The PIP Crisis — A Default Breeding Ground
By Steve Van President & CEO, Prism Hotels | October 14, 2012
Get ready for even more hotel defaults as brands turbocharge the default pipeline by pressuring owners with long overdue product improvement plans. Brands aren't kidding around; they are defending their brand integrity against competitors who are remodeling. And with the instant customer feedback the Trip Advisors are producing, they have to act more quickly than ever. Here's why a PIP is necessary, how to deal with a brand on PIP issues, and what could happen if you don't. Remember-brands aren't evil-it's the outdated amenities that will dry up the customers and the cash flow.
The slack in the rope for hotel owners, the postponement of Property Improvement Plans while the hospitality industry regained its footing during the recession years, has reached its end. During 2008-10, the major brands made an unspoken deal with owners-we'll let you slide on upgrades now, but when the economy comes back, you have to come up with the money. Now, it's time to pay or get dated out of business, but this known requirement will still cause a lot of headaches, disputes and a spike in defaults this year and through 2014.
Many brands waived portions of their required PIPs for three-to-five years during the economic downturn, a move that owners appreciated, but now it's time to catch up. The economy seems to be back on an upswing and the hospitality market has been growing by leaps and bounds. Transactions are moving again, and RevPAR is up. According to PKF Hospitality Research LLC, RevPAR for U.S. hotels will increase by 5.8 percent in 2012 and another 6.6 percent in 2013.
The large brands have already started to push owners to make the delayed improvements. Construction firms are working on multiple PIP projects per month vs. doing just a handful per year in 2011. Owners who balk at the expenditures could find themselves dropped from the brand, or sued to comply. Lenders can be hurt here also. A hotel asset as loan collateral often looses half its value if the flag goes away.
Why do I need a PIP?
The idea behind a Property Improvement Plan is what keeps a brand fresh and interesting-a customer is promised that a hotel will have new, modern amenities, something as close to home as possible, but also clean and with elegant walls, floors, bathrooms and beds. Most of the major brands, including Marriott, Hilton, Sheraton and Holiday Inn, are now implementing these amenity upgrades.