Lodging Unlimited performs newsworthy services
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Problems on the horizon.
(Friday, 25 January 2008)
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With the hotel industry enjoying a sustained recovery, the occupancy rate nationally has climbed from 59% in 2002 to 63.8% in 2006, reports accounting firm PriceWaterhouseCoopers. After languishing in 2002 and 2003, profits per available room jumped 30% in 2004. Since then, profits have continued climbing at double-digit rates, reaching $5,660 per room in 2006, according to PriceWaterhouseCoopers.
In today's strong market, bankruptcies are rare, and the number of troubled hotels is only half of what it was during the downturn that bottomed in 2002 and 2003, according to PKF.
But hotel doctors caution that the number of troubled properties is likely to rise soon. With lenders eager to finance hotels, properties are being built in marginal locations, says Sanjeev Misra, vice president of NAI Global Hotels, an advisory company in Chicago.
Overbuilding could be particularly severe in weak markets, including Philadelphia and Norfolk, Va., where supply is growing at an annual rate of around 8%, according to PriceWaterhouseCoopers. Some deals include 90% debt, up from the more typical levels of 75%. “When the industry starts to decline in two or three years, the owners will discover that many of these new hotels shouldn't have been built,” says Misra.
To keep a property looking spiffy, owners must set aside about 4% of revenues for basic renovations, says Misra. Carpets and wall coverings should be changed every five to seven years. Hotel doctors often find that the sick properties appear shabby because the owner ran out of cash or lacked professional management.
When Lasky recently acquired an underperformer near Williamsburg, Va., he found a catalog of problems. The roof leaked, and light bulbs needed to be changed. The staff worked in their street clothes, a mistake for a hotel that aspired to serve a high-end market. “Within weeks we got the desk clerks in uniforms, and we got them trained,” Lasky says. “We planted new shrubs and improved the curb appeal by 1,000%.”
Renovations can bring quick results. When Gencom Group recently purchased the Sheraton Raleigh in North Carolina, the company began spending $4 million to update the 355-room property. While the renovation is still under way, the financial results for the hotel are already improving, says Greg Denton, executive vice president of Gencom, a hotel owner and developer in Miami. Denton says that business groups can make reservations up to three years in advance.
Assured that they will be checking into a brand-new hotel, corporate groups are willing to make advance reservations at a turnaround property. “As soon as they heard our story, groups began making advance bookings,” says Denton. “The renovations have also helped us keep groups that were at risk of canceling.”
As renovations progress, hotel management must be careful to not disturb guests. To limit noise, some hotels work on one floor at a time, keeping the floors above and below vacant. The aim is to hide all signs of construction from guests. As a final resort, some owners completely close the hotel. “If you antagonize guests, many of them will never come back again,” says Randall Carroll, president of Lazer Lodging, a consultant and asset manager in Washington, D.C.
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