Lunch & Learn - Hotel Industry & Hotel Development

CRE's picture
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Rank: The Pro | 43,581

Inspired by this post about warehouses, I want to start a series of threads in the WSO Real Estate forum that help educate other users about roles and product types they may not be familiar with. Think of it as a reverse AMA - essentially, a tell me/us anything. If this sucks, we don't have to do it again, but I thought it might be enlightening.

To kick things off, I'm interested in knowing more about the hotel world, both from a development and operational perspective. Outside of knowing how to calculate RevPAR and the ADR from graduate school, I genuinely don't know much about the product type or have any real experience in it. I'd love to hear from any hotel professionals here - people who build hotels, buy or sell hotels, or work for a hotel brand like Marriott or Hilton or IHG - on trends in their industry, main drivers, things they struggle with, how effective the "boutique" movement is with new sub-brands seemingly popping up every day, how effective or cost effective modular or other innovative construction types are, etc.

Comments (48)

Feb 13, 2020

By no means am I an expert, but in NYC there used to be a trend in the outer boroughs of building a hotel in pretty shit areas with the end goal of leasing it out the Department of Homeless Services. There's a cluster of three in Jamaica (Queens) within a couple blocks of each other. Not sure how true it is, but I've been told from multiple sources that the owners are getting leases with 100% occupancy from DHS. I'd love to see the financials on those. Curious if this or something similar happens elsewhere

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Feb 13, 2020

heard about this also. it's definitely a thing. you'd be surprised how many hotels in manhattan have rooms set aside just for the homeless to increase occupancy interested to learn how these deals get done as well.

Feb 14, 2020

It's absolutely a thing. The city is against building homeless shelters because of the local pushback. The law in NYC is that no one can be turned away for shelter, so the DHS sends them to these boutique hotels, costing the city millions of dollars a year. Very interesting market.

everyone's a liberal until they start making money

Feb 14, 2020

Another aspect is that NYC as a market is starting to become VERY over built. Occ is already trending downward and there is still a ridiculous amount of rooms in the pipeline.

Feb 14, 2020

Our few NYC hotels are getting crushed. If you saw the P&Ls you would barf.

Looking like a good 5 years before we see the market stabilizing.

Feb 13, 2020

I like the idea, I think it would be neat to pick out some weekly topics to keep this going.

Regarding hotels, my understanding of the CapX is that it's a hard 7 year rotation for higher end hotels, with a different style of buy and interiors than standard construction. Typically you'll have a GC that hires a multi-trade (paint/drywall/carpentry/flooring/plumbing) all-in-one that absolutely burns through the work. FF&E room flips, disposal, and deliveries are all bigger concerns than with normal renovations.

The work itself isn't by any means complex, but egress, entrance, and phasing coordination is extremely important. Existing conditions with mold and ACM can crush you if not taken into account, like multifamily but worse. Minimal project management but super heavy on the superintendents.

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Feb 13, 2020
Feb 13, 2020

great idea @cre. maybe do a monthly or bi-weekly topic to let everyone chime in and let the dust settle before moving on to the next topic if this works

Feb 13, 2020

Love the idea. It would be sweet if you could do these every so often.

Feb 13, 2020

I am currently in Hotels exclusively with a large institutional shop. Mainly AM work but do get to do some underwriting time to time.

I can go on and on so feel free to shoot any questions.

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Feb 13, 2020

What are the primary issues that you come across as an asset manager? I feel like in other product types, asset managers spend a lot of their time dealing with tenant issues and complaints, but in the hotel space I feel like tenants aren't around long enough to cause any problems.

Feb 13, 2020

I'm not a manger level but I am at the Associate level and do support our Directors. At my firm, we are the LP however, we are heavily involved in the assets.

Do AMs in say office actually deal with tenant complaints though? I feel that would be more Property Management. It is similar in Hotel as the property level staff will deal with those complaints from guests. If you're asking just in general, what the day to day is like, ...a lot of communication with the GM of the hotel, capex, dealing with the BS at the brand level, monthly meetings to review Operations, P&Ls, Cash flows, etc with the property or our JV partners, etc

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Feb 28, 2020

Agree with this. The AM team wouldn't necessarily even hear about tenant issues (unless it's recurring or extreme cases) and then their role would be to advise PM team - not to spearhead the communciation. I think capex, budgeting/CF forecasting and refis fall under the most important responsibilities of someone in asset management. Project management skills is also essential for a good asset manager (especially at leaner shops).

