In this issue
Make the Case: Anti-Assignment and Anti-Delegation Clauses in Hotel Management Agreements
Key Take: With the increasing number of mergers and acquisitions occurring within the hospitality industry, hotel owners and operators will need to pay attention to the developing case law determining the effect of anti-assignment and anti-delegation provisions in HMAs.
Anti-assignment and anti-delegation provisions in hotel management agreements (HMAs), as in other contracts, ensure that the parties to the contract cannot be replaced without consent, preserving the relationship between the contracting entities to be exactly what they bargained for. Such provisions are of paramount importance in the context of HMAs, given these contracts usually involve the provision of personal services. Personal services contracts—i.e., those involving personal skill, trust, or confidence—are generally not assignable without consent from the other party to the contract.[1]
In the context of an operator’s decision to merge with another company or sell its assets (including its HMAs), determination of whether that operator has breached the anti-assignment and/or anti-delegation provisions in an HMA is highly factual in nature.
The Case for Hotel Owners
Where a hotel owner can demonstrate that its contract with an operator is one for personal services, the case for a breach of an anti-assignment or delegation provision in the context of a merger or acquisition is stronger, as such contracts, by virtue of longstanding precedent and public policy, cannot be assigned. As an initial matter, hotel owners must be able to demonstrate that the transaction at issue did not result in a mere change of control, as the law is clear that “change of ownership, without more, does not constitute an assignment as a matter of law.”[2] In determining whether an assignment and/or delegation of duties occurred in the context of a merger or asset acquisition, courts look at the consequences to and effects on the parties, including whether the transaction involved an increased risk to the non-merging party.[3] For instance, courts look at factors such as (1) who is performing the services under the HMA; (2) whether the operator’s employees were transitioned over to the acquiring entity’s payroll; (3) whether the operator entity still exists; (4) whether the operator entity still maintains its offices; and (5) the post-transaction structure of the operator entity.[4] This type of inquiry is heavily fact-dependent and often requires targeted discovery.
The Case for Hotel Operators
In the context of a merger or acquisition, hotel operators are likely to rely heavily on the plethora of case law in which courts have held mergers do not violate anti-assignment clauses.[5] However, it is important to note that these cases deal with anti-assignment provisions in leases and insurance contracts—which are not personal services agreements. Accordingly, in order to defend against a claim for breach of an anti-assignment and/or anti-delegation provision, hotel operators will need to delve into the specific factual circumstances surrounding the transaction at issue.
Hotel operators may also attempt to argue that the HMA is not a contract for personal services. While this is a harder argument to make, courts have, in certain cases, determined that an HMA is not a personal services contract due to the hotel owner’s sustained level of managerial involvement under the contract.[6]
With the increasing number of mergers and acquisitions occurring within the hospitality industry, hotel owners and operators will need to pay attention to the developing case law determining the effect of anti-assignment and anti-delegation provisions in HMAs.
Citations
[1] See Am. Jur. 2d Assignments § 26. “[I]t is indeed the general rule that contracts for personal services cannot be assigned […] Performance, in other words, cannot be delegated to another ... Thus if a specific artist is hired to paint a picture, the artist cannot delegate his duty of performing…” Rsrv. Realty, LLC v. Windemere Rsrv., LLC, No. DBDCV136013161S, 2015 WL 4726795, at *10 (Conn. Super. Ct. July 1, 2015).
[2] See Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, 2011 WL 1348438, at *12 (Del. Ch. Apr. 8, 2011)
[3] TXO Prod. Co. v. M.D. Mark, Inc., 999 S.W.2d 137, 141 (Tex. App. 1999).
[4] Buchanan Cap. Markets, LLC v. DeLucca, 150 A.D.3d 436, 51 N.Y.S.3d 417 (2017); Merritt v. MGC Sports LLC, No. 3:17-CV-01372, 2019 WL 3531877 (M.D. Tenn. Aug. 2, 2019); Wien & Malkin LLP v. Helmsley-Spear, Inc., 12 A.D.3d 65 (1stDep’t 2004), rev’d, 6 N.Y.3d 471, 846 N.E.2d 1201 (2006); Nassau Hotel Co. v. Barnett & Barse Corp., 162 App.Div. 381, aff’d 212 N.Y. 568, 106 N.E. 1036.
