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For Luxury Hotels, The Question Becomes Not: If You Build It Will They Come? But: Can You Build It? Print E-mail

rushmore.jpg Interview with Stephen Rushmore
Luxury Travel 360 met with Stephen Rushmore, president and founder of HVS and a pioneering  expert on the valuation of hotels.  HVS  is a global company that has provided valuation services for more than 10,000  hotels in all 50 states and 60 countries. The company now offers consulting in  a broad range of hospitality areas – from executive search to interior design  to marketing. He had some dramatic things to say about the challenging  economics of luxury hotel development. 

 

LT360: What is the outlook for luxury hotel development in  the current economy? 

Rushmore: Developing any hotel is a question of economics. The rule of thumb has long  been that you need an average daily rate of $1 for every $1,000 invested in a  hotel. In other words, if you spend $500,000 per room, you should be able to  charge $500 a night. Until about 10 years ago it made economic sense to develop  a freestanding luxury hotel. Then because of increasing costs it became  necessary to add a residential component to make the economics work. 

 

LT360: Why is that? 

Rushmore: To compensate for the escalating cost of building a luxury hotel, you needed to  sell condo units upfront. 

 

LT360: Then why have the hotel at all? 

Rushmore: The five-star hotel brand will drive up the price of the condo. Take a condo  that might be able to sell at $2,000 a square foot; a branded hotel on the  property might make that $3,000. 

 

LT360: How does the current real estate crisis impact that equation?  

Rushmore: Now even the residential component of luxury hotel development has become an  unknown. How are we going to get these 5-star hotels to work economically? It  will be difficult to build true 5-star hotels until the residential component  comes back. 

 

LT360: Are there mitigating factors to that outlook? 

Rushmore: There is an ego factor that will offset some of these economic realities –  people simply want to build luxury hotels no matter the economics. Also, the  low value of the dollar and the low cost of capital will enable some projects  to be built. And there are companies like Tata, the Indian conglomerate that  wants its Taj hotels in major gateways and will pay what it takes to get them.  We are working on a hotel in downtown Manhattan that is costing  $2 million a room to build. 

 

LT360: What does all this mean for existing luxury hotels? 

Rushmore: For existing properties, the hotel industry offers an unbelievable opportunity. 

 

LT360: What about the many new luxury brands and luxury hotels that have been announced?  What is going to happen to them? 

Rushmore: A  lot of people want to build but they won’t get financing. We are working with a  developer in Seattle  with a great location who wants to build a Marriott. He went to 30 lenders and  got one deal; six months ago he would have gotten 15. 

 

LT360: Are resorts in a  different situation? 

Rushmore: Resorts are different. There is a higher cost in developing them,  but that  is offset by even more residential opportunities – such as timeshare. Also,  there are significant sources of revenue like spa, golf, and banquets and  weddings. 

 

LT360: Speaking of spa, they have become a key element in the luxury product. Are they  big moneymakers? 

Rushmore: They are necessary but the margin is only about 15 percent, which is eaten up  pretty quickly by taxes and other costs. But spas are more viable than room  service, which is a guaranteed money loser; and restaurants, which are usually  profitable only when they are leased to outside operators. 

 

LT360: What  will turn all of this around?  Rushmore: At some point – demand will become so strong it will become worthwhile to build  again. Emerging markets in India,  China and Russia will  also contributed to that turnaround.

 
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