In 1997, Sebastian Junger published his book "The Perfect Storm," recounting the Halloween nor'easter that struck much of the East Coast in the fall of 1991.
During the past few years, though, that phrase could just as well apply to a U.S. lodging industry marked by a travel-spending decline and rebound as well as a spate of hotel acquisitions. And while the winds of this storm aren't literal, many hotel flags have been blown over in the process.
Last year, the number of U.S. hotels that were reflagged spiked more than 35% from 2010 and 2009 levels, and the reasons ran the gamut.
U.K.-based hotel giant InterContinental Hotels Group (IHG) reflected the hangover from the Great Recession by announcing in September 2011 that about 10% of its nearly 400 upscale Crowne Plaza hotels would be deflagged for not meeting certain standards.
Best Western International hinted at the travel-spending recovery early last year by announcing that about 800 North American hotels would eventually be upgraded out of the midscale brand into the Best Western Plus upper-midscale delineation.
And Hyatt Hotels and Resorts reflected the effects of an increasingly active acquisition market with plans to rebrand all 20 of the Hotel Sierra and Avia properties it acquired from LodgeWorks last year for $660 million.
"As the economy improved, hoteliers have stabilized their occupancy rates and are recognizing the opportunity to increase room rates," said Scott Smith, senior vice president of hotel industry research firm PKF. "If they're able to renovate and reflag, they can be in a much better position."
Last year, 2,436 U.S. hotels were reflagged in some form, according to Smith Travel Research (STR). While that accounted for less than 5% of the approximately 50,000 hotels in the U.S., it marked a 39% jump from 2010's reflagging rate and a 42% increase from the number of U.S. hotels reflagged in 2009. Overall, since the beginning of 2009, about 7,100 U.S. hotels have been reflagged, amounting to about one in every seven properties. (Click on the image, left, for a view of total U.S. hotel reflaggings, by property count, 2009-2012.)
The recent increase reflects a U.S. lodging market roiled by a combination of the largest economic downturn to hit the U.S. since the Great Depression and its ensuing rebound as well as an abnormally active acquisitions market last year. U.S. occupancy, which reached a high of 62.8% in 2007, cratered to 54.6% by 2009, when revenue per available room (RevPAR) plunged 16.7% from a year earlier, according to PricewaterhouseCoopers (PwC).
"During the heyday of 2005 and 2006, when business was screaming, there were a lot of owners who didn't have the time or inclination to renovate, but they were still able to drive rates and occupancy, and they were happy," said Rob Palleschi, global head of Hilton Worldwide's DoubleTree by Hilton brand. "When the market collapsed and the world imploded, those owners found themselves sitting on assets that were tired and with not enough money to invest in those properties. So you had a vicious cycle."
Since then, occupancy has rebounded to what PwC predicted in August will add up to a 61.5% rate this year, with RevPAR forecasted to rise 7.2% in 2012 and 5.6% next year.
And franchisers who had given owners a free pass of sorts by letting them delay property improvements during the economic downturn have been getting antsy.
"Brands had been very patient and understanding about capital expenditures and how owners' profits have been affected by the recession and industry performance," said Bjorn Hanson, divisional dean of New York University's school of tourism and hospitality management. "That patience has come to an end. So many brands are terminating or not renewing agreements."
The reflaggings might also reflect a "rich-getting-richer, poor-getting-poorer" scenario in the U.S. lodging industry during the past few years. On one side, the economic downturn caused many operators to delay spending -- or neglect to spend -- the 3% to 6% of revenue hoteliers typically invest annually in capital improvements such as paint, roofs and flooring. As a result, many cash-strapped operators of midscale and economy hotels either dropped their flags or were dropped by franchisers that decided to begin enforcing certain requirements in their branding agreements.
Meanwhile, many properties that had been acquired by real estate investment trusts (REITs) and private equity firms since last year have been bumped upmarket by new owners looking to get the best returns on their investments by improving furnishings and boosting prices as travel demand returns.
As a result, the midscale sector, which includes brands such as Ramada Inn and the nonimproved Best Western hotels, lost the largest number of reflagged properties --more than 800 -- since 2009, while 407 hotels were deflagged altogether and became independent, according to STR data.
"During the last couple of years, you've had a lot of brands clean up and enforce brand standards," said Duane Vinson, STR's vice president of database content and integrity. "Companies took a close look at what there was in their portfolio, and a lot of hotels lost flags."
Meanwhile, the upper-midscale sector, which includes Holiday Inn and Hampton Inn, gained 164 hotels through reflaggings, while the upper-upscale and upscale sectors increased their property count by 76 and 44, respectively. (Click on the image, left, for a view of net changes in U.S. hotel property reflaggings by sector.)
"If you look at what was considered a typical midscale hotel 10 years ago and you look at it now, it's very different," Vinson said. "That product has improved so much. Holiday Inn and Hampton Inn are two brands that have put a significant amount of time, effort and money [into] improving what those brands are. And [Marriott International's] Residence Inn and Courtyard continue to be very aggressive with their growth numbers, as well."