[5] See Brunswick Corp. v. St. Paul Fire & Marine Ins. Co., 509 F. Supp. 750, 753 (E.D. Pa. 1981) (holding “under state corporation law, the surviving corporation in a merger is vested with all rights and benefits under a liability insurance policy formerly due the merged corporation”); Dodier Realty & Inv. Co. v. St. Louis Nat. Baseball Club, 361 Mo. 981, 988, 238 S.W.2d 321, 323 (1951) (holding that lessee’s merger into another corporation did not violate the anti-assignment provision in the lease and noting “[f]orfeitures of leaseholds are looked upon with disfavor”)
[6] See IHG Management (Maryland) LLC v. West 44th Street Hotel LLC, No. 655914/2017, 2018 WL 1730840, at *2 (N.Y. Sup. Ct. Apr. 10, 2018)
Maryland Statute Under Fire – Court Substantially Narrows Application in Matter of First Impression
Key Take:The Maryland statute has become an obstacle to hotel owners seeking to terminate long-term hotel management agreements that incorporate Maryland law.
On January 12, 2022, the Maryland Circuit Court for Howard County dismissed a hotel manager’s counterclaim for specific performance of the management agreement and upheld a hotel owner’s right to seek recission of a hotel management agreement limiting – for the first time – the application of Maryland Code of Commercial Law Section 23-102, which states a Maryland court can issue orders of specific performance compelling hotel owners to continue to employ their unwanted hotel managers.
In the hotel management context, beginning in 1991 with Woolley v. Embassy Suites, Inc., a prevailing line of authority developed holding that hotel management agreements were revocable at the will of the hotel owners notwithstanding the language to the contrary in the written agreements.[1] This holding was predicated on two legal principles: 1) that a hotel management agreement constitutes an agency relationship, and a principal retains the right to revoke the agency regardless of the contract’s terms (so long as the agency is not coupled with an interest), and 2) that hotel management agreements constitute personal services contracts and cannot be enforced by injunction or specific performance.[2]
By virtue of this line of authority, hotel owners had the right to terminate an unwanted hotel manager, regardless of whether such termination was permitted under the hotel management agreement. If the termination was not contractually permitted, courts would nevertheless decline to award injunctive relief or the remedy of specific performance to return a manager to management, and the only recourse available to a manager was to seek an award of monetary damages, which exposed managers to potentially significant hardship if termination was early in the management term and the manager had made a significant investment to manage the hotel.
However, in 2004, in an effort to mitigate the hardship imposed by courts refusing to enjoin hotel owners from terminating their hotel management agreements (or declining to award specific performance), hotel managers successfully lobbied the General Assembly of Maryland to pass a one-of-a-kind statute specifically applicable to hotel management agreements. This statute (unique to Maryland) provided that, notwithstanding the common law rule that a principal (such as a hotel owner) can always revoke an agency relationship (which courts have uniformly found hotel management agreements to be), Maryland courts could issue orders of specific performance compelling hotel owners to continue to employ their unwanted hotel managers.[3]
Specifically, pursuant to Section 23-102(a), Maryland codified that “[i]f a conflict exists between the express terms and conditions of an operating agreement and the terms and conditions implied by the law governing the relationship between a principal and agent, the express terms and conditions of the operating agreement shall govern.” Further, under Section 23-102(b), a court “may order the remedy of specific performance for anticipatory or actual breach or attempted or actual termination of the operating agreement notwithstanding the existence of an agency relationship between the parties to the operating agreement.” By virtue of this statute, to the extent Maryland law applied, hotel managers had a tool to defend against wrongful terminations to protect their investment in the hotels and their long-term hotel management agreements.
Although the statute presented a conflict between Maryland and every other jurisdiction in the United States on this issue, the Maryland statute remained largely unchallenged until recently. Indeed, there are only a handful of decisions discussing the statute, but they largely favor hotel managers.
In 2018, a New York court held that a hotel management agreement “provides for the application of Maryland law” and therefore “a court may order specific performance for anticipatory or actual breach or attempted or actual termination of a hotel management agreement.”[4] Based on this ruling, both owners and managers were on notice that courts outside of Maryland may apply Maryland’s statute notwithstanding the conflict with the common law developed in their jurisdiction.
Further, in 2020, a Maryland court concluded that the statute was “both remedial and procedural.” Therefore, although the hotel management agreement applied the law of the District of Columbia, “Maryland law governs … the availability of remedies potentially available in the event of a contractual breach” and, even if it did not, because the law of the District of Columbia provides for specific performance for breach of contract, that remedy remained available regardless of Maryland’s statute.[5]
Consequently, hotel managers operating under a hotel management agreement that incorporates Maryland law, or operating a hotel in a jurisdiction that provides for specific performance as a remedy for breach of contract, now have authorities that support a request for the remedy of specific performance for wrongful termination notwithstanding the common law of agency developed in other jurisdictions.
