At the Hotel Granduca—a luxury, villa-style boutique hotel with 122 suites in Houston, Texas’s Galleria area—it’s sometimes difficult to book a room during the week.
“Over the past three months, Hotel Granduca has posted the highest occupancy since [it] opened four and a half years ago,” says Mary Grace Gray, the hotel’s general manager. “Houston is the energy capital of the world, and the rise in oil prices means greater activity for Houston, and many more hotel guests. Also, we’re seeing an increase in visitors, particularly from south of the border—Mexico and South America—because of strong currencies such as Brazil’s. We expect this surge in business to continue through the rest of the year.”
Similar stories are being heard across the United States. “There’s no question the hotel sector is on a rebound,” says Scott D. Berman, principal and industry leader, Hospitality & Leisure at PwC in Miami, Florida. “In the last 120 days, corporate group business has come back much [more quickly] than expected. That says to me the Fortune 1000 is getting on airplanes not only for client service needs, but also to meet corporate leaders.”
Not only that, says Richard C. Conti, president of the Plasencia Group, Inc., in Tampa, Florida, and chair of ULI’s Hotel Development Council, the industry’s standard measure of health—revenue per available room (RevPAR), which is occupancy times rate—is expected to rise by 7 to 9 percent this year and by double digits in 2012.
“As the recovery in the industry strengthens, hotels have become an attractive sector,” Conti says. “Equity funds are back in the marketplace, and real estate investment trusts [REITs] are a big player, putting more money out. They got in early to buy properties at a discount. There [are] a lot of transactions. In 2009, there were $2 billion in hotel transactions, rising to $6 billion in 2010, and transactions are expected to double this year.”
Hotel demand is highly correlated to gross domestic product, and as properties boost occupancy, rates increase. “There is virtually no new construction of hotels,” Conti explains. “The further good news is that debt has finally come back for acquisitions—but not for new development.”
Individuals and companies interested in entering the hospitality industry should study it carefully, says Granduca owner Giorgio Borlenghi. “Partner with someone already in the industry who has built hotels before and has the financial wherewithal to do it again,” he advises. “Make sure you absolutely, positively know what product is needed in the location you are pursuing. In some markets, a limited-service property may be needed rather than the luxury hotel you might want to build. Take into consideration the ambience of the hotel and the competition you might face.”
In most cases, don’t go it alone, emphasizes Conti. “Go with a brand,” he advises. “It’s very difficult as an independent. Many lenders won’t work with you unless you’re an established independent like a Kimpton. And don’t overleverage. People got into trouble last time because, between debt and mezzanine debt, they overleveraged—sometimes [up to] 90 percent—so there was no room for error if the market hiccupped. Even if you have the opportunity to overleverage the property long term, it is best not to do it.”
PwC’s Berman urges that extra due diligence be done in preparation for any hospitality transaction. “Spend money on commercial and financial thoroughness,” he says. “If you are buying existing assets, ‘check under the hood’ and make sure the seller is representing the goods accurately, whether inventory or financial figures. Be vigilant.”