New Hospitality Realities Will Remain

ROSEMONT, IL-As the economic slowdown of a few years ago begins to finally fade in the rearview mirror, the hotel industry's initially tenuous recovery is beginning to pick up some sustained momentum. For industry analysts and observers working to evaluate where the industry stands and where it is headed in the future, this is an ideal time to take stock. While it might be a bit early to draw definitive conclusions, it is clear that hotel development in the months and years ahead will look quite different than it did five or six years ago.

In this Brave New Post-Recessionary World, virtually every aspect of the hotel industry is up for review. From development and management strategies, to architectural and design decisions, nothing is sacred, and everything is subject to a new and different professional context.

Real estate professionals who want to remain competitive in this industry must appreciate the fact that a “business as usual” approach is unlikely to succeed. There is an abundance of new features on the landscape of hotel development, and navigating your way through that landscape requires both the ability to understand those features, and the capacity to adapt to them successfully.

But what are these new realities?How are they influencing hotel development and real estate investment strategies? And what are the consequences for owners, developers, investors who fail to account for them?

Certainty is king

The regulatory environment is significantly more demanding than it was just a few short years ago, and, with the lingering perception that hotel development remains a riskier lending category, the availability of credit is still not what it needs to be. The combination of caution, enhanced regulatory scrutiny and restrictive financing means that certainty is the best currency in today's environment. Developers are significantly more likely to move forward on deals that stand a higher-than-usual chance of success. In stark contrast to a pre-recessionary development atmosphere where deals were getting done based on little more than a positive outlook and a strong presentation, a demonstrably strong track record of return-on-investment successes and a strong portfolio are essential for making anything happen today. Expertise and experience are no longer just preferable, they are prerequisites.

Effective management is essential

The importance of superior management expertise is almost universally understood. Today, hotel management companies are often brought on board at the outset of a development opportunity, and many of those companies choose to (or are encouraged to) contribute their own investment capital in order to get some “skin in the game.” These strategic development partnerships, presented with a management team already in place, not only get more deals done, but optimize the property's chances of starting off strong and delivering impressive ROI in a relatively short period of time.

Operational expertise adds value

While a management partner with proven experience is increasingly viewed as critical, partnering with the right management team is even more important. Owners, developers and investors who want to leverage a valuable piece of real estate or a promising hotel property must understand that a smart, savvy and experienced operator is essential in more ways than one. In fact, the value conferred by having an operator on board is made clear before the project even gets underway:there is a growing perception on the financing side of the equation that those projects with proven operational professionals attached to them are the strongest candidates for success.

Markets matter

It is clear that a handful of specific markets are having an outsized impact on the industry's development momentum. In the midst of a still-tenuous recovery, deal-makers are not only being more strategic about what they build, they are also being more selective about where they build. The majority of projects today are in urban locations and involve the industry's highest profile brands. A handful of hot markets are seeing the lion's share of activity, and secondary markets are focusing exclusively on the most desirable locations. In general, there is significantly less tolerance for risk, and deal-makers are focusing on projects and places that are proven commodities.

Boutique offerings are on the rise

While the familiarity and appeal of recognizable national brands is still an asset, more and more hotel developers are working hard to leverage the distinctive and defining difference of experience. Place-making, unlocking the experiential value of great locations and boutique offerings, is an increasingly popular strategy. Evolving consumer preferences and an influential millennial demographic that appreciates the new and the different has given hotel professionals new motivation to find new ways to deliver a boutique experience to guests. High quality renovations in historic buildings, for example, can add new interest and fresh appeal to a familiar brand. A number of prominent hotel brands have begun to embrace such a strategy, while others have worked to expand their upscale select-service model with new and more luxurious features designed to appeal to guests.

Guest preferences are a priority

The idea that you have to “give the customer what they want” is at the heart of every service industry. The hotel industry is no different. As a result, there has been a renewed push in recent years to account for and service the changing preferences of today's travelers. Much of that energy and effort is being aimed at the influential and important millennial demographic. Most major brands have introduced millennial-focused marketing campaigns, and are tailoring many of their product offerings specifically to cater to millennials. While these efforts have had both notable successes and high-profile failures, there is no doubt that generational preferences will continue to play an important role in hotel industry decision-making in the years to come.

Technology is inescapable

Today, technology largely influences the guest's experience, and provides them with the subsequent ability to rapidly and effectively communicate that experience to a larger audience.Feedback is immediate: it is not a comment card, but a virtual manifesto, and the enormous power of technology to make or break a hotel demands attention. Developers, owners, operators and investors must adapt, and integrate an enhanced understanding of new technologies to improve everything from the reservation process to the guest experience.

Hotel development today is not for the inexperienced or the faint of heart. These new realities are neither optional nor avoidable: they are at the heart of successful hotel development, and will remain so for the foreseeable future.

Robert Habeeb is president and COO of First Hospitality Group Inc. The views expressed in this column are the author's own.