To date, only one Maryland court, in an unpublished decision from 2022, has declined to apply Maryland’s statute in the face of a hotel manager’s argument that the hotel owner wrongly sought to terminate a hotel management agreement.
In Bigstore Hotel Partners, LLC v. IHG Management (Maryland) LLC, the owner of the Even Hotel in Pittsburgh, Pennsylvania, brought an action asserting a single claim for rescission of the hotel management agreement as the remedy for the manager’s substantial and material breaches of the hotel management agreement. Relying on the Maryland statute, the manager counterclaimed for specific performance to stop the alleged anticipatory breach and/or attempted termination of the hotel management agreement. The hotel owner moved to dismiss, arguing that Section 23-102 did not apply to its claim for rescission. In turn, the manager argued that recission was an attempt to terminate and therefore the statute applied warranting specific performance.
Siding with the hotel owner,[6] Judge Bernhardt recognized that while the statute is “very favorable to hotel managements,” Maryland did not intend to “create a wall of almost immunity around hotel management from … certain types of actions at law.”[7] The Maryland court rejected the manager’s argument, held that rescission was materially different from attempted termination of a hotel management agreement and that the rescission claim did not implicate the statute, then dismissed the manager’s counterclaim for specific performance.
Although few courts have interpreted or applied Maryland’s statute, it is clear that the statute provides hotel managers with significant protection against wrongful termination where the dispute is litigated in Maryland or where the hotel management agreement incorporates Maryland law. Hotel owners should be mindful of this when negotiating the choice of law provision in their hotel management agreements and when deciding whether to purchase a hotel located in Maryland. For those hotel owners subject to Maryland’s statute, they must consider alternative or otherwise creative arguments and claims, such as a claim for recission, to avoid the application of the Maryland’s statute and the remedy of specific performance for breach and wrongful termination of hotel management agreements.
Citations
[1] Woolley v. Embassy Suites, Inc., 278 Cal.Rptr. 719 (Cal.App.1991); see also Pac. Landmark Hotel, Ltd. v Marriott Hotels, Inc., 19 Cal App 4th 615 (Cal Ct App 1993); Govt. Guar. Fund of Republic of Finland v Hyatt Corp., 95 F3d 291 (3d Cir 1996); 2660 Woodley Rd. Joint Venture v ITT Sheraton Corp., CIV. A. 97-450 JJF, 1998 WL 1469541 (D Del Feb. 4, 1998).
[2] See, e.g., Marriott International, Inc. v. Eden Roc, LLLP, 962 N.Y.S.2d 111 (N.Y. App. Div. 2013)(holding that a hotel management agreement is a personal services contract that may not be enforced by injunction).
[3] As noted in Marriott Hotel Services, Inc. v Wardman Hotel Owner, L.L.C., 2020 WL 10758279, at *8 (Md Cir Ct, Montgomery Cnty Dec. 3, 2020), the bill file for Section 23-102 “makes plain that this provision was added to allow enforcement of hotel management agreements by specific performance despite their being considered personal service or agency contracts.” (footnote omitted).
[4] IHG Management (Maryland) LLC v. West 44thStreet Hotel LLC, 163 A.D.3d 413 (1st Dep’t 2018) (“It is undisputed that the [agreement] at issue provides for the application of Maryland law, which specifically provides that a court may order specific performance for anticipatory or actual breach or attempted or actual termination of a hotel management agreement.”) (citing Md. Code Ann., Com. Law §§ 23-102[b]; 23-101[c])).
[5] Marriott Hotel Services, Inc. v Wardman Hotel Owner, L.L.C., 2020 WL 10758279, at *8 (Md Cir Ct, Montgomery Cnty Dec. 3, 2020).
[6] Bigstore Hotel Partners, LLC v. IHG Management (Maryland) LLC, No. C-13-CV-21-000391 (Md Cir Ct, Howard Cnty Jan. 12, 2022) (granting owner’s motion to dismiss hotel manager’s counterclaim for specific performance).
[7] Author’s note: The court’s quote is from the hearing transcript and the court’s ruling at the conclusion of the hearing, which was followed by a one-page order that incorporated the court’s reasonings its the order.
The Changing Climate: Factoring Sustainability in Hotel Due Diligence
Key Take: Climate change risks should be factored into the underwriting of hotel projects.
