Mr. Holthouser

Development & Construction

Hotel Development in the 21st Century: Adapting to a New Real Estate Landscape

By Jim Holthouser, Senior Vice President Brand Management, Embassy Suites Hotels

Co-authored by William Fortier, Senior Vice President, Development, Americas, Hilton Worldwide

Looking at the global landscape, we’ve seen North America fall behind in hotel development over the past couple of years, but a gradual turnaround is now in progress. While still slow, development is starting to pick up as occupancy levels increase, raising the potential for a healthier ROI and attracting new owners to venture into the hospitality business and existing ones to expand their portfolios. Historically, there’s a two-year cycle that follows a downswing in this industry, and we’re about a year into that cycle. I think we can anticipate a greatly improved investment outlook by the fall of 2011.

Without doubt, it’s been a tough time for new hotel owners, and the continued volatility of our economy makes financing a challenge still. At Embassy Suites we encourage owners to be creative and to design targeted strategies for attracting multiple lenders and securing loan assistance. We work with them, also, to keep construction costs manageable, and to contain them through an innovative approach without cutting corners or sacrificing style.

Embassy Suites Mexico City

Our own Kit of Parts system supports maximum versatility in layout and in the design process; and Design Option III is a hotel prototype that makes investment dollars go a long way and sparks a faster ROI. Both Design Option III and the Kit of Parts address the increasing difficulty of finding a plot of land well-suited for a new-build hotel project. As land prices soar, so the properties available become progressively more challenging—smaller, for reasons of price, or perhaps because of the location when the setting is a metropolitan city—and often irregular in shape, defying any concept of building at 90˚angles. The land a developer chooses will naturally determine whether the hotel will be an expansive three-story structure spread over a couple of landscaped areas in a rural setting, or a sleek downtown high-rise elevated on a mere 8,000 square feet with just seven guestrooms per floor.

In the second scenario, and in a market where corporate travelers make up the majority of business, Design Option III can be tweaked to incorporate Embassy Suites’ new one-room suite design, introduced to developers last year. The redesigned room option is spacious – approximately 370 square feet – and features the same amenities as a traditional two-room suite: a living area, wet bar, bathroom and bedroom area. While it is geared toward business travelers, developers also benefit from the new design, which packs more rooms into a conventional Embassy Suites footprint. Developers can allocate up to 20 percent of the guestrooms as one-room suites. When the owner takes the incremental number of rooms and multiplies it by rate and occupancy over the lifetime of the franchise agreement, that owner really sees an impressive jump in the ROI of the property.

The more cost-effective, scalable nature of Design Option III reflects our commitment to sustainability in design, construction, and material sourcing. From a developer’s perspective, its smaller footprint with side-by-side suites cuts construction costs, making an affordable franchise option for owners with limited space.

Of course, finding the best possible site remains the ultimate goal. As a prospective owner/developer, you want visibility and accessibility in order to compete for a viable share of your chosen market. While price points are naturally a primary consideration, when the location is really close to ideal but the price is marginally higher than budgeted, it’s generally worth the effort to raise the extra financing. Passing up a near-perfect piece of land to save a few dollars per square foot on costs can jeopardize the long-term success of a project and diminish the revenue potential.

Hotel Lobby Buffalo

An understanding of the geographic area and the local market is key, and any savvy hotel developer will invest time in serious research before purchasing land, and certainly before the design process begins. To optimize revenue, it’s imperative to identify the time constraints, and to guard against overbuilding or wasting space. Not every city needs a Taj Mahal, and building a room count that exceeds market demand is likely to result in disastrous occupancy rates. Similarly, creating multiple on-site dining venues in a region with an abundance of fine restaurants could lead to an army of wait staff with little to do but polish the silverware. A close examination of the area’s existing hotels and their occupancy levels can provide excellent guidelines for achieving a happy balance between guestrooms and public areas, and there are plenty of companies to help with a feasibility study.

