Category: Miscellaneous

The next wave in hospitality

Investment in the hospitality business is booming. We continue to see constant transaction activity across the United States. The industry has chosen its darlings – the select service upscale brand collection – and they continue to form most of the pipeline of new rooms on market.

These years have been exciting. Good for business. But as the same hotels transact over-and-over-and-over again, the ceiling is inevitable. The next evolution of hospitality is overdue. The market is wondering ‘what’s next?’

The past 10 years’ economic cycle has risen tides for thousands across the country, and social media has (depressingly) created FOMO in all generations. It’s not just snowflake-entitled-lazy-avocado toasters seeking adventure on mom-and-dad’s money, it’s mom-and-dad spending their own savings with a hope to experience the world they provided their children before they die. The wealth gap is increasing yet all Americans – liberals and conservatives alike – are seeking the exact same thing.

The entire hospitality business – I count Airbnb in this as well – hasn’t been ready for the individualized emotional experience our guests expect at all points on their next journey. Hotel brands have responded by adding sub-brands and piles of select-service rooms, most of which loosely following the same hyper-current aesthetic, to try and prescribe these emotions for middle-class patrons. Different brands but still the same, homogenous look, feel and experience at all of them. Not the goal.

Airbnb has pushed to grow revenues too as the ceiling beckons, featuring ‘curating’ units to increase commissions on room sales while trying to convince customers that they are still focused on experience. It hasn’t worked. Room tax issues, expensive units, and the lack of security has hurt but, most importantly, the host-individual interaction that created the feeling of a personally guided ‘visiting the place the locals do’ trip Airbnb built their business on has been lost. Your Airbnb host is rarely an individual with a vacant house, but rather a professional with many guests to look after. Another upscale select-service hotel brand, basically. The magic that made Airbnb special is fading.

Both have missed the target. The affordability and appeal for an exploding demographic is missing.

The opportunity, to me? Economy and lower-midscale brands for the modern traveler.

The economy pipeline, outside of the Motel 6 monster, has been empty. Best Western ceded their territory by kicking economy properties to the curb. Super 8 (Wyndham) and Quality Inns (Choice) are dominant in their franchises but belittled by modern travelers as ‘not for them’. The task, if we choose to take it, is simple: create unique and affordable offerings.

Of all the fluff brands created in the past 10 years, IHG is the only one to commit to an economy/midscale brand. This is shocking to me. This segment can and will grow around the world. There’s demand for hostels for a reason. I can’t understand why the commitment has not been made. Millions of travelers seek affordable rooming and find nothing newer than 1980.

That’s the opportunity I see. First one of us to do it wins.

Understand the Risk: Asbestos

There are plenty of things we don’t want to think about in the hotel business. We don’t want to think about what happens in our stairwells. We don’t want to think about how dirty your hallway carpet gets when it’s been raining outside.

Hotel construction is no different. Hotels requiring renovations are generally old buildings, and old buildings have skeletons. I implore you though – If you’re in one of these buildings, you must know about asbestos.

Asbestos is a compound that has been mined and used for thousands of years. On the surface, it’s a miracle material: it’s sound absorbent, an outstanding insulator and extremely cheap. As such, manufacturers, builders and safety clothiers used it everywhere.

Unfortunately, it’s hazardous.

Asbestos is fibrous and breaks down easily. Those asbestos fibres, when inhaled, cause inflammation and scarring in the lungs. Long term exposure can lead to numerous serious and fatal illnesses: a variety of cancers – including mesothelioma and lung cancer, COPD, thickening of lung canals and reduction of lung capacity. These issues began to be identified in the 1800s but no actions were taken to restrict its use in the United States until 1973. Even still, asbestos has not been banned completely and, as of 2018, the new EPA regime has inconceivably resumed allowing it.

An early indictment of asbestos (and an absolutely fascinating read) – An excerpt from the ‘1898 Annual Report of the Chief Inspector of Factories and Workshops for 1898, Part II.’, prepared for the British Home Office / http://ibasecretariat.org/workshop-report-1898.pdf

Now – I’m not saying rip apart your hotel looking for it. Quite the opposite. Undisturbed asbestos poses little threat. Asbestos fibres are released into the air during degradation, damage and disruption of asbestos containing materials. Knowing is what’s important.