Changes in our climate have created drastic increases in flooding, fires, heat waves, and droughts. It seems that so-called “hundred year storms” are being experienced on a yearly basis. Coastal areas have experienced severe damage from flooding and high winds, and extreme heat and drought conditions have devastated California as well as interior states. Unfortunately, current projections suggest that these conditions are bound not only to continue but also to worsen in the coming years.
Hotel owners, developers, and acquirers need to be cognizant of the risks posed by climate events as well as local statutory and regulatory “sustainability” requirements that may apply to real estate development and operations. Quite simply, climate change risks should be factored into the underwriting for hotel projects.
Analysis of sustainability requires due diligence beyond that which has traditionally been the norm. A “Phase I” environmental assessment and property condition report—“traditional” areas of property-level due diligence—do not include analyses of the potential for flooding and sea level changes that could affect a real property asset and its operations. Depending on the location of the property, a report that analyzes current and future flooding potentials and suggests solutions for mitigating their effects should be included among the information collected as part of due diligence.
Traditional due diligence reports also typically do not analyze or explain existing and pending regulatory requirements, some of which could have significant financial impacts. For example, as a result of Superstorm Sandy, which in 2012 caused extensive and catastrophic flooding in Manhattan and low lying portions of New York’s outer boroughs, New York City adopted new zoning and building requirements to raise the levels of entrances, mechanical equipment, and the like to conform with new floodplain maps that were created by FEMA. Other cities and states, notably many in Florida and California, have adopted similar requirements.
In addition to flooding and sea level concerns, agencies are requiring information and analysis of greenhouse gas emissions, which many believe are a significant factor in changes to the climate. Some cities have required retrofitting existing buildings to reduce emissions from HVAC systems. For example, Local Law 97 in New York City requires building owners to substantially reduce greenhouse gases by 2024, with further reductions required by 2030 and 2050. Compliance with this type of legislation is a lengthy and costly process and may, in some instances, require changing HVAC systems from burning fossil fuels to electric power or renewable forms of energy.
Hotel owners, developers, and acquirers should also factor in the premiums for property insurance, which are uncontrollable and often hugely significant costs. In recent years, many owners have faced sharp increases in premiums along with higher deductibles, due to both weather-related risks and inflation.
The lesson to be learned from these and other requirements is that due diligence and underwriting for hotel projects must include an analysis of the need to protect against potential impacts of climate change and the costs of mitigating or protecting property from the sequelae of flooding, increased global temperatures, and compliance with regulatory requirements. Hotels, like other real estate asset classes, are not immune from climate risks, and owners, developers, and acquirers should as much as possible be cognizant of the associated costs.
How City Planning Commission Special Permits Are Hindering New York's Hotel Scene
Key Take: A cumbersome process for special permits is preventing hotel developers from meeting hotel room demand in New York’s billion-dollar hotel industry.
As New York City’s tourism and hospitality sectors continue their post-pandemic recovery, the demand for new hotel rooms may be difficult to meet due to changes in the city’s zoning laws over the past several years. These zoning text amendments have eliminated most as-of-right transient hotel developments, conversions, or enlargements in all areas of the city. Instead, new hotel projects require a special permit from the City Planning Commission (CPC) – a discretionary land use action that is subject to public review and influence from various civic organizations and interested trade groups.
Piecemeal text amendments over the years have mandated special permits for new hotel developments in select special zoning districts throughout the city. In 2018, the city council adopted an amendment extending the special permit requirement to all manufacturing zoning districts. Then, in December 2021, the council extended the CPC special permit citywide through the adoption of Citywide Hotels Text Amendment. This text amendment requires a CPC hotel special permit for the following projects located anywhere in the city:
- the development of a transient hotel building;
- change of use or conversion to a transient hotel, or the proposed enlargement of a building to a transient hotel if such building did not contain a transient hotel use as of December 9, 2021; or
- an enlargement or extension of a transient hotel that existed prior to December 9, 2021, that increases the floor area of such use by 20 percent or more.
The CPC special permit is a discretionary land use action subject to the city’s Uniform Land Use Review Procedure (ULURP). The findings that must be made by the CPC in granting any special permit include that (i) the site plan incorporates elements addressing any potential conflicts between the proposed use and adjacent uses, (ii) the use will not cause undue vehicular or pedestrian congestion on local streets or unduly inhibit vehicular or pedestrian movement or loading operations, and (iii) the use will not impair the future use or development of the surrounding area.
