Hotels Grow Premium Product Stateside

<B> Hotels Grow Premium Product Stateside</B>

By Maria P. Vallejo

After a brief hiatus that had first class hotel development focused more on overseas destinations than domestic ones, deluxe hotels are turning their sights back to the United States.

The faltering Asian economy, along with improved national occupancy levels and rising rates, has refocussed interest by U.S. hoteliers in expanding their domestic portfolios.

"People who were forced to grow their companies and their chains overseas are looking back to the U.S.," said Robert Mandelbaum, PKF Consulting's vice president and director of research in Atlanta.

Deluxe hotel companies, including Fairmont, Four Seasons, Mandarin Oriental, Peninsula Group, Ritz-Carlton, Rosewood and the Sheraton Luxury Collection, report increased demand for their products in the United States and some are considering opening new properties nationally. Analysts predicted that the slow, visible shift from international to national development is a prelude to a stronger, more concentrated trend in 1999 and 2000.

This year's national supply of luxury hotels is expected to increase by 3.3 percent from last year, according to Coopers & Lybrand's Annual Wrap-Up and Forecast report. In 1999, a 2.8 percent increase in supply is expected over this year. And by the end of 1999, about 517,900 luxury hotels will be open in the United States, a 6 percent increase over the 487,900 hotels open today.

This will be a change of pace for luxury hoteliers who witnessed a decline in demand during a difficult economic period, resulting in stagnant U.S. development in the early 1990s. Development in the hotel industry was virtually at a standstill during that time, until economy and midprice hotels began to lead an expansion in the industry. While the domestic deluxe markets remained dormant during that period, a growing interest in international development began to take form.

"During that interim, those looking to do luxury development looked overseas because that's where luxury hotels were the norm, particularly in Asia," Mandelbaum said. "There's certainly pent up demand because we've gone through this long period of several years with little competition. There comes a time when sufficient demand and pricing in that segment gets to a point when it can support that type of growth."

Ritz-Carlton, based in Atlanta, is looking to expand its U.S. portfolio by six hotels by the year 2000. It is concentrating its efforts on finding properties in New York City and Houston, as well as Florida, Texas and Arizona. Hotels in Mexico, Las Vegas and "another resort location" will open in late 1999, while the remaining hotels will open by 2000.

"We're aggressively looking," said Ritz-Carlton vice president of marketing Jim Schultenover. "Actually, there is more than one opportunity depending on what combination comes to fruition."

Less than a year ago, Asia still was considered a virtual gold mine. Guests in Asian hotels were willing to pay a higher premium for luxury accommodations than those in the United States. Hotels began furiously building in major cities like Hong Kong, Kuala Lumpur and Shanghai. But the continent's crumbling economy at least temporarily has drawn away some hotel development efforts and helped rejuvenate interest in U.S. luxury hotel growth.

"There has been a fair amount of construction in Asia in recent years. Now we're in a situation where people are scared to put another penny in the Pacific Rim in terms of currency and economies themselves," said Jon Rohs, managing director at New York-based Schroder Capital Management. "Investment in a very attractive market like the United States is a far easier decision to make than to put that dollar in Asia, which is in a state of turmoil right now."

Hotels in the area are experiencing low occupancy and price wars are beginning to break out. Although international travelers are still coming, Asian guests are less likely to stay at five-star hotels. Also, the past rush of development has brought the continent to the edge of overbuilding. "It's affected our hotels that operated our business," said David Crowl, vice president of sales for Toronto-based Four Seasons Hotels. "We have seen a considerable negative impact on our business there."

With no current plans for new development in the United States, Crowl said Four Seasons may look into San Francisco because of its previous holding in that market. Four Season does plans to open new resort hotels in southern California and Scottsdale, Ariz. Last year, it opened the Grand Hotel in Atlanta. Crowl said the majority of this new interest stems from a period of developmental hibernation caused by the recession. This prelude to a trend will help balance the scales.

Aside from headline economic problems, expectations of sustained occupancy and rising room rates in major U.S. cities pointed to new opportunities for luxury hotel development, hoteliers said. Industry-wide occupancy rates will remain at 73.9 percent, matching last year's figures, according to PKF Consulting's State of the Hotel Industry report. Average domestic room rates are projected to reach $112.39 this year, following record-high room rates in 1997 in New York and other major business destinations.