Feb 14, 2020

Not specifically relevant to the topic but I propose that we change the name to "watercooler conversations", unless @CRE is offering us sweaty handshakes and Panera Bread with these posts.

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Feb 14, 2020

I'm open to either name changes or sweaty handshakes. Really 50/50 on that.

Feb 15, 2020

+1. Dang you guys are getting Panera? I keep cutting the roof of my mouth on the same crusty sandwiches from Mangia catering.

Feb 14, 2020

i actually had this same idea a while back after reading one of @brosephstalin comments in this thread Here

The linked thread has a really great overview on how to look at hotels. There's also a link in that thread on how to look at Self Storage.

I'm going to try to use his format but do one for retail properties

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Feb 14, 2020

Just getting those links made this thread worth it.

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Most Helpful
Feb 14, 2020

Don't have time to do anything organized or comprehensive right now so here's my jumbled steam of conciousness. I am closing in on my first year in hotel development. I sit on the development team for a new luxury brand. We are super lean - just me and an equal counterpart that report to the SVP of global development who reports to CEO. We are responsible for tying up all developments globally (targeting 30+ in next 8 years), with several already in the pipe. To be clear, our role is to source deals by finding land for our development arm (we are owned by a top developer) or finding other developers with land/baked project that need a brand/operator. We sometimes marry the developer with our dev arm in a JV - very deal dependent. We target AAA locations for obvious reasons, which as you might imagine makes our job difficult but always keeps things interesting. I am relieved that I do not have to put out money now or the forseeable future. I already felt what a nightmare it was becoming when I left acquistions last year, and based on the recent forum sentiment, sounds like everyone else is feeling it too. The deal making I'm doing now is different and I'm learning a ton from this role. Getting great deal reps, learning every major market, understanding the details of the opps, getting dev experience from our dev arm (they sit right next to us) and international experience. I had no idea just how crazy hotel opps, especially luxury, were until I joined this team. Holy shit it's wild. So many things need to align and will still go wrong at every juncture, never a dull moment. I really enjoy the creative aspect this job brings - you really have to think about what components you need in a specific market/location, how to lay out the premises, what special features you need (i.e. rooftop scene, screening rooms, junkets, customized event spaces), how many suites we should have, what size should they be, how to program the F&B etc. Think this is enough for you guys to pull questions from, ask me whatver. / end verbal diarhea.

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Feb 15, 2020

If you have no hotel experience but want to be involved in hotel acquisitions/development post mba what would you suggest?

Mar 1, 2020

Not an easy jump. I would recommend what I did - got my current gig from networking my ass off (started with a cold email). Probably the only realstic way since you can't go back for another "mba reset" at this point. Perhaps you can lateral into a hotel group for whatever vertical/team you are currently working on (i.e. office AM to hotel AM then to dev/acq further down the line). Small jumps are easier and more achievable and allow you to get perspectives and experience on all sides of the deal over time.

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Feb 15, 2020

How do you go by deciding how much F&B to put in a hotel? Aren't the margins higher? Why don't more hotels have this? Any insight into how these work?

  • Investment Analyst in PE - Other
Feb 15, 2020

f&b size is typically a function of STR chain scale, number of rooms, overall strategy. F&B margins r not typically good/better, if u can hit 30%+ you're doing great, unless you're running like a Vegas or Miami type hotel bar that is pushing obscene amounts of booze.

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Mar 1, 2020

F&B and Spa margins are pretty thin. We usually end up around 20%, but we structure a third party operator (i.e. some top chef) running that show, which entitles them to 5-10% of the flow through (between management fees and profit share). If you have a union operation your margins can be as low as breakeven or 5%. So ideally not having F&B is great, but for luxury hotels you need to have it. This is why select service hotels usually have significantly higher GOP and NOI margins.

It highly depends on the location. You can't have too many venues, otherwise they will just cannabilize revenue from each other. So ideally you want to program the F&B outlets ina way that they complement each (for instance one specialty restaurant that does most of it,s business in the PM, a speakeasy that might only be open on the weekends, a small outdoor space that only serves brunch etc). That way you can share labor and make the operation more efficient while maximing the turns at each outlet. How you come up with the mix will depend highly on location, the overall design of the project (i.e. do you have poolside F&B, rooftop bar, patio area etc) and local preferences.

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Feb 17, 2020

You should re-post some of your comments from the other thread that was linked.

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Feb 15, 2020

Love this idea @CRE - I can contribute and breakdown the basics. I spent the first three years of my career in valuation and specialized in triple net leases and hotels.

