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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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From the Editor

Family-Friends Front & Forward in Upscale Travel - A Conversation with Mary Gostelow
We began our recent report on ‘Family Travel Rising’ with the following:

“All the evidence -- whether you are looking at the Amex-Harrison Group study we reviewed in our last issue, or the Ipsos Mendelsohn Affluence Report completed in September, -- shows Family First when it comes to disposable dollars.
 
We believe family focus is going to be front of mind for a long time to come, long after the punishing economic climate has subsided.  Provider brands will be hard pressed to provide much more than kiddie or junior, or young adult activities. Smart travel agents will have to rise to higher levels of creativity and  performance on the family front to sustain customer loyalty and earn the benefits of word of mouth in the neighborhood.”

And last week we caught our favorite global traveler-editor-writer-commentator during a quiet moment at home in England, the home of The Gostelow Report. She shared these thoughts:

•  The hotel industry has been very slow to realize that this big expansion in family travel was going to happen. We’ve had “connecting rooms and you can put the kids next door”. They moved on to two swimming pools rather than one. One was kid friendly and one was not.  But we really haven’t had anything more than that.

•  We are seeing more and more bigger family groups. Operators are having a real challenge coping with such groups because it’s not a group per se, but they form their own groups. They want to be private. They want their own thing. .They tend to do their own excursions. They suddenly want a bus to take them all out. So it’s a real, real challenge. And so far the hotel industry has not realized this is happening. Now, it’s not only families. We’re also seeing more and more groups of friends traveling. And the hotel industry is not incentivizing enough – say a pair of DINKs come- Double-Income-No-Kids.  There’s no incentive to them at the moment to bring along two other friends or even four other friends. And there’s big potential on the marketing side there.

Who Is Mary Gostelow?

Everybody knows her, but her bio is worth repeating.


Mary Gostelow, president of Gostelow Travel: Hottest Hospitality News Worldwide, is an inveterate traveler on the road more than 300 days a year. She owns and publishes the definitive Gostelow Reports, monthly market intelligence briefings to the top levels of the hospitality industry.  She is the editor of KIWI's online Wow! Magazine, and also sends out a monthly update to top travel professionals worldwide.

At the same time, she is contributing editor to such publications as Elite Traveler, enRoute, Hotels and Le Magazine.

Voices & Views

Good News Anyone? Downcast Faces and Views at Fall AHLA

But Lux 360 Found a Brighter -and we think, Sensible Side-

 

From Harvey Chipkin’s report in the British online Hotel Report-a paid service from William Reed Business Media- http://www.wr-bi.co.uk/ - Reproduced here with publisher permission

At the first industry wide meeting following the fall financial meltdown and the recent presidential election, the consensus seemed to be that, yes, the industry faces a historically challenging situation that will last for awhile. But there was also a feeling that lodging is in a better position than other industries – and, happily, a few silver linings were perceived as well.
   

We’ve all heard the bad news over and over: global liquidity drought, drops in rate and occupancy, a dismal outlook for employment, and a possibly extended recession. But some leaders managed to find ways to take – if not a positive view -- at least a more nuanced one. Following are a few comments about why weeping and gnashing may not be the only appropriate attitudes.
   
Steve Joyce, who recently became CEO of Choice Hotels International, said he has been “the only optimistic person in the room at a number of events over the last few weeks.”  I strongly believe,” said Joyce, “that there is a paralysis factor and that you can’t base projections on two weeks of hysteria.”
   

“Forecasts in this environment,” he continued, “are entertaining but not much use.”

Other ‘smart marketer’ insights from Joyce, Mark Lomanno of Smith Travel Research; Peter Yesawich, CEO of The Y Partnership; Michael Kaufman, Chairman of National Restaurant Association; Patrick Ford, CEO of Lodging Econometrics; and Roger Thomas, Steve Wynn’s design guru for many years.

Market Research

The Rich Still Have Time to Read -- MMR 2008 Affluent Survey
Nat Ives, in Ad Age Online Sept 6, cites new data from Ipsos MMR which assures that well-off readers read print publications just as much now as they did 5 years ago.
Also, survey respondents making more than $100,000 annually said their average hours online had grown to 22.1 each week from 10.7, while the time they said they spent watching TV sunk to 18.6 hours from 23.7 in the 2003 survey.  Read the full Ives story at http://adage.com/mediaworks/article?article_id=130685. Lux 360 attended the client briefing this week and will provide additional perspective in our Sept. 30 issue, interviewing Ipsos MMR President Bob Shullman.

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