Conservation often comes into play in projects that call for adaptive re-use of a structure, especially when the original building has significant historic value. In the case of a former bank with a spectacular façade in downtown Portland, Ore., Embassy Suites preserved not only the façade but also many interior architectural elements, including some magnificent columns and the original bank vault, which now serves as a meeting room. Embassy Suites Hotel Mexico City - Reforma is another prime example of innovative design in adaptive re-use development. The property was formerly an office building.

With conversion projects, the Embassy Suites’ Kit of Parts also enables a developer to transform an existing hotel structure so that the resulting new hotel perfectly reflects the brand. Of course, there are certain prerequisites. We must ensure, for example, that a configuration can be achieved to accommodate a lobby area that conveys a strong sense of space, where guests can relax or work throughout the day. It must offer ample space for our nightly Manager’s Reception, a popular event with our guests. This has been artfully achieved with our Embassy Suites Fort Worth - Downtown hotel, and also at Embassy Suites Waikiki Beach Walk in Honolulu, where the traditional atrium has been replaced with a public area open to the Hawaiian skies.

Hotel Lobby Portland

Mixed-use development projects are by nature expensive and tend to attract sophisticated developers with long-term experience and access to substantial funding. They present a very intricate set of challenges. When the goal is to create a single complex to house retail, office or residential units as well as a hotel, the positioning of the hotel must support easy access and good visibility. And while the hotel design should not be at odds with the surrounding structures, it must always be a clear representation of the brand. Our Embassy Suites property in Buffalo, N.Y., is an excellent example, incorporating condominiums and office space alongside the hotel. And summer 2012 will see the opening of the new Embassy Suites St. Louis - Downtown hotel, formerly a Dillard’s department store. This expansive project includes 32,700+ square feet of retail space as well as apartments.

As a global hotel company with multiple brands, Hilton Worldwide has ventured into several development projects that the industry has dubbed “dualtel.” In a trend that has evolved over the past five years or so, driven primarily by escalating costs, developers have worked with two brands under the same umbrella company to design hotels that in essence complement each other and provide mutually beneficial support. While each hotel is a separate entity led by its own general manager, the two may share certain back-of-house staffing teams—for example, in the areas of accounting, housekeeping and maintenance.

A combo-project can work especially well in a market that calls for brands with diverse styles and price points. Rather than build a 600-room hotel, a wise developer will identify this dual market demand and perhaps design one property with 350 rooms and another with 250 rooms, each hotel clearly styled with its own brand identity and brand features. An example of this within the Hilton Worldwide portfolio of brands is the Hilton Garden Inn positioned together with a Homewood Suites property in Baltimore’s Inner Harbor, an excellent combination for capturing dual market share.

Looking at the real estate landscape now, I’d say the key drivers of success for any development project—whether a new-build or a conversion—are an understanding of the market and a flexible approach to the project. It’s a challenging marketplace, and one that that never stands still.

William Fortier contributed to this article. In his role as senior vice president, development, Americas, Hilton Worldwide, Mr. Fortier is responsible for developing both the managed and franchised businesses for all of Hilton’s brands in the region. Since joining Hilton in 1996, Mr. Fortier has worked with owners to develop Hilton and Hilton Garden Inn franchised hotels in the Western Region, and has spearheaded franchise development efforts for Hilton Worldwide’s brands in North America, including Hilton Hotels & Resorts, Doubletree, Embassy Suites Hotels, Hampton Inn, Hilton Garden Inn and Homewood Suites by Hilton. In his work to expand the company’s network of hotels, he ensures the consistent delivery of brand standards from a development standpoint.

As the global head of brand management for Embassy Suites Hotels since 2006, Jim Holthouser leads marketing, sales, revenue management, research and development and franchise owner relations efforts for the $1.8B annual revenues brand. Mr. Holthouser also serves as global head of full service brands (Hilton, Doubletree and Embassy Suites) for Hilton Worldwide. Under Mr. Holthouser’s leadership over the last three and a half years, the Embassy Suites brand has won numerous awards for product and service quality. Mr. Holthouser can be contacted at 703-883-1000 or Maggie.Giddens@hilton.com Extended Bio...

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