We strongly suggest the following:

1) Identify potential problem areas

Asbestos was used in hundreds of different materials within hotels, but some common items to be aware of (a more comprehensive list can be found here:

  • Any plaster applications – especially walls and mortar
  • Mechanical equipment, especially those from before the 1980s
  • Insulation throughout the property especially around turns, joints or elbows (it will feel especially hard to touch) and within block walls (gravel-looking substance within the cavities of hollow block walls)
  • Drywall and drywall mud applications, especially those from the 1980s and earlier
  • Floor and window levelling compounds
  • Roofing felt
  • Small 9” vinyl floor tiles

2) Get it professionally tested

Educate yourself. Hire an environmental engineer to assess asbestos risk prior to starting work. Test the areas that you’re asking contractors and staff to disturb. Testing costs money, but the liability of a negligence claim is even more expensive. Not knowing is not a defence.

Bring in the experts!

 

Do they look like serial killers? Yes. But they’re the good guys in this story. (iStock)

3) Follow a designated asbestos working environment plan, encapsulation plan and/or abatement (removal) plan

You have three broader options to manage ACMs in your property – a good engineer/consultant should explain all three and make a suggestion on any one or combination of approaches.

a) Abatement/Removal

Pretty straightforward. You have asbestos, bring people in to remove it. When possible, it’s the safest solution.

Keep in mind though – this can cause significant business interruption and put your staff and guests in more danger if the ACMs being removed are difficult to access, cover a large area or require extensive demolition of ‘good’ material to get to.

Removal is certainly ideal but isn’t always the safest option.

b) Encapsulation

‘Encapsulation’ refers to limiting most or all contact with ACMs by covering or hiding them to prevent disturbance or deterioration. Encapsulation can include things such as:

  • Placing a new plywood subfloor above asbestos containing vinyl tile and/or leveling compound
  • Covering an asbestos plaster or ‘mudded’ wall with another layer of drywall on top of it.
  • Installing an acoustic tile ceiling inches below the existing ACM containing ceiling
  • Completely restricting access to mechanical rooms that have significant amounts of asbestos.

Bury that asbestos, lads.

A skilled contractor and strict process is required to install materials over ACMs. Areas being disturbed must remain slightly damp (the asbestos fibres attach to water particles to prevent fibre release into the air). Require your contractor to specifically acknowledge – either within a purchase order, waiver form or executed notice – that asbestos is present on site and their commitment to ensuring safety precautions are mitigated. Have an engineer present to monitor air quality during and after work is complete. Most importantly, once the work is done, compile logs and a map of all work done, precautions taken and all contractors and engineers on site during the work.

c) Strictly follow working plans and procedures for working around asbestos

Ensure that your environmental engineer prepares a working plan and that those most vulnerable – especially maintenance (given that they are frequently tearing things apart and rebuilding them) understand and acknowledge it. Formal training is readily available throughout North America – your local construction association can point you in the right direction. Trained maintenance can protect your staff and guests best. Also, critically, ensure that all employment contracts include reference to the asbestos on site, their locations and procedures for new staff to review and sign.

Be smart out there!

Your ‘teenage’ hotel – evaluating franchising options

All good things must come to an end.

You’ve made massive (hopefully) amounts of money in your brand-new. Your guests have beaten it to hell, but it still spits out cash like a camel. But you, I and the brand know that the arbitrary ‘we feel that your hotel looks old’ clock is ticking. And, when that point arrives, your franchise sales rep, designer, contractor, general manager, children etc. will be happy to tell you) that everything needs to be replaced. Your guest reviews are slipping. Pressure is building.

The first thought is – let’s do it all. It’s simple – “I can’t afford to lose this brand”.

I disagree.

I understand the ‘protecting the strength of your portfolio’, the ‘I get satisfaction from owning a higher end property’, and the ‘I don’t want to explain to my bank how this brand will make money’, and the ‘this <insert name of other individual that you’re polite to in person but desperately want to beat> will build a <insert upper midscale brand here> next to his and take all my business’ arguments. I get that these hotels to me – Holiday Inn Expresses (especially in the US), Hampton Inns and maybe Courtyards by Marriott (in certain markets) in my mind – are desirable.

I’d also argue that it’s also time to consider selling the property in the 18 months preceding your first major PIP. You know that area and that property – will you truly have a strong return on investment; in many, many cases I simply don’t think it’s there. Get your franchise PIP and comb through it; you know your rate structure (and don’t be afraid to, if you choose to carry out the PIP, try and get a discount). Most importantly understand the revenue contribution that brand brings. Project those revenues and profits out. It doesn’t always make sense.

Ask yourself these 4 guiding questions:

1) How has my customer changed?

 A franchise agreement covers extremely long periods of time. Neighborhoods can change quickly. A ring road can change traffic patterns drastically. The local mine or factory can shut down. The Detroit hotel market flourished, wilted, died and has been reborn in the matter of 50 years.

