How to address the six pitfalls for full-service hotel development (4/4)

Part 1: www.ap-ha.com/post/six-pitfalls-full-service-hotels-1-4

Part 2: www.ap-ha.com/post/six-pitfalls-full-service-hotels-2-4

Part 3: www.ap-ha.com/post/six-pitfalls-full-service-hotels-3-4

Hotel development is a complex undertaking. It requires little of the skills to operate and monetize the asset. Owners and architects are often ill-equipped to measure up the requirements for running a successful hotel a few years down the road. While certain industry trends exist, fundamentals still need to be observed. Words of caution for those attached to specific brands or roles a hotel is meant to fulfill – in today’s world of hyper-efficiencies it is becoming more difficult to provide everything for everyone. Or specifically: provide a comprehensive range of service to all types of travelers. The real estate required to accommodate these service encounters has simply become too expensive to build. Thus, the question: is the classic full-service hotel concept in peril? The following article discusses the major challenges that negatively impact the financial returns for new-built, full-service hotel in many markets in Asia Pacific and presumably, the world. The six pitfalls are land costs, seasonality, market dynamics, labor cost, construction cost and(brand standards).

In this final part of the article, we discuss strategies and band aids to address the six pitfalls.

Quo vadis, full-service hotel?

Considering the above challenges, developers need to evaluate many aspects when considering a full-service hotel development. By and large, a standalone development for full-service hotels is close to a non-starter in Asia, particularly when trying to tick all the boxes. There are very few markets or locations where the numbers will pencil.

Three alternate strategies:

1.     The easiest way to make a project come true is to have deep pockets and a very long-term investment horizon – while already owning the land. Unfortunately, only few in the industry have such dispositions and the industry is required to evolve and adopt new ideas to continue to grow and prosper.

2.     Don’t build a full-service hotel! For some, their return on ego may get hurt by owning a more profitable hotel. Overall, developers need to evaluate their objectives for a project and review if alternative business models with more favorable returns would be more attractive (i.e. feasible) to them and their financiers. Regrettably, many valuations for hotels that only perform poorly tend to be on the high side for various reasons not to be discussed here.

3.     Introduce branded residences to create a mixed-use development ‘light’. Eschewing more complex commercial uses of retail and office, developers are more and more frequently introducing residences for sale, which an operator would ‘brand’. This model has proven successful in several markets across the region, initially in resorts but increasingly in cities as well. While additional risks are introduced with a residential component, the benefits often outweigh them.

Four band aids:

As the above silver bullets are in short supply, here are four ways to optimize returns of a full-service hotel development.

1. New construction methods – as mentioned, unfortunately, the construction industry is about as innovative as hotels. Modular construction and the use of alternative materials may help to lower costs and or reduce the development timeline. In some regions, construction cost is also inflated by various layers of subcontracting. Understanding the ways of the industry and finding ways to gain efficiencies is easier said than done. Hence the band aid, as not many developers either have extensive hotel experience or are willing to bring in experts that do so.

2. Less/better F&B – many iconic ‘grand’ hotels feature a supreme range of dining outlets. Often these venues were serving the finest cuisine in the city. As the city evolved, more and more independent restaurants have sprung up, competing at the same level. At the same time, guests may feel more adventurous trying authentic local cuisine in less curated environments. While rising disposable incomes may offset some of the above trends, the appeal of grand dining may not be everyone’s cup of tea. What to do? Fortunately, given the relatively smaller investment requirement for F&B (among other things) attracts a far larger pool of entrepreneurs than hotels. As a nimbler investment – but by no means less complex, F&B is inherently more innovative. Regrettably, it is less profitable compared to a rooms division. While there is merit to offering several dining options to guests who stay for a longer period, there is a fine balance in the right number and mix of outlets that can develop a steady following. Furthermore, not every hotel operator can execute F&B at a high level. In planning the F&B programming most hotels will not be able to escape the need to serve breakfast. While attempts to outsource breakfast have been made at limited-service hotels, the results have been mixed and often abandoned sooner or later. However, there are a range of means to make an outlet more compelling. Concepts such as rooftop bars have seen their rise in popularity even in locations without a meaningful view, perhaps because they are efficient in terms of built area and often more profitable from the share of beverage sales. One does not look further than revolving rooftop restaurants, to caution about the longevity of certain concepts as they get more widely adopted or, bluntly put, copied. Thus, instead of providing a wide range of outlets, focusing on a select few well executed and perhaps outsourcing the others when needed may be a more prudent approach. Bringing in an F&B consultant can also do wonders.

3. Marginalization of MICE space vs seasonality buster – meeting facilities catering to meeting, incentive, convention, and exhibition demand can be a large component to a hotel’s space requirement and business model i.e. economic success. Meeting demand has seen changes in requirements over the years. More flexibility in configurations via air walls is one big aspect. Ballrooms have also increased in size, while breakout rooms have become more critical. Many hotels built in the last millennia may find themselves with facilities that are less competitive in today’s market. A knee jerk reaction would be to drastically reduce the size of meeting space. However, MICE facilities can help to attract demand during slow periods, thus helping to boost occupancy levels, particularly in markets with stronger seasonality. While the profitability of MICE space is usually higher than for F&B outlets, the large space requirement can offset this advantage voiding a strategy to expand capacity wantonly. The challenging part is that MICE demand, particularly in Asia, is not as abundant nor easy to attract as other segments. Meeting planners are increasingly looking for venues that mesmerize attendees to make a lasting impression. Installing large scale LED screens is one of the more recent trends to stand out from the competition. We strongly recommend a careful evaluation of MICE demand and future potential to right-size meeting facilities and look for opportunities to impress future guests.

4. Consider a lifestyle brand – although this is no universal solution. Located side-by-side a lifestyle hotel will almost certainly outperform a legacy brand, provided it is in a location suitable for lifestyle hotels. The challenge is that lifestyle hotels face more stringent qualifiers and selection criteria when it comes to location, site characteristics, surroundings/neighborhood, and demand generators. What is even more compelling is that the construction cost is often similar to a legacy brand, though arguably the land cost would be higher. This does not mean that there is no place for legacy-branded, full-service hotels in today’s world. Given their broader appeal they can open up new markets more easily and are often better suited to accommodate larger MICE facilities.

Conclusion

Hotel development remains a complex business. The path is treacherous. The saying goes that only the third owner of a hotel will make money. Yet, the dream of owning a hotel, the vision behind it, for the hospitality one can provide, is almost contagious. In the end, successful full-service hotels are a product of collaboration among hundreds of individuals rallying behind one shared vision.