The Chesapeake Point of View

Management Companies Bullish On Prospects For 2014

Management Companies Bullish On Prospects For 2014

January 03, 2014

It’s a common theme at hospitality gatherings: owners urging management companies to push rate. Certainly, aside from the profitability aspect, it’s easy to see why. Over the past couple of years, both guests and brands demanded renovations, meaning going into 2014, the market is filled with relatively attractive product at a time when historically low averages of competition are entering the field.
Nick Kellock, COO, Concord Hospitality Enterprises Company, a hotel management company based in Raleigh, NC, with 90 fullservice and upscale, select-service hotels throughout the U.S. and Canada, of which roughly two-thirds are through a third-party management agreement, noted that overall, we’ll continue to see steady growth “with most of the opportunity coming in the form of moving rates up, rather than occupancy.” Joe Smith, EVP of Greenbelt, MD-based Chesapeake Hospitality, which operates 25 hotels, agreed, adding that RevPAR is expected to increase 4-6%, primarily coming from rate.
“The economy continues to move forward, albeit probably not as fast as everyone wants,” Smith continues. “Because supply continues to pace below previous cycles, the hotel business seems to be doing great. As long as demand keeps pacing ahead, we’re very bullish on 2014 right into ’16.”
Of course, the outlook depends market by market. Tom Prins, partner, Gemstone Hotels & Resorts, LLC, which has a portfolio of 18 properties, primarily independent and boutique, noted that the company is bullish on its New York City and Los Angeles properties, but “we’re worried about Chicago as there’s a supply situation.” Prins noted that despite the fact that supply is historically low now, there will be supply issues in many markets soon enough. “It’s a little crazy when people can get financing again,” he said, calling it a rubber-band effect. “It’s a cycle, it happens, you deal with it, but it’s a concern.” He noted that supply affects RevPAR, which has a huge affect on rate.
For his part, Kellock contributed that Houston and parts of South Florida will continue to be strong, but “Washington, DC is a big question mark” with the industry looking for recovery
depending on government demand. “Any market with high government dependency is a little up in the air,” he said, “but generally we’ll see continued growth somewhere in the order of 5-7% revenue growth.”
With regard to the government, the Affordable Care Act (ACA) continues to be a big concern for management companies. “It won’t be a major impact in 2014, but it will be a potentially big impact in ’15 and ’16,” said Kellock. Smith added that it’s a big concern for owners and they’ve wanted to know what strategies management companies have for dealing with it. “We’ve looked at a couple of strategies, but the rules keep changing,” he said, alluding to the ever-changing deadlines and components of the law. “It’s hard to come up with the strategy when the playing field is different from day to day. It definitely has a opportunity to upset the apple cart.” Of course, Smith added, that’s the mark of a good management company: “You always have to be prepared to flex in case the wind blows a little.” Overall, the executives agreed that not much has changed in the way of owner expectations. “Bottom line, the owners want yield,” Prins said. “It’s a matter of really driving the bottom line and incorporating a very effective yield management systems.” Prins noted that there are certain aspects of operations that are out of the management companies’ control, so it’s important to fine tune and streamline to make sure the hotel is as efficient as possible.
Kellock said that operations are getting tougher because the economy isn’t an inflationary environment and there are continued pressures of cost escalation in this business. “There is new supply coming in, so we can’t be overly aggressive and on top of that, construction costs have been on the increase,” he said. “On the other hand, the interest rate environment is lower, so that’s a major mitigator.” With regard to supply, Kellock noted that Concord is building a number of hotels, so it’s important to focus on the basics: markets where there’s a need and barriers to entry are high. As a management company, there are two major ways to defend against encroaching supply on your street corner: “Keep up your standards, focus on the people you have in place and retain the best people; It’s very critical to stay ahead of the game when it comes to your own renovation plans,” Kellock said. “Don’t leave those longer than they should be left.”
Of course, new supply coming into the market also means increased opportunities for additional management contracts. “I’m booming,” Smith said, noting that his company recently took over two properties, a Hilton Garden Inn and a Hampton Inn, and he’s working on another eight deals. “What’s happening, on the third-party side, is two-and-a-half years after the financial crisis, if the hotel hasn’t been performing and you’re hearing we’re still getting over the crisis, owners are starting to say that national numbers don’t support that,” he said. “Maybe it’s time to change management.” Kellock noted that his company tries to be selective about what it goes after. “We like to work in situations where we really believe we can add value,” he said. “We’re not really minded to achieve growth just by adding contracts for contracts. “
All agreed that there’s still plenty of competition out there for management contracts. “The market is always competitive,” Smith noted, while Prins added that the benefits of being in such a niche segment is that Gemstone has some stability. “When people think independent, they come up with five or six names on the jump and we’re one of those,” he said.
Optimistic for the future, Kellock expanded on the key to success in 2014: “Do renovations where they’re applicable; continue to focus on attracting and retaining the best talent in all areas, but in sales in particular at the moment; and maximize the benefit of each of the brand relationships we have.”