Consequently, your customers will change. Examine your market mix (comparison of number of guests per market, parking lot counts of yours and similar hotels versus number of rooms sold, changes in vehicles per day count on the supply roads around you. Even the types of cars in your lot can indicate the type of guest you have and give you a good sense of changing customer demands.

Be honest with your assessment. If your business-heavy clientele is migrating to vacationers or industrial workers, work to accommodate them and execute on their required experience. The path of highest profitability will be looking forward rather than fighting with newer hotels to recapture what you’ve lost.

2) How has your market changed?

The past few years have seen unprecedented hotel construction throughout the United States and Canada whether it seemed financially viable or not. Every property in North America has been affected by new supply without question – if you feel yours hasn’t, I’ve got some magic beans to sell you. This product tends to be upscale and above, limited service, and small-to-midsize boxes (75-150 rooms).

A business school staple – a SWOT (strength, weaknesses, opportunities, threats) analysis – for hotels in your regional market works a treat here (instructions on how to do this can be found here). Of the hotels that have entered your market, what segments have they filled? Which hotels have left? What segments have opened up?

New hotels and changing markets shift demand upward and downward. Franchise aside, your renovation should match that emerging market accordingly.

3) What’s the damn hotel made of – literally?

It’s extremely easy to move a wall on paper. You erase them, cross them out or draw around them and they no longer exist. Good times.

Stupid as this sounds, those existing walls are actually real.

That said – what may be achievable on paper may be prohibitively expensive in the real world. Contractors, architects and consultants can be creative, but some miracles are more expensive than others. If your franchise is requiring significant exterior work, load bearing interior walls or adding floors. Plan for the big numbers; if it happens to be cheaper, happy days.

Also – and I can’t stress this enough:

Many of you have heard of asbestos. Most of you should be familiar with black mold. If you have a hotel from the 1990s or older you need to understand whether either of these two things will be a problem.

Know what you’re getting into. Remember – liability for contractors, guests and employees that interact with damaging materials is borne by the Owner primarily.

Protect yourself and do what’s right.

4) Honest Quantitative Unemotional Assessment: Does maintaining your franchise still make sense?

The scariest question in a PIP situation.

The pressure from banks, partners and franchises to stay in a system can be insufferable, but what truly drives an investment decision? We’re in business to make money, and the status quo isn’t always the best.

Let’s consider a base case: an older upper midscale hotel (say three design generations old). 100 room, 3-storey interior corridor hotel. Franchise wants a massive overhaul; the total dollar amount is $20,000 per key. If not, you’re out and finding something new. You currently do $1,780,000 in revenue – $75 ADR, 65% occupancy – at a 30% margin, equating to profits of $534,000. A midscale franchise offers to convert your property with minimal changes – carpet, paint, artwork, signage and linens – at $3,000 per key.

What’s the best way to evaluate this?

Option 1: Stay Upper Midscale

At $20K/door your renovation costs $1,700,000. You fund your renovations through an interest only loan at 5%.

You estimate that the renovation might bring back a few old corporate accounts and sneak the occupancy up to 70% and pull up your ADR to $80 even though the brand and target customer are still the same. New revenue of $2,044,000 and $613,200 in profits. That, less the $85,000 in new interest per year, takes us to $528,200.

Option 2: Move to Midscale

Your midscale renovation, at $3K per key, costs $300,000. You borrow these funds at 5%

You estimate your occupancy at 65% but drop your ADR to $70. Revenue goes down to $1,660,000 and $498,000. That, less the $15,000 in new interest per year, takes us to $483,000.

At these numbers we have an overall difference of $1,400,000 ($1,700,000 – $1,400,000) in construction costs yielding an additional $45,000 ($528,200 – $483,000) in income. A quick, back of the envelope return rate of $45,000/$1,400,000 is 3.2%, notwithstanding the additional risk of taking on a larger loan.

I understand the math will be different for each case, but is it truly worth it?

If you choose to stay with your current franchise, talk to your contractors and compile a list of the big-ticket items of their plan. Walk your franchise or PIP representative through your math. Your franchise should want you to make money; if they understand the pain points then they can do something about them. Push for additional time or a lower fee structure to get them done.

 


 

You have a decision to make. I don’t envy it. Insofar as possible take the emotion out of it and make the best decision at the point you have it. Projecting the future can be a fool’s game, anyway. If it wasn’t, Greg Oden would be a superstar, Britain would still be in the EU, no one would have purchased Knights’ Inn and I’d be dining out on my Amazon stock from my high school days ($13/share!!!) and not writing this.

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