Healthy demand, ADR growth augur strong operating landscape

The Hilton Garden Inn, in Tupelo, Miss., is managed by Peachtree Hotel Group.
The Hilton Garden Inn, in Tupelo, Miss., is managed by Peachtree Hotel Group. The hotel was recently renovated last August.

The Hilton Garden Inn, in Tupelo, Miss., is managed by Peachtree Hotel Group. The hotel was recently renovated last August.

National Report – This year appears poised to be a good one for travel, which means it will be a good year for hotels and the companies that operate them. Hotel Management turned to management companies for their take on 2015. From what executives told us, the year is shaping up nicely.

With more discretionary income, travelers have a greater range of options for where to go and what to do—and with increased demand for room nights, hotels can charge more for their services. With increased revenue, hotel developers are also looking to expand, and are able to secure better loan terms from lenders.

In terms of hotels seeing significant rate changes, Rolf Tweeten, chairman of the board at Alliance Hospitality, noted that many hotels—both branded and independent—lowered rates during the economic downturn, driving growth now that the economy is more stable. “When you think about it, how we responded as an industry with regard to rates had no bearing in reality,” he said. “No one created demand during the recession by slashing rates. If you look at the last six years of rate history, you can see that we are now just approaching where we were pre-recession.” This “bodes well” for revenue growth—“assuming that the properties have no deferred capital and have their eye on the ball with regard to guest service.”

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Matthew Woodruff, SVP of guest and brand excellence at Hospitality Ventures Management Group, agreed, predicting that 2015’s growth will be driven by ADR. “The fundamentals are strong, which will lead to aggressive pricing and less reliance on third parties, pushing more business through the low-cost brand distribution channels,” he said.

➔  “The fundamentals are strong, which will lead to aggressive pricing and less reliance on third parties, pushing more business through the low-cost brand distribution channels.”

Matthew Woodruff, SVP of guest and brand excellence, Hospitality Ventures Management Group

In terms of financing expansion, Tweeten said that owners can add value on the debt side, noting that lenders are “actively lending at very favorable terms, whether it’s for capital needs or a simple refinance.” He recommended that any owner considering placing debt of any sort should ensure such debt is assumable. “In the future, when rates do move up, one of the biggest competitive advantages an owner who is considering taking a property to market can have is to be able to offer it with debt rates lower than those being offered in the market at that time,” he said. “We anticipate that we will finally see some upward movement in lending rates. But as long as we retain the healthy gap between lending rates and cap rates that we have maintained for the most part during this cycle, and do not experience the compression between the two that we saw in the run-up to the recession, we should be just fine.”

Peachtree Hotel Group COO Mitul Patel also expects that his company will be able to push its room rates up. “A lot of the time, our local negotiated rates or group rates tend to be lower,” he said.

New Castle Hotels & Resorts President and COO Gerry Chase expects to exceed 2014’s growth this year, more through ADR than occupancy. Like Woodruff, he sees strong fundamentals for increased brand growth and development, and notes that supply growth is still muted. “We’re in the right position now and we’re going to take advantage of it at least through 2015,” he said, noting that financing takes longer and construction costs are higher, leading to slower development. As the economy becomes increasingly stable, he continued, the only potential dangers on the horizon are rising interest rates. “But, based on the projections that are out there right now, it doesn’t appear that that’s going to happen,” he said.

The fundamentals for growth mostly depend on the cost of capital, Chase explained. “Debt is underwritten with some pretty stiff criteria. The lending community still is looking to professional hotel developers and operators.”

Still, he acknowledged, the financial industry is not as willing to take risks as it was before 2007, and with real estate at a premium (making lucrative locations difficult to acquire), and construction costs on the rise, expansion will be tentative.

NEW TECH TRENDS

Woodruff predicted that brands will take increasing advantage of “customer-driven technology” to connect with guests on a personal level, citing smartphone apps that can streamline the arrival process and even unlock guestroom doors. This, he continued, will focus on the touchpoints of a guest’s stay, even from the pre-selection process. “Technology is going to allow a brand to know more about an individual [and] what their personal preferences are, their likes and their dislikes, to allow them to make it easier [to] meet those needs,” he said.

