Hospitality Industry in Exuberant Time

CHICAGO—The US hospitality industry has entered a period of transition, and Steve Belmonte, the chief executive officer of Vimana Franchise Systems, led off the wide-ranging opening session of the THINConference, the hotel investment networking conference, held yesterday and today at the Chicago Hilton, by asking some tough questions. He pointed out to a panel of industry leaders that “all across America, we have these giant full-service boxes,” and many are struggling. He asked them what advice they had for these operators.

These properties need new investments, said Murray Dow, the president and chief executive officer of the Dow Hotel Co., but the key to making those investments productive is decentralized decision-making, so locals who understand their markets can direct the dollars. “I agree with Murray,” said Michael Conway, the president of Winegardner & Hammons, Inc., the solutions are “local, local, local.”

“Corporate doesn't know the market,” added Sam Toia, president of the Illinois Restaurant Association, “but the franchisee knows.” Many areas have seen grocery outlets such as Whole Foods set up shop, for example, and this influence can change eating habits, and the expectations that customers have for the restaurants located within the hotels. “People are now cooking as a hobby; they did not do that twenty years ago.”      

Another challenge for the industry has been the rise of Airbnb. The social networking service, which connects travelers with private lodging hosts, essentially bypassing hotel operators, was founded in 2008, and since grown to over 500,000 listings around the world. Last month, the service received $450 million in funding from a group led by private equity firm TPG.

“Competition is the hallmark of the hospitality industry,” said Vanessa Sinders, senior vice president of government affairs for the American Hotel & Lodging Association. She suggested, however, that this particular competition had some unfair aspects, since short-term, online rental companies don't have to abide by the many laws and regulations that structure the hospitality industry.

“They certainly are a competitive threat,” said Dan Kwon, vice president, hotel acquisitions for the Starwood Capital Group, but perhaps more in secondary and tertiary markets. “It is hurting the hotel industry for sure,” he added, but remains unconvinced that the threat is a long-term one.

Belmonte also asked panelists if they were doing anything new that others in the industry should look into adopting. Kwon encouraged everyone to begin paying more attention to social media. This step has become an everyday part of Starwood's acquisition strategy. “You may be buying a hotel and find out from social media that the hotel is falling out of favor.”

Dow said his company had begun to change how it approached hotels that they had decided to sell. In the past, once the decision was taken to sell, capital spending was halted. But recently, it kept making repairs and changes to a hotel even though it was also on the market. This ended up impressing a lot of potential buyers, especially ones who were not comfortable launching renovation projects on their own. In the end, the tactic increased the pool of potential buyers, and “was definitely worth the dollars spent.”

The panelists were upbeat about the near-future. Kwon pointed out that the hospitality market has been rising for about 30-35 months, and that the last rising market continued for about 65 months. He estimates that this current run will continue another 18-24 months. Conway was a bit more hopeful, and said that if interest rates held steady, it could go on somewhat longer. Financing has become much more available, added Kwon, especially from sources like CMBS, which now approaches pre-crisis levels. “There is a lot of exuberance out there.”