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Hoteliers enjoying life in the fast lane
May 29 2013

With a speedway located in the Rocky Mountains as a back drop, participants at the annual Track Days event saw a smooth road ahead for the hotel industry.

  • Attendees at the annual Track Days event see positive movement in the hotel industry.
  • Advantageous refinancing fundamentals are fueling some of the optimism.
  • PIPs dominate the conversation, which was held at the Pikes Peak International Raceway in Colorado.

FOUNTAIN, Colorado—By most accounts, the U.S. hotel industry is cruising at a brisk pace as it continues to distance itself from a debilitating recession that left it gasping for air.

With 38 consecutive months of revenue-per-available-room growth through April, according to parent company STR, it was not surprising that attendees of the annual Track Days event at Pikes Peak International Raceway in Fountain, Colorado, used driving metaphors to describe the state of the industry.

“I would say we are moving into the fast lane,” said Amy Jakubowski, partner at architecture and interior design firm BBG-BBGM, during an open panel discussion. “You’re seeing a lot of (property improvement plans) that were stalled last year going full forward again; projects that didn’t move forward are moving forward.”

“The fast lane of our hospitality business has frankly never been busier,” added Mark Anderson of construction management consulting firm MGAC.

The event, organized by Benjamin West and Audit Logistics and benefitting Good360, revolves around participants using driving-school race cars to speed around the track with the Rocky Mountains serving as a backdrop. Good360’s mission is to fulfill the needs of nonprofit organizations through corporate product donations.

Optimism ahead
Participants in the discussion displayed optimism.

“Our transient—all segments, to be honest—it’s much stronger than we thought it would be at this point,” said Sam Suleman, VP of development and operations for Equinox Hotels, a hotel acquisition, development and management company.  “We’ve been able to get the rates higher and people have been accepting that we are pushing rates higher, both sides.”

John Walters, Hilton Worldwide’s VP of architecture and construction for Latin America and the Caribbean, said development—which has been nearly stagnant for the past four years—is on the upswing.

“We’re extremely busy. We have the largest pipeline in the world right now,” Walters said. “When you have high rates and high occupancies people want to build more hotels so development is going strongly.”

Anderson said investment interest in hotels runs across the board when it comes to investors—ranging from high net-worth individuals to investment funds.

“Did we see it coming or being this busy? Frankly, no. It’s been a pleasant surprise,” Anderson said.

Money talk
Bill Sipple, executive managing director of HVS Capital Corporation, said it’s a good time to refinance.

“There is a tremendous amount of capital available in the market today at very good rates,” he said. “My advice to anyone who is looking and has an opportunity to recapitalize a hotel asset this is a very good time to do that.”

Sipple said his firm is placing five- and 10-year fixed-rate non-recourse financing at about 4% to 4.25% fixed interest rates. He said the current conditions are close to the underwriting conditions in 2005, 2006 and 2007.

“We’re seeing underwriters getting more aggressive on other terms than pricing and proceeds in order to get loans done,” Sipple said.

“The financing is making a big difference and that’s why we’re seeing a lot of release of things that have been sitting idle,” Jakubowski said.

PIPs dominate the landscape
But it was PIPs that dominated much of the conversation among attendees—many of whom were in the design, architecture and supplier segments of the hotel industry.

Walters said Hilton has a full team devoted to PIPs in the United States.

Hilton is more open to alternatives when it comes to adding properties around the globe. “We have become more flexible in that we realize markets are different,” Walters said, citing the different sizes of guestrooms around the world for some of the company’s brands as an example.

“Certainly the brands won’t compromise on fire and life safety, but on certain elements, if the brand is interested in having a location, they will talk with the owner about certain aspects,” Anderson said. “It’s more about what the inflexible items are.”

Brian Regal, managing director-Western operations for construction company First Finish, said brands, owners and developers are more flexible when it comes to PIPs.

“It’s almost like the PIPs become a shopping list, and we’re seeing situations where 80% of the items on the PIP list are part of the scope and 20% are left out because of budgetary reasons,” Regal said. “(Owners are) opting not to proceed at that point in time, but as we’re 30% or 40% along in the construction process, then those things become active and the 20% gets added back in.”

The PIPs that are underway are much needed, according to the panelists.

“There’s a wave of aging properties,” Anderson said.
“Everybody in this room knows a lot of institutional owners or private owners who were barely making payments because they were paying the money out of the (furniture, fixtures and equipment) reserve, so there was no money to fix the curtains or the torn carpet,” Suleman said.

Advancements in various products have helped the PIP process.
“I think of technology as the use of some of these new materials that have come onto the market because it allows us more design opportunities within a space at a tighter budget,” Jakubowski said. “People are spending their money wisely. It’s not running rampant like it was back in 2007 in terms of how they look at things.”

“Finished materials have really come a long way,” Walters said. “Look at the porcelain tiles, you can’t tell the difference if it’s a wood floor now. It’s beautiful, it lasts forever, you don’t have to polish. There are a lot of things like that.”

Global outlook
The speakers’ outlooks were optimistic as well.

“Latin America and the Caribbean is going to be strong for the next several years because there is an emerging middle class in many of these countries and there is undersupply of branded hotel products so it is just a natural progression,” Walters said.

“People are starting to build new hotels,” Suleman said. “We’re going to see an increase in supply, definitely. They’ll be done in a much smarter way than they were four, five, six, seven, eight years ago.

“There will be a slow, steady growth this year, and I think it will be smart and intelligent processes to get there,” Jakubowski said.

That includes most regions around the world. Jakubowski said her firm can hardly keep up with the requests for proposals coming from China.

“It’s truly a world economy now … it’s busy all the time so you need to be everywhere,” Walters said.

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