they have to come out of a downturn and know that there’s integrity in their brand in the way that it’s franchised.”

Rogers; Jayesh Patel; Megan Brumagim, head of brand portfolio for Comfort Inn, Comfort Suites, Sleep Inn and Mainstay Suites at Choice Hotels International; Azim Saju, VP and general counsel for HDG Hotels; and Quinn discuss the importance of new construction for many hotel brands.

The Direct Answer

When asked if direct booking campaigns have had any noticeable impact on the industry, Jayesh Patel, CEO of Athena Hospitality Group, said his company is not depending as much on online travel agencies as it had in the past. “We still rely on [them] because obviously we’re not running 100-percent occupancy, but we’re not relying on [OTAs for] 50 [percent], 60 percent, that’s for sure,” Patel said.

Saju said the biggest game changer for direct bookings has been the rise of member-only rates. Despite these rates being discounted off of best available rates, Saju said it is preferable to losing commissions to OTAs, and the alternatives remain too costly to consider.

“The other thing that’s helped is [Choice Hotels’] Smart Rates… revenue management in terms of knowing how to manage the different distribution channels based on demand,” Saju said. “That’s huge, because these other distribution channels—there’s value to them in softer times, in slower seasons— but you’ve got to know how to manage them, and revenue management is key to that.”

Caragh McLaughlin, head of brand portfolio for Quality Inn, Clarion, Econo Lodge, Rodeway and Suburban Hotels at Choice Hotels, said her company’s direct booking promotion—“Badda Book. Badda Boom.”—has driven an increase in proprietary contributions from a macro standpoint.

“We’re now up to [where] about $6 out of every $10 in revenue is being generated via Choice’s proprietary channels versus the others, and the growth off of a higher base is higher than we’re seeing off of our other channels as well,” McLaughlin said. “We’ve also seen 10 million new Choice Privileges members over the last two years, and so that member rate kind of hooks people in to get the discount. Now they’re part of our loyalty program and we can market to them; we can provide the rate offers to them at the right time; and get them to come back and stay with Choice properties again and again.”

Though the concept of “true loyalty” remains elusive in a world where every consumer is a member of every conceivable loyalty program, Shuy still counts Choice’s activity in this arena as a success.

“We’ve still got an opportunity to communicate with the [guest] directly, which we didn’t have before, so it’s positive no matter how you package it,” he said.

Eisen; Jyoti Sarolia, COO at Ellis Hospitality; Tim Shuy, VP of Choice Hotels International; Bijal Patel, VP of Coast Redwood Hospitality; and Caragh McLaughlin, head of brand portfolio for Quality Inn, Clarion, Econo Lodge, Rodeway and Suburban Hotels at Choice Hotels International, analyzed the success of the industry's push for direct bookings.

The Great Unknown

As the conversation drew to a close, participants were asked to look to the future to determine what will be their greatest challenges going forward. Bijal Patel said labor remains a pressing concern, particularly in California.

“We have high minimum-wage laws coming in. We don’t really know how that’s going to affect our operations,” he said. “There’s housekeeping panic buttons coming in. There’s talk about human trafficking training. There [are] so many different things that are kind of resting on our shoulder.”

Jay Patel, on the other hand, pointed to high interest rates, which are increasing alongside construction costs.

“The prime rate is supposed to go up another two times this year, and it’s already gone up,” Patel said. “We’re having to start looking at 10-year swap rates to lock in. I may pay a little higher rate right now, but at least I have the satisfaction of knowing my cash flow’s going to be the same, consistent.”

As for opportunities, Jay Patel said the midscale hotel market is perfectly poised to pick up the business of traveling millennials and retiring baby boomers.

“There are still opportunities in the right markets, the right places,” he said.