Last week IMN hosted an inaugural New Hotel and Development Conference in New York City. The gathering of developers, hotel operators, brands and other hospitality service providers was very upbeat. Many panelists indicated that they were more optimistic now than they had been six months ago. They credited the state of the macro economy and stimulus provided by the recent tax reforms.
Despite a general consensus of an overall oversupply of hotels in the market, many panelists suggested that the large supply of hotel properties in certain locations, such as New York City, has skewed the national average and that many opportunities still exist in under-supplied markets. They focused on the need to dig into the particulars of an individual market and to drill down on the actual supply available for different categories of hotels. For example, an individual market could have too many full service rooms but need more select service rooms.
One of the common areas of concern for owners and developers is an overall increase in the cost of hotel operations and construction. In particular, participants were concerned about increasing labor costs due to minimum wage increases and increased costs of payroll taxes and employee benefits. Further, certain jurisdictions have seen significant increases in property taxes where property values have increased but where RevPAR has not increased at a corresponding rate, creating a mismatch for owners.
In the hotel industry, traditionally branded hotels (e.g., Embassy Suites or Residence Inns) are described as “brands” under “flags” of their parent companies (e.g., Hilton and Marriott, respectively). The ever-growing number of brands under individual flags was discussed at length. (In case you have lost count, Hilton currently has 14 brands, Marriott is up to 31 brands (post-Starwood merger), and Wyndham has 21 brands.) The flags view the increasing number of brands as an important way of tailoring hotel experiences to the specific preferences of different types of travelers by developing different brands to reflect those different preferences. For example, Moxy is Marriott’s new hotel brand targeted at millennials with small rooms in urban spaces, while Marriott’s Fairfield Inn & Suites brand, which has been around for 30 years, targets business travelers.
As a counterpoint to the proliferation of new brands, there has also been a renewed demand for boutique hotels. Many boutique owners and non-traditional brand owners argued that such hotels outperform branded hotels since they are not encumbered by substantial franchise fees or the rigid standards required by the brands. The boutique hotels pride themselves on cultivating unique experiences, often tailored to the location of the hotel, communal spaces and outstanding food and beverages spaces. Several panelists expressed frustration that traditionally lenders have favored branded hotels with the major flags over independent hotels but many believed that certain lenders are starting to show greater interest in boutique hotels. There has even been a recent trend of “soft” brands created by the major flags with less mandates from the flag, allowing an owner to receive the benefit of a franchise reservation system and loyalty program while having more flexibility in design and operation to be more similar to a boutique hotel.
Separate from all the discussion regarding the importance of branding or uniqueness of hotels, there were a few issues relating to new hotel construction that are of interest from a legal perspective. The New York State Historic Tax Credit expires at the end of 2019, so New York developers intending to take advantage of that credit need to make sure their construction is completed early enough in that year to apply for such credit. There was also an extensive discussion of the significant rise in ADA accessibility litigation in the hotel context, especially in jurisdictions with strict accessibility regulations, such as New York City. Panelists encouraged developers of new construction to make sure they are in compliance with accessibility laws to avoid costly repairs in the future.
In sum, one thing was clear at the conference – developers are eager to provide ever expanding lodging choices to travelers through a variety of different hotel models. We look forward to working on the deals to make such development happen!