The Candlewood Suites, in Bentonville, Ark., is managed by the Hospitality Ventures Management Group. It is HVMG’s only Candlewood property.

The Candlewood Suites, in Bentonville, Ark., is managed by the Hospitality Ventures Management Group. It is HVMG’s only Candlewood property.

Technology also means that a hotel’s public relations really are public now. “It’s no longer sufficient to simply have the best flag and the best location,” Tweeten said. “You must also have the best ratings from your guests. Having an active and engaged management team that’s making contact with their guests and employees daily during high-traffic periods is critical to the financial success of a hotel property.”

Patel said that his management company has invested heavily in improving their overall connectivity options, specifically in terms of bandwidth, over the last two to three years across all of their represented brands. “And once one brand picks up on a thing, the rest follow,” he said.

W. Nick Kellock, COO of Concord Hotels, agreed, noting that the “tech-savvy” crowd is accustomed to seamless connectivity. “All brands are working hard to enable technology that appeals to this generation of traveler,” he said.

THE NEXT-GEN GUEST

Perhaps the most tech-connected demographic is the increasingly powerful millennial generation—generally defined as those born between the late 1970s and the year 2000. Hotel brands, Kellock said, are fighting for the loyalty of this generation. “It’s a bigger group than the boomers were, and significantly bigger than Generation X.” While this market was important in 2014, it will be “huge” in 2015, he added.

The Westin Portland Harborview, in Portland, Maine is managed by New Castle Hotels & Resorts.

The Westin Portland Harborview, in Portland, Maine is managed by New Castle Hotels & Resorts.

Tweeten praised the efforts of the franchisors in researching and creating environments that are attractive to millennials. “As a result of this research much of what we are doing simply makes more sense to today’s travelers of all ages,” he said, noting the importance of educating hotel teams on the needs and expectations of millennials. “We still have more work ahead of us, but also more opportunities to rethink how we do business in order to accommodate younger, more hip travelers.”

“There are many different types of people forming the [millennial] generation,” Kellock noted—but they do have some common traits: “More than any other generation today, they like to act independently. They have less of a tendency toward brand loyalty. They are very interested in independent verification of their decisions.” Chase agreed, noting that most of the major brands are creating “millennial-friendly” hotel environments that can include everything from added outlets in guestrooms to large lobbies for mingling and connecting. New Castle is also using social media to attract this demographic, he added, and is hiring representatives of the generation to gain insights first-hand. “They are not the problem,” Chase said. “They are the solution for advancing companies.”

But there is a downside to a tech-savvy demographic, and Kellock has noted a fight for distribution preference among travelers, especially millennials. “Brands want people to book on their own channels as opposed to using OTAs” like Expedia, he said. Distribution costs can often be lower when guests book their rooms on a brand’s website, he said, and the brands are offering incentives to those who do. Loyalty points and rewards like complimentary in-room Wi-Fi are encouraging travelers to book their stays on brand websites, and Kellock believes that the fight to reduce the cost of attracting the booking guests “will be front-and-center” this year.

In order to keep on top of brand concerns, Concord has its team members on the advisory boards for Hyatt and Marriott in order to both share and get insights that benefit both the brands and the management companies. “We get early warnings about what’s to come and can participate in discussions about best practices,” Kellock said. “At end of day, if you’re a franchised Courtyard,” a Marriott brand with more than 30 properties managed by Concord, “what you do is determined by the brand. Our job is to execute it effectively.”

So, what will be the most important element for management companies to bear in mind for 2015 and beyond? “Brands must stay in the forefront of emerging [and sustainable trends] and must be known as possessing an identifiable culture which relates to their target customer,” Woodruff said. “In order to achieve those goals, brands must align themselves with partners that share in those common core goals. I see a strengthening in the value of those partnerships this year and into the foreseeable future.”

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