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The Real Estate Summit held in New York City discussed the hospitality sector and such brands as Marroitt, Ritz Carlton, Residence Inn and Hyat.

Room (and Rooms) for Returns in Hospitality

How is the hotel sector faring during a period of geopolitical instability and economic uncertainty? This was the focus of a panel discussion entitled “Uncovering Returns in a Changing Hospitality Sector,” held during the Global Leaders in Real Estate Summit. The event, which was co-sponsored by iGlobal Forum and EisnerAmper, took place at the Lotte New York Palace on September 28.

Nelson Migdal, principal shareholder at law firm Greenberg Traurig, moderated the discussion with four prominent panelists: Nolan Hecht, managing director of Square Mile Capital Management; Mark Gordon, managing partner of Intrinsic Hotel Capital; Phillip Summers, managing director of Lazard; and Russell Flicker, co-founder and managing partner of AWH Partners.

Hecht said that the hotel market is “overall, very healthy.” Although it’s a slow environment with a lot of new supply, it’s nevertheless a growth environment. But where, exactly, are the opportunities for growth?

The “Right” Locations and Service Levels

For Hecht, the answer is hotels in markets where there isn’t a great deal of supply and where new supply is unlikely to go. For example, Square Mile recently bought a Ritz Carlton in Maui and a Hyatt in Newport, Rhode Island.

Secondary markets, noted Summers, “have been more of the unloved, unwanted child, if you will, in this recovery cycle.” And the strong secondary markets are where AWH Partners gravitates in search of full-service properties.

New supply in such markets is likely to be limited-service, Flicker explained. With this in mind, the firm recently bought the Marriott at Sea-Tac airport, rather than looking at options in downtown Seattle, where there is ample supply.

The full-service models, preferred by AWH, offer the benefit of additional sources of revenue through on-site restaurants, meeting spaces, ballrooms, spas, and gyms, etc., said Flicker. A catering business, for instance, drives room bookings.

Gordon, in contrast to Flicker, sees risk in full-service models. He observed that ancillary revenue sources can be labor-intensive, and that their profit margin is much lower than it is for rooms.

Intrinsic focuses instead on the select-service side of the business. The firm takes “a fresh perspective on assets,” and undertakes renovation and repositioning, along with changes to management and brands. “We’ve actually been inundated with opportunities,” Gordon reported.

Intrinsic is hardly alone in its pursuit of select-service properties. According to Summers, one of the factors underlying the recent Marriott/Starwood merger was Starwood’s lack of a “meaningful select-service presence.”

Brands Vs. Boutiques

The panelists had different views on the benefits of brand hotels vs. independents. Square Mile seeks out the latter, which comprise 50% of its portfolio. Of particular appeal to the firm, said Hecht, are “lifestyle boutique hotels” in urban areas that provide unique experiences. A case in point is the NoMad Hotel on Broadway and West 28th Street in New York City.

In branded hotels, Hecht continued, the top 10% of the revenue goes to Marriott or Hilton or Hyatt. “It’s very frustrating when you own a Marriott and down the street they open an Autograph, which is their soft brand, or whatever brand they come up with -- an Edition or Moxy,” he explained. “So from an ownership standpoint, I think you have to step back and [ask], ‘Is it really worth doing a brand in some of these markets?’”

Flicker, on the other hand, is a fan of brands, especially “the further you go from gateway markets.” He noted that “in times of trouble, brands tend to hold up pretty well.” That said, he expressed disappointment with the consolidation that characterizes the market today because fewer brand families equate to less negotiating power for his firm.

Intrinsic is another fan of brands, generally speaking. According to Gordon, they are finally catching up with design trends. He offered the example of a micro-hotel concept, The Moxy, which reflects the innovation and creativity that was previously lacking. Moxy rooms are smaller than what customers might find in a Residence Inn, Courtyard, or Hilton Garden Inn, he said, but there is still a high level of design, along with great public space.

“If you go to a major city like New York or Washington or LA or Miami, the reason you’re going there is, presumably ... to meet other people and be part of a local culture,” observed Gordon. The communal space in the Moxy enables just that – the ability to interact with other people.

Brands are also “leading the charge” on technologies that enhance convenience, Gordon continued. Such technologies include online check-in, electronic lighting and temperature control, and service orders through tablets. Also in the brands’ favor are the premium guest programs. As Gordon noted, “there is a very large percentage of the traveling public that really values getting points.”

When evaluating a brand platform, consider such criteria as sustainability, durability, and consistency, suggested Summers.

What should investors avoid in the hospitality sector? Migdal posed this question to Gordon. In responding, Gordon shied away from identifying specific areas or asset types: “I think there are good deals to be done in bad markets and bad deals to be done in great markets.”

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