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The Economy Is Back, And So Are Hotel PIPs

That three-letter acronym many hotel owners loathe to hear, PIP, or property improvement plan, has come out of hibernation. With the net operating income of the average U.S. hotel expected to rise 10.9% this year, according to PKF Hospitality Research, the major brands are exerting more pressure on hotel owners to complete PIPs.

More often than not, renovations were put on hold in 2009 and 2010 as the industry weathered the Great Recession by doubling down on expense control. Now that the economy is showing sustained, albeit modest growth, hoteliers must deal with issues like deferred maintenance.

The re-emergence of PIPs was a hot topic of discussion during the 23rd Hunter Hotel Investment Conference in downtown Atlanta early this week. The two-day conference at the Marriott Marquis drew several hundred attendees, including owners, operators, lenders, and service providers from across the Southeast.

“It amazes me that an owner of a $15 million, $25 million, or $30 million asset doesn’t understand that in order to maintain the value of that asset, they need to reinvest and improve the property constantly,” said Nancy Johnson, executive vice president of business development for Carlson Hotels Worldwide, during a panel focusing on leadership and experience. A privately held firm based in Minnetonka, Minn., Carlson’s portfolio of brands includes Radisson, Country Inns & Suites, Park Inn and Park Plaza.

In an effort to accommodate financially strapped owners during the past few years, Carlson opted to “put off” PIPs as long as the delay didn’t affect safety, security or the customer experience. But that window of leniency is closing because of improving market conditions.

The customers are driving the need for improved amenities, Johnson emphasized. For example, most guests today simply assume their room will include a flat-screen TV. “When you walk into a hotel room that doesn’t have a flat-screen TV, I’m sure you say, ‘What the heck is this?’ It’s a boat anchor. Get rid of it.’”

And Johnson offered this practical advice for hotel owners. “You have to make sure that you are not dating your property by the colors that are still on it. I mean mauve and green are out.”

Not standing still
A brand is only as good as its weakest link, observes Liam Brown,COO of select service and extended-stay hotels in the Americas for Marriott International. The obligation of the brand owner, he believes, is to make sure that standards are met. “We did work with owners in 2009 and 2010, but at the end of the day you have to look at the condition of the property, its competitive threats. Is it accretive to brand equity, or dilutive to brand equity? And you need to work with the owner to get the PIP done, the right renovation done.”

A publicly traded company, Bethesda, Md.-based Marriott is not remaining idle. More than 270 Courtyard by Marriott hotels sport a new lobby design as part of the chain’s “Refreshing Business” concept that it started rolling out a few years ago. Flexible seating options range from a communal table for larger group interactions, to more private media booths with high-definition televisions, as well as a more intimate, semi-enclosed lounge area.

Nearly 300 more Courtyard by Marriott hotels will undergo an upgrade by the end of the year, Brown projects. “We’ll have about 560 done by year-end, so that’s nearly 70% of the brand. We’ve seen great results in guest satisfaction.”

Revenue per available room (RevPAR) at comparable Courtyard by Marriott properties in North America for the 16-week period ending Dec. 31, 2010 was 7.1% higher than the same period a year ago.

Jim O’Shaughnessy, senior vice president of acquisitions and development for Cornerstone Real Estate Advisers in Hartford, Conn., said owners have every right to questionsome of the brand-related requirements. “Just like anything else, a brand leader can sometimes make a mistake, or get bad data, or interpret that data improperly.”

O’Shaughnessy recalls the time a brand manager wanted to convert all tubs to showers in king rooms of a certain hotel. Such a move could drive up costs significantly, depending on the total number of rooms or hotels within the portfolio ultimately affected, he said.

That situation illustrates the need for a discussion between the brand manager and owner in which some important questions are addressed, said O’Shaughnessy.“What’s the value-add? What’s the customer perception? What’s kind of a ‘nice to have’ that is going to help your brand, but maybe isn’t bringing as much of a ROI (return on investment).”

Enforcement of property improvement plans should help fuel transaction activity, said Naveen Kakarla, president and CEO of Philadelphia-based Hersha Hospitality Management. That’s because some special servicers and holders of assets are being asked to put more capital into their properties rather than just cover operating expenses. It’s capital they don’t have, explained Kakarla.

“This year we’ll have a lot of those very difficult and painful discussions. This brand unity around Capex (capital expenditures) is going to drive a lot of unintended and intended behaviors to watch this year.”

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