U.S. hoteliers turn on the capex spigot

By Danny King

Danny KingIf you had perused the dozens of presentations and breakout sessions at the Lodging Conference at Phoenix's Biltmore earlier this month, you would have found many attendees who were dressed in sport coats and slacks suffering various stages of anxiety, ranging from downright consternation at worst to, at best, extremely cautious optimism.

But the few guys walking around in shorts? They were beaming.

Amid a three-year run during which hotel development has been at a near standstill, people in the construction industry -- the guys wearing shorts -- finally have reason to celebrate. Hotel owners are just starting to invest in their properties again at prerecession levels.

U.S. hoteliers will spend about $5 billion on capital expenditures this year, according to a report released late last month by New York University's School of Continuing and Professional Studies. That figure is up 33% over last year's capital expenditures and up 85% over the $2.7 billion spent in 2010.

With Smith Travel Research (STR) pegging the domestic hotel supply at about 4.9 million rooms, that means that each room is getting about $1,000 worth of new goodies this year.

What does this all mean?

The good news is that some of this spending is going toward fun items such as in-room iPads, flatscreen TVs, redesigned lobbies, upgraded restaurants and whatever else is left in the till after hoteliers pay to upgrade in-room devices to accommodate the new iPhone 5 connectors.

Slightly less sexy is the investment tied to what's been a recent raft of hotel-rebranding efforts.

As PKF Hospitality Senior Vice President Scott Smith put it in a recent interview, some investors who recently have been able to line up the capital to buy a hotel are using the opportunity to reflag the property and bring it to a higher-rent district, rate-wise.

That might mean a capital investment of anywhere from $5,000 a room for basic upgrades of a budget or midscale hotel to as much as $30,000 per key for a full-scale face-lift for a luxury property.

But the more mundane explanation is that hotel owners are finally making good on improvements to items such as paint, carpet and bathroom fixtures that either they or previous owners skimped on in order to get through the economic downturn with enough cash for day-to-day operations.

Because while the current capital expenditure level marks a jump from the past few years, it's still less than the average amount the industry spent between 2005 and 2008, when the bottom dropped out, according to the NYU study.

Either way, those capital expenditures will be funneled into existing hotels because newbuild properties are few and far between.

U.S. hotel room supply has increased just 2.8% during the past three years, and most analysts say growth will bump along at about 1% a year for the foreseeable future.

The bottom line is that now that the bill's come due, it's time for the guests to start chipping in. That's the short version of an unspoken dialogue hoteliers are having with their guests after years during which both parties were operating on the cheap.

NYU has already reported higher U.S. hotel surcharges, which will rise more than 5% this year, to about $1.95 billion, which is more than triple those of a decade ago. Indeed, management's getting more aggressive about collecting on items such as in-room phone bills, minibar charges, room-service delivery fees and those dreaded "resort fees" that few can actually decipher.

Think of these surcharges, of which as much as 90% goes directly to the bottom line, as the lodging industry's version of baggage fees and ticket-change charges.

But the real result -- or at least the result the suits at the Lodging Conference hope for -- is a legitimate increase in average room rates that will go beyond mere inflationary levels.

While most of the increases in revenue per available room since the economic downturn have been realized in the form of improved occupancy rates, most of the analysts at the conference said rising room rates would be leading the way from here on out.

Specifically, average U.S. room rates through the first eight months of the year rose 4.3% from a year earlier, to about $106 a night, while occupancy was up just 2.9%, Vail Brown, STR's vice president of global business development and marketing, said during her Lodging Conference presentation.

Even better, analysts say that those rates have room to grow because they're still below levels U.S. hotels hit in 2008.

Whether hotel operators have the discipline to keep increasing their rates and limiting the discounts designed to boost occupancy remains in question.

Hoteliers already talk a big game when it comes to saying they're going to resist the urge to offer a bunch of discounted rooms to online travel agencies like Expedia and Orbitz.

But at last glance, online agencies were selling about $10 billion worth of U.S. hotel rooms a year, and that's not likely to change anytime soon.

Still, that didn't stop hoteliers from preaching the idea of boosting room rates for the sake of financing hotel improvements. (In some cases those improvements will amount to a welcome bonus for the guest; in others, merely overdue maintenance.)

"I work for a madman," Charles Harris, vice president of marketing for Luxe Worldwide Hotels, said of his boss, Efrem Harkham, who decided to launch the company after being dissatisfied with the company that was managing his Los Angeles hotel. "He was promised certain rates, and he never got them. It's all about the rate."

Contact Danny King at dking@travelweekly.com and follow him on Twitter.  

A previous version of this column mistakenly identified Smith Travel Research Vice President of Global Business Development and Marketing Vail Brown as male.  

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