Strong operating numbers, big transactions boost luxury/lifestyle segment

Coming out of the lodging industry downturn of 2008-2010, analysts were surprised at how badly the luxury/lifestyle segment had fared and then how long it took for the segment to rebound. It wasn’t until 2014 that brand executives began to speak with any confidence that “L&L” was back.

Fast-forward to mid-2015 and all traces of indecision are gone. Lodging Econometrics noted that as of the end of this year’s first quarter, there were 37 luxury projects, accounting for 10,500 rooms, in the construction pipeline in the U.S. Granted, these numbers pale compared to the construction pipeline of the upper-midscale industry tier for the same period (1,457 projects, 141,269 rooms). But luxury/lifestyle is a wholly different development model.

Desirable building sites are harder to come by. The barriers to entry are higher. The number of room keys may not be that much greater, but the interior design is more elaborate, the finishes more expensive, the ancillary facilities (food-and-beverage, spa, conference space) more extensive.

On the operations side, the performance of the U.S. luxury/lifestyle segment has rebounded, as well. According to industry analysts, year-to-date through April, the luxury segment scored an occupancy rate of 75.1 percent, the highest of any industry tier. Even more impressive, analysts expect average daily rate at luxury properties to end 2015 5.5 percent ahead of last year with revenue per available room for the year up 6.1 percent.

In style and design, today’s luxury lifestyle offering evolved from the previous era’s boutique hotel model. The 20 Hard Rock hotels, for example, are located in trendy destinations around the world from Bali to Vallarta on the Riviera Nayarit, Mexico. Given their often exotic location, the hotels emphasize authenticity, meaning that the service and amenities should reflect the destination.

In keeping with the millennial generation mindset, lifestyle hotels generally are experiential, placing a high priority on giving guests a range of experiences they couldn’t get at traditional hotels. In the case of the Hard Rock brand, many of those experiences revolve around music.

Celebrating its 44th anniversary this year, Hard Rock International expanded from cafes, opening its first hotel in 1995 in Las Vegas. Other pioneering lifestyle lodging brands include Kimpton Hotels & Restaurants and W Hotels, which is part of Starwood Hotels & Resorts Worldwide. InterContinental Hotels Group acquired the Kimpton brand in late 2014 for $430 million with the intention of growing the brand outside the U.S.

More recent entrants into the lifestyle arena range from Ace Hotels and Viceroy Hotels & Resorts to Virgin Hotels and, as of nine months ago, Canopy by Hilton.

With luxury lifestyle hotels posting successful results with each passing quarter, lenders’ reticence to green-light loans has gradually diminished. Meanwhile, the transactions market is being propped up, in part, by the amount of foreign investment capital available to acquire high-quality assets.

Two recent luxury transactions—both in New York—tell the story. Both are bound for the record books. In February, Hilton Worldwide Holdings completed the sale of the iconic Waldorf Astoria hotel to Chinese interests for a record $1.95 billion. The same month, Starwood Capital Group and Tribeca Associates sold the new 114-room Baccarat Hotel & Residences for $230 million, or a record-breaking $2 million per key, also to Chinese interests.

Chinese interests aside, private equity firms, institutional buyers, lodging real estate investment trusts, sovereign wealth funds and private individuals are among those chasing the most desirable luxury and lifestyle assets.

Pebblebrook Hotel Trust, for example, a 6-year-old lodging REIT based in Bethesda, Md., in the past eight months acquired luxury and/or lifestyle properties in San Francisco; Naples, Fla.; Boston; and Nashville, investing approximately $600 million. --Bruce Serlen