Meanwhile, hotel companies looking to boost royalty fees will expand newer brands by approaching hotel developers that have existing relationships with the parent brand with financial incentives to encourage either a newbuild or reflag, predicted Leslie Ng, chief investment officer at Interstate Hotels & Resorts.
"The game for these brands is to try to hit critical mass when they can," said Ng, whose company is the world's largest operator of the "Big Five" hotel branding companies: Marriott, Hilton, Starwood Hotels & Resorts, IHG and Hyatt.
On the other hand, IHG is taking a less-is-more approach with Crowne Plaza, which was launched in 1983 as a Holiday Inn offshoot. IHG said last year that it was looking to move that brand upmarket into the upper-upscale sector by deflagging underperforming properties that were neglected during the economic downturn.
Through the end of June, IHG had deflagged 16 Crowne Plaza hotels for not meeting standards related to "product quality and consistency," according to the company. Another 25 flags will be pulled as IHG looks to go upmarket in the U.S. while expanding the brand in regions such as China.
Meanwhile, much of the reflagging was caused by a spate of new REIT owners and private equity firms looking to get the best return on their investments. Last year, the Americas region accounted for $15.4 billion in hotel sales, marking a 24% jump from 2010 and the highest total in four years, according to Jones Lang LaSalle Hotels. New York alone accounted for $3.5 billion worth of hotel sales, more than double year-earlier figures for the city.
The new owners are banking on the combination of a continued rebound in travel spending and limited new hotel inventory, which STR forecasts will grow only about 1% this year.
"There's a lot of capital going into the hospitality industry right now, and as transaction activity picks up, rebranding follows," Ng said. "New owners are always trying to find a way to improve the value of an asset, and rebranding is one of the easiest. The impact can be pretty quick and immediate."
Hyatt is a prime example. The hotelier, which went public in late 2009, bought 20 hotels from LodgeWorks as part of an effort to expand Hyatt's Andaz badge while launching its Hyatt House limited-service brand. Hyatt has since converted the 15 Hotel Sierra properties to Hyatt House hotels. That's in addition to the 38 Hyatt Summerfield Suites that have been reflagged. Of the remaining five hotels in the LodgeWorks portfolio, two were converted to Andaz properties while three were rebranded under Hyatt's flagship badge. (Click on the image, left, for a view of the largest U.S. hotel brands, by 2011 room count.)
How quickly reflaggings pay off for hotel operators depends on the brand, sector market and, especially, the scale of the renovations needed to get the property up to the new brand's standards. While a basic upgrade for a budget hotel can run as little as $5,000 per room, hotels being reflagged to upper-upscale brands, such as Starwood's Sheraton badge or the flagship Marriott, Hyatt and Hilton brands, will often spend 10 times that amount, according to PKF's Smith.
Ng pegged the typical cost of renovating a reflagged full-service hotel at between $20,000 and $30,000 per room, while a reflagged select-service property usually requires between $15,000 to $20,000 per room.
So with the average size of a U.S. luxury and upper-upscale hotel topping 350 rooms, a hotel owner can sink $10 million to $15 million into upgrading a full-service hotel to meet the new brand's standards.
Additionally, an independent hotel that moves under a chain's umbrella has to take on new, recurring fees to keep a flag. And those contracts typically run from seven to 10 years. While fees vary, depending on services provided and whether profitability levels are tied into the agreement, Ng said that branding costs, including fees related to royalties, reservations and marketing, usually total between 9% and 10% of revenue for upscale hotels. And that doesn't include the 3% management fee typically charged by a hotel company that takes over operations in addition to planting its flag.
That means a 350-room upscale hotel that generates about $15 million a year in sales could have about $1.5 million in annual branding fees, not including management.
Whatever those fees are, DoubleTree's Palleschi said they usually more than pay for themselves. Palleschi, whose Hilton-owned brand has boosted its U.S. property count from about 150 in 2007 to 260 now and which is adding about 25 U.S. flags per year, said the flag can bring an underperforming hotel's occupancy rate up to a level on par with the competition in a particular market within three or four months, with RevPAR reaching what's known within the industry as "fair share" in six to nine months.
What's more, the rising tide of travel spending, combined with low interest rates, can make the investment all the more worthwhile. In August, both PKF Hospitality and PwC boosted their 2012 RevPAR forecasts because of stronger-than-expected demand from businesses and higher-end leisure travelers, and PKF forecasts that 2012 will mark an all-time high for occupied hotel rooms in the U.S., beating the 2007 record by about 5%.
And much of those RevPAR increases are coming in the form of higher room rates, which translate into a better bottom line for hoteliers. PwC said room rates will advance about 5% both this year and next.
PKF had room supply increasing just 0.4% this year, meaning that investors looking to benefit from the travel-spending rebound have a far better chance of buying and reflagging a hotel than of building one.
"People are just starting to travel again," Palleschi said. "It's a good time to buy a hotel that needs some love and bring a new brand to the table."
For hotel and hospitality news, follow Danny King on Twitter @dktravelweekly.