As part of the CPC special permit process, the Department of City Planning must review a separate City Environmental Quality Review application, which analyzes the projected environmental impacts generated by the proposed development. This in-depth environmental review includes, but is not limited to, pedestrian and vehicular circulation, shadow studies, air quality, effect on existing mass transit, and quality of life issues. If significant environmental impacts are projected due to the proposed development, a more comprehensive environmental impact statement must be prepared.
Once an applicant has completed the land use and environmental application review with the Department of City Planning, the project is ready to entire the formal ULURP public review process, which lasts a maximum of 7.5 months. The ULURP process is mandated by the City Charter and involves hearings with the local community board, borough president, CPC, and often the city council. The process almost always requires the support of the local council member, as the full council typically defers to the local member on land use actions. It is during these deliberations that interested groups, such as neighborhood associations and trade unions, may attempt to influence the proceedings, leading to an uncertainty of outcome. In total, these types of applications, inclusive of the pre-certification and public review process, typically take between 24 to 30 months and can cost hundreds of thousands of dollars to process.
Hotels and their related uses are a vital part of New York City’s economy and its post-pandemic recovery, contributing billions of dollars in revenue each year. Unfortunately, the time, cost, and uncertainty of success in pursuing a CPC special permit are significant factors that may deter developers from pursuing new hotel projects that will be needed to address increasing demand.
The impacts of the Citywide Hotels Text Amendment have not been fully realized yet since the amendment included grandfathering provisions for hotel projects already in the development pipeline and for existing hotels shuttered during the pandemic. However, a search of the Department of City Planning’s Zoning Application Portal is particularly telling for new hotel projects. Since the adoption of the Citywide Hotel Text Amendment, only two hotel special permit applications have been filed with the Department of City Planning. Both of these applications involve large development projects that necessitated ULURP for other land use actions, and so far neither project has completed the public review process.
Akerman’s New York Land Use and Zoning practice is comprised of attorneys and planners who have significant experience working with the Department of City Planning (DCP), City Planning Commission, and New York City Council to successfully shepherd land use applications through the ULURP entitlement process.
Citations
[1] Woolley v. Embassy Suites, Inc., 278 Cal.Rptr. 719 (Cal.App.1991); see also Pac. Landmark Hotel, Ltd. v Marriott Hotels, Inc., 19 Cal App 4th 615 (Cal Ct App 1993); Govt. Guar. Fund of Republic of Finland v Hyatt Corp., 95 F3d 291 (3d Cir 1996); 2660 Woodley Rd. Joint Venture v ITT Sheraton Corp., CIV. A. 97-450 JJF, 1998 WL 1469541 (D Del Feb. 4, 1998).
[2] See, e.g., Marriott International, Inc. v. Eden Roc, LLLP, 962 N.Y.S.2d 111 (N.Y. App. Div. 2013)(holding that a hotel management agreement is a personal services contract that may not be enforced by injunction).
[3] As noted in Marriott Hotel Services, Inc. v Wardman Hotel Owner, L.L.C., 2020 WL 10758279, at *8 (Md Cir Ct, Montgomery Cnty Dec. 3, 2020), the bill file for Section 23-102 “makes plain that this provision was added to allow enforcement of hotel management agreements by specific performance despite their being considered personal service or agency contracts.” (footnote omitted).
[4] IHG Management (Maryland) LLC v. West 44thStreet Hotel LLC, 163 A.D.3d 413 (1st Dep’t 2018) (“It is undisputed that the [agreement] at issue provides for the application of Maryland law, which specifically provides that a court may order specific performance for anticipatory or actual breach or attempted or actual termination of a hotel management agreement.”) (citing Md. Code Ann., Com. Law §§ 23-102[b]; 23-101[c])).
[5] Marriott Hotel Services, Inc. v Wardman Hotel Owner, L.L.C., 2020 WL 10758279, at *8 (Md Cir Ct, Montgomery Cnty Dec. 3, 2020).
[6] Bigstore Hotel Partners, LLC v. IHG Management (Maryland) LLC, No. C-13-CV-21-000391 (Md Cir Ct, Howard Cnty Jan. 12, 2022) (granting owner’s motion to dismiss hotel manager’s counterclaim for specific performance).
[7] Author’s note: The court’s quote is from the hearing transcript and the court’s ruling at the conclusion of the hearing, which was followed by a one-page order that incorporated the court’s reasonings its the order.
