Author of www.HotelLawBlog.com
1 February 2007
Yesterday, I shared the first in a series of reports and observations from the recent Los Angeles hotel investment conference (ALIS). You may find it as interesting as I do to hear industry leaders describe current issue in their own words. If so, check out yesterday’s posting: “Notable quotables from hotel industry thought leaders 2007.”
But today, I would like to take a different approach, reflecting my personal observations on the state of the hotel industry taken from a number of Conference panels, a lot of one-on-one meetings with industry leaders, and a few hours with the Lodging Industry Investment Council — the hotel industry’s think tank.
Captured here for www.HotelLawBlog.com is my “Hotel Industry Snapshot” as of February 1, 2007 — a perspective on the issues and developments that seemed to be the most important around the ALIS Conference. They may portend future opportunities . . . or challenges to be overcome. You will probably hear a lot more about them in the near future.
The mood and setting.
The all-time-record number of attendees (2,500) shows that we are in the “best of times.” Conference attendance always soars along with industry profits. But despite very strong industry fundamentals (which we will discuss in a separate posting), optimism about the industry was mixed, and industry insiders trying to interpret the new marketplace signals were not all in agreement. The forboding I noted at Phoenix Lodging Conference (see Hotel Lawyer with pulse of the Phoenix conference — “Ebullient Foreboding”) was amplified significantly.
For example, I think the Blackstone-Vornado private equity battle over EOP (see Size no longer matters . . . at least in the hotel industry. Is the entire hotel industry now in play? What the experts have to say.) and the Morgan Stanley buy out of CNL is compelling endorsement for smart money’s views on the direction of the economy in general and the lodging industry in particular. But Bill Marriott (from his “Hot Seat” presentation at ALIS) and I may be among a relative minority who think we are still in the “early innings of the ball game.
Hotel Industry Snapshot
Here are some of the issues – and some specifics – that were buzzing around the conference:
Hotel mixed-use is huge. Everyone is getting into it mixed-use properties: from development, financing and operations. This is a big part of the future of our industry. That is why we have devoted The Hotel Developers Conference entirely to hotel mixed-use this March 7-9, 2007.
Hilton’s Matt Hart says that the model with traction is hotel mixed-use — hotel with residential particularly, such as the roll out of the new Waldorf=Astoria.
Major commitments to hotel mixed-use are also being made by Marriott, Starwood, Carlson (with its Regent brand), InterContinental, Fairmont Raffles, Mandarin Oriental, Shangri-La and many others. See, Hotel Mixed Use development gets a big boost from Barry Sternlicht’s “1” Hotel and Residences brand and Waldorf=Astoria Residences in Las Vegas and Trump’s luxury residential mixed-use project in Hawaii sells out in 8 hours. New sales record claimed.
SPAS AND LIFESTYLE TAKE OFF
Spas are more important than ever. Lifestyle hotels are also a major trend to watch. Both of these merge into some exciting hotel mixed use concepts such as Miraval Living in Manhattan and the new Miraval Resort in Costa Rica.
The Four Seasons New York has broken $1,000 ADR, and Four Seasons Hualalai is bound to do it, too.
In Manhattan, RevPAR has now reached $220 — a new record.
Barry Sternlicht thinks that replacement cost for hotel rooms in Manhattan is more than $700,000 per key.
CAPITAL IS EVERYWHERE
Capital is more abundant and cheaper than at any time in recent memory.
Private equity may gobble up the hotel industry with its juicy profits and low cap rates. (see Size no longer matters . . . at least in the hotel industry. Is the entire hotel industry now in play? What the experts have to say.)
Cap rates are at an all time low for hotel properties. But there is no “new normal.” Many hotel veterans think cap rates have bottomed. Some — particularly financial analysts with a broader multi-industry view — think that cap rates for the hotel industry are bound to go lower as capital floods the industry. Hotel cap rates are still very low compared to other real estate product investment alternatives.
INTERNATIONAL MARKETS ARE ON FIRE!
International markets are huge — product in India and China keeps coming online, Europe is big, Mexico and the Caribbean are huge, Eastern Europe is also very exciting. Many talk about Russia as one of the most exciting opportunities.
Starwood Capital’s Barry Sternlicht says, “If I were 25 today, I would move to either China or India because of the opportunity.”
Hilton completed its $5 billion acquisition of Hilton International, and has announced deals in both India and China.
InterContinental is focused on India and China — thinks that extended stay will be big in China.
Wyndham started its international platform in 2004 and is particularly focused on India and China.
Smith Travel Research (STR) has added international information to their reports, through a joint venture with Bench.
Brands have never been more powerful with the consumer, or more arrogant with hotel owners.
The value and power of brands is behind the Waldorf=Astoria rollout; ditto for Barry Sternlicht’s new rollout of “1”; and the proliferation of a host of new brands like Element, Aloft, Nylo, Valencia, and so on.
Overzealous regulation poses a risk to the industry.
Insurance costs continue to burden the industry.
Airline capacity and fares are critical to the industry. The cost and availability of air travel has a dramatic effect on hotel utilization in a particular market, and fares are going up to most markets.
2007 should be a very exciting year! Now that we have heard the quotes from the leaders, and viewed my “Snapshot” take on the industry, the next posting will look at the hard numbers on the hospitality industry from the experts!
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Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of 50 seasoned professionals with more than $87 billion of hotel transactional experience, involving more than 3,900 properties located around the globe.
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Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm’s Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at firstname.lastname@example.org or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.