Hotel Online Special Report 

 
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Conversions Drive Luxury Hotel Development  

Chart: Facelift Facts

By Marty Whitford  H&MM Senior Editor 

National Report-Orson Welles was once quoted as saying: "Living in the lap of  luxury isn't bad, except you never know when luxury is going to stand up."  Welles may have had a point, but today's hotel companies seem more concerned  with finding out when-and where-luxury is going to lay down than when it's going  to stand up. They're scrambling to put their money where money frequently stays-  upscale properties-with little or no fear of luxury leaving them or their  customers stranded. 

Thousands of hotel rooms are undergoing major facelifts to convert into luxury  lodging, and cash in on the segment's hearty growth and healthy outlook,  according to Smith Travel Research. The upper-upscale segment in 1997 added  14,961 rooms via conversion-almost 1,000 more than the next-closest segment,  economy. 

"There's always a fair amount of converting from independent to economy, but we  haven't seen this great a move into high-end luxury in over a decade," STR  President Mark V. Lomanno said. 

Upper-upscale was the only STR segment last year with more conversions than new  builds, with facelifts outnumbering new room construction nearly 4-to-1.  Meanwhile, the No. 2 benefactor of conversions-the economy segment-opened 2.5 times as many new rooms as it converted, according to STR data.  In this expansion cycle, it wasn't until 1995 that more companies repositioned  their properties into upper-upscale than they did out of the luxury segment,  Lomanno said. In 1993 and 1994, the upper-upscale segment lost 4,676 rooms total  to conversions. However, in 1995 that trend halted as 2,297 converted rooms were added. 

Upper-upscale chains saw four times as many conversions into the segment in 1996  than in 1995, and last year grew 1996's number another 50 percent, to more than  14,000 rooms added through conversions. The past three years, the segment has  added 26,785 rooms combined via conversions, compared to 9,929 rooms added  through new construction. 

All segments but midscale without food-and-beverage and independents benefited  from conversions last year. Midscale with f&b lost 1,651 rooms through  conversions in 1997, and independents lost 22,921 rooms-marking the fifth  consecutive loss through conversions for both segments since 1993, according to  STR statistics. 

Contributing factors 

Mark Mutkoski, a principal and senior lodging analyst with BT Alex.Brown in New York, cited several factors propelling luxury conversions, including: 
 

There's a plethora of older and undercapitalized hotels that are in dire need  of property improvements and repositioning; 
Many older office buildings in cities such as Boston, Chicago and  Philadelphia, now offer greater opportunities for return on investment as hotels  than they do as office real estate. Mutkoski cited several companies which have  been using this strategy for years, including Adam's Mark Hotels & Resorts,  which this fall will open the ninth-largest hotel in terms of meeting space in  the United States. The Dallas property-with 1,844 rooms and 230,000 square feet  of meeting space-is a conversion of a former Harley Hotel and two vacant office  towers;  and 
The much more fragmented midmarket currently serves as an attractive  acquisition pool for major players looking to buy, upgrade and reposition  properties. 

"A number of big public companies in one way or another are exploiting this avenue," he said. "Bristol [Hotel Co.] has done it by converting Holiday Inns to Crowne Plazas. [Patriot American Hospitality's] Wyndham Garden flag has its very roots in conversion. These are just two; the list goes on." In the late 1980s and early 1990s, the trend was to reposition downward, but that has drastically changed, said Bjorn Hanson, PricewaterhouseCoopers' chairman for global lodging and gaming. 

Segment takes root 

As demand and rack rates grow in the luxury segment, and funding and permit problems cap new supply, conversion is taking root, Hanson said. A typical midmarket hotel in a major metropolitan area can upgrade to a luxury property for $20,000 per room, including public spaces, and reap paybacks beyond investment expenses in just six to eight months, he said. 

"The trend since 1996 has been to reposition upward," Hanson said. "The real beauty of these luxury conversions is that they allow you to overcome strong barriers to entry and they have almost immediate impact, as opposed to new construction, which can take years." 

Today's record-tight labor market only further prompts developers and hotel companies to convert existing properties, according to Eikon Ito, vice president of Hotel Nikko (U.S.A.). 

It typically takes new builds more time, money and effort to attract, train and maintain a high-quality work force than it does for existing properties to elevate service and add just a few dozen more employees, said Ito, who also serves as assistant general manager of the Essex House/Hotel Nikko New York. 

The growing number of conversions, coupled with slow-but-steady luxury room construction, and changing the competitive landscape, said Dennis Hulsing, Omni Hotels senior vice president of sales and marketing. The competition in the luxury segment is thickening, but Omni's commitment to quality and customer service-and its ongoing refurbishment program totaling hundreds of millions of dollars-will help it stay ahead of the pack, Hulsing said. 

"There's crazy money out there right now, which is increasing room supply, which is decreasing occupancies," he said. "If the economy takes a turn for the worse, some in our competitive set will have to reposition properties again-this time downward."
 

Facelift Facts
 
1997 New Room Construction
1997 Room Conversions
Upper upscale 3,881 14,961
Upscale 18,915 1,474
Midscale with f&b 7,597 (1,651)
Midscale withou f&b 46,439 2,884
Economy 35,027 13,981
Independents 15,814 (22,921)
 
Upper - Uspscale Room Conversions
1993 (3,082)
1994 (1,594)
1995 2,297
1996 9,527
1997 14,961
Source: Smith Travel Research
 
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Contact:
Hotel & Motel Management
website: http://www.hmmonline.com
Jeff Higley, Managing Editor
440-891-2654
email: [email protected]
 


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