Q&A With Pinnacle Advisory Group’s Rachel Roginsky and Gary Avigne
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Rachel Roginsky, ISHC, is the owner and founder of Pinnacle Advisory Group, with more than 40 years of experience in hospitality consulting. |
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Gary Avigne is a senior advisor and the director of asset management at Pinnacle Advisory Group, with more than 30 years of experience in the hotel industry. |
Ms. Roginsky and Mr. Avigne provide advisory services in all facets of hospitality real estate, including litigation support and expert testimony.
Q: Pinnacle has provided expert witness services to Akerman in the past. Can you give us some insight into what has been keeping you busy lately on the litigation support side of Pinnacle’s advisory services?
A: Pinnacle provides a very broad scope of services under the umbrella of litigation (avoidance) support. Recently, we have provided advisory services in connection with potential dispute resolutions involving hotel managers and hotel owners where both parties wish to avoid significant legal fees. In these types of assignments, we are asked to assess the hotel’s operations — from human resources items, to sales and marketing, to accounting — in order to help bridge the gap of the dispute. In fact, it is often the case that the owner’s frustrations with the performance of its operator may not rise to the level of a breach of the hotel management agreement but are significant enough to create a lot of challenges between the owner and the operator.
In order to assess the hotel operation and figure out the best path forward for both parties, we try to use as many benchmarks as we can find from a factual perspective. This includes evaluating STAR (STR) reports and the position of the hotel within the market relative to its concept. We look at trends using HOST or CBRE statistics in order to determine margins for things like food and beverage revenue and occupied versus available room statistics. This is not an exact science, but, rather, all these data points help to create a story. This story also includes delving into what kind of sales and marketing activity efforts have been pursued by the operator and whether the operator uses the services of a third party marketing company. We look at whether the business practices at the hotel property are industry standard. For instance, is there a monthly performance review meeting between the owner and the operator in order to review the sales and marketing reports and initiatives?
We have been involved in many situations where there is a HMA in place and the HMA is really misaligned as it relates to the objectives of the owner and the operator such that it would be disproportionately to the advantage of the operator where the performance was disappointing, at best, but doesn’t fail a performance test. In that case, the owner often sees no other choice but to live with poor performance because the owner entered into a management agreement that was somewhat ill-advised. This is why it is so important for owners to not just be represented by counsel during HMA negotiations, but that owner’s counsel is experienced in reviewing and negotiating HMAs.
However, even in these cases where the HMA disproportionately favors the operator, we are often able to help the parties find a productive path forward. Due to the fact that there are a lot of generalities in HMAs, it can be difficult for an owner to point to anything in detail as it relates to a potential breach. What we are often able to do is expand upon those generalities such as “industry best practices” — which is one of those phrases that isn’t usually defined in a hotel management agreement. Our extensive experience in the hospitality industry allows us to opine as to what those industry best practices are and evaluate which of those practices are being done and those that are not. This type of analysis is often sufficient to bring the parties to the negotiating table.
Q: Outside of litigation support, are you noticing any trends among the other advisory services provided by Pinnacle?
A: Litigation support is actually only a small part of our business. On the advisory side, which is the bulk of our work, we are doing market and financial due diligence for new hotels. In contrast, we are not seeing acquisition due diligence (which had been a big part of our business) because there are not a lot of transactions happening.
Interestingly, of the 20 advisory projects we are currently working on (and not including our asset management work), 90 percent of these engagements are for new hotel construction. This is surprising to many because the cost of construction and interest rates are so high right now. These market studies need to start now, however, because developers want to have the hotel open in three to four years. Our work is all part of the planning process. These developers are not going to go get financing today, but have to start somewhere.
There are other reasons why we are currently so busy with market study engagements. The timing of the COVID-19 pandemic plays a role. For two years developers were sitting on the sidelines. Now that the pandemic is behind us, hotel developers want to get started on new projects.
Another reason for the interest in new hotel construction is spurred by the fact that the major hotel companies have added many new brands to their portfolio. For instance, Marriott now has approximately 35 brands and both Hyatt and Hilton have 20+ brands. When these hotel companies announce a new brand, they also hire a development person to help grow the brand. In three to four years, we should expect to see many more new hotels open.
Q: As it relates to the market study work that you are doing, is there one specific type of hotel that your clients are asking you to evaluate?
A: Yes. There is a tremendous amount of interest in hotels that service leisure markets — and these clients are most interested in independent boutique hotels and soft brands. Leisure travel is what helped the hotel industry recover from the COVID pandemic and many of these trends are here to stay. Room rates in many leisure markets have doubled from what they were pre-COVID, although we are now beginning to see some pullback. In any event, the leisure market remains top of mind and it is an exciting time for new construction and the expansion of new hotel brands.