The luxury segment's average daily rate is projected to increase by 11.3 percent between 1997 and 1999, based on New York-based Coopers & Lybrand's data.

At the Peninsula New York, general manager Nicklaus Leuenberger said the hotel's 1997 average daily room rate exceeded $400, up 13 percent from the $355 average in 1996. "Ninety-seven was a blockbuster year for the industry," he said. "We had record average rates. This is what it takes to get new luxury hotels growing. It seems the market is ready to take more."

The Peninsula New York is undergoing renovations to add new technological amenities benefiting the business traveler, such as hands-free bathroom telephones, bedside panels and thermostats. The same technology renovations eventually are expected to reach all Peninsula hotels.

Although no formal plans are set for new U.S. development by Hong Kong-based Peninsula, should an opportunity arise to develop a hotel in San Francisco, the hotel company strongly will consider the property, according to Michael Hoffmann, general manager of Peninsula Quail Lodge in Carmel.

It is not alone. Major business destinations and resort locations, especially those on the East and West Coasts, will experience the greatest growth in luxury hotel development, analysts said. Developers and hoteliers will concentrate their efforts in particular on New York and Los Angeles, which report 10 percent higher average room rates than the rest of the nation, Mandelbaum said.

"Luxury only works in gateway cities or key financial cities in the United States," Grand Bay Hotels president Jerry Thoele said. "We presently have projects under consideration in all the gateway cities."

Grand Bay Hotels, part of Wyndham's Luxury Division, will open hotels through office building conversions in New York City and Philadelphia, in late 1999 to mid-2000. "This is the best cycle we've had in the hospitality industry and the U.S. economy," Thoele said. "It's only natural that luxury hotel development start up. The economy is hot and people appreciate service, and that's what we give."

Grand Bay Hotels also will open a new luxury property on North Michigan Avenue in Chicago. The new construction project, scheduled for opening in the spring of 2000, is part of the North Bridge Development project that will include retail stores and DisneyQuest, an interactive Disney theme park.

Given limited property space and the success of current businesses in key regions, most hotel companies are expected to convert existing office building and hotels. Conversion projects take about 12 to 18 months to open, while new construction can take years.

Hoteliers say these new properties, which some might expect to super-saturate the prime markets, will only feed the demand that already exists. Andy Anderson, vice president of development for Dallas-based Rosewood, said the shortage of luxury hotels in key business destinations will offset any new building or conversions taking place presently and in the near future. Rosewood is focusing on building or acquiring new hotels in Chicago, Dallas, New York and San Francisco.

ITT Sheraton Luxury Collection, although waiting for approval from new owner Starwood Hotels and Resorts, plans to continue its trend of growing in "strategic areas of capital cities" internationally, including the United States, according to vice president of sales and marketing Doug Mackenzie.

The Luxury Collection plans to continue to search for new U.S. properties, but does not anticipate any formal decisions until the completion of its acquisition by Starwood, said David Van Kalsbeek, New York-based ITT Corp.'s senior vice president of marketing and strategic planning. "We're always looking for new opportunities for the United States," he said. "We're certainly looking to grow strategically. Barry Sternlicht will play a very major role in the future of the Luxury Collection in the United States and around the world."

Hotels may open in strategic business locations, but some consultants said they only will affect a small segment of business travelers. Travel managers will hunt for the most cost-efficient deals even in an era of high occupancy and limited availability, said Carol Salcito, president of Management Alternatives Inc. in Stamford, Conn. "Corporations are trying to find any property they can sleep in, and when they find a property, they are trying to find the best rate," she said. "There are still some corporations that have a certain level of employees that require luxury products, but that's not the norm."

As the U.S.-based luxury hotel companies take a second look at the national marketplace, some Asia-based luxury hospitality companies are continuing efforts in their homeland. Peninsula Hotel Group will open hotels in Bangkok, Thailand, in November and Jakarta, Indonesia, next year. Mandarin Oriental also will continue to expand in Asia.