Someone previously asked about hotel acquisitions and what are the basics they need to know which I covered in this thread separately: Hotel underwriting overview

Anyone who wants to learn I recommend starting there and I am happy to answer any questions thrown my way.

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  • Investment Analyst in PE - Other
Feb 15, 2020

Hotel Design, Planning and Development
Book by Lawrence Adams, Richard H. Penner, and Walter A. Rutes

If you want to do hotel development or investment read this textbook. It has pretty much all the info you need. Absolutely probably the most informative and info packed textbook I've ever seen. Combine this with a CHIA certification class and you'll be golden. (The certification is worthless but knowing how to read str reports and other relevant info from the course is prime info for someone who hasn't work in hotels)

Feb 17, 2020

Love that you posted a book. Really appreciate that.

  • Investment Analyst in PE - Other
Feb 18, 2020

Can't tell if this this is sarcasm, but this is legitimately the most informative thing you could possibly use, besides working in hotels or spending a significant amount of time with someone who works in hotels, so thought somebody could find it useful to know about this.

Funniest
Feb 18, 2020

Hah 100% genuine.
I ordered it off Amazon.
https://www.amazon.com/gp/product/0393733858/ref=p...

Not sure how to sound non-sarcastic on the internet I suppose.

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Feb 18, 2020

From a construction perspective:

Hotels are not too different from multifamily but have some nuances. I've worked on estimating roughly $250MM in hotels and on site for a $70MM hotel. My experience is limited, I just happen to work in an expensive area. Well not anymore, I switched to tech. But anyway..

Hotel brands have a lot of control, but don't hold all the cards. There's normally guidelines for flags (aka brands, ex. Marriott) to dictate the design intent, especially as it pertains to rooms. Experienced developers can push back and add their own flair or spin to things, but this is a give and take that can be nuanced. This holds even more true for operations, as one would expect.

Hotels can have unexpected costs that should be caught ahead of time. Ice machines are unusually important but necessary (these can add up in cost quite a bit). Flag poles, coiling doors, gates, running beer tap lines, a lot of little things. Think of it like planning a wedding, it really is death by a million (dollar bill) paper cuts.

Hotels can really vary a lot in terms of pricing. There's not a general rule of thumb unless it's a standard Marriott Courtyard with all the normal, boring features and soulless carpet and LVT. Air conditioning can change. PTACs are cheap shit. You can get some advanced systems for your Four Seasons. Your GC should give you feedback if they're half decent.

Millwork is annoying and best to get out of the way. As the developer, don't let your interior designer get custom sized cabinets for every room. That makes you have to have custom sized appliances, furniture, all that. It quickly adds up well into the 7 figures.

Account for a training period when projecting cash flows and loan payoffs. There's a few weeks to a month from TCO to when you can have "heads on beds" for certain flags. Marriott does not allow training to begin until you get TCO, for example.

There's a lot of marketing to be done in advance, especially if your F&B operation will become your saving grace for those cash flow projections. Open your stuff before the dead period. Sort of like student housing opening before the semester begins.

F&B can be huge. I know of a prominent newer hotel in LA that generates nearly 50% of profits (not revenue) from F&B (nightclub included in that figure).

If I think of more I'll add it. Feel free to ask any questions anyone. I took some hotel courses in college, have lots of friends in hospitality, am good friends with a hotel developer, and briefly worked building/ estimating hotels.

"The three most harmful addictions are heroin, carbohydrates, and a monthly salary." - Nassim Taleb

Previously Malta Monkey

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Mar 3, 2020

Do you mind name dropping the newer Hotel in LA? Interested to hear your response.

Array

Mar 3, 2020

Hmm if it has a nightclub included, it has to be the Edition in West Hollywood

Unless he is talking about some place that has a venue that is not a night club.

  • Prospect in IB-M&A
Feb 18, 2020

Where's the lunch? I'm hungry :(

Feb 21, 2020

How's the Cornell Hotel School certs? Are they worth the time?

Also would like to know the future for hotels.

Feb 29, 2020

I'm curious to those working in hotel acquisitions/asset management/dev if they recommend entering the space or doing multifamily instead at this time.

Feb 29, 2020

I work in the space. It comes down to your interests. Purely from an economic standpoint? Of course multi family. It's the most stable asset class. Hotels obviously are most impacted by a downturn but I find them the most interesting asset class which is why I entered the space. I personally find multi family boring but that is just me.

Feb 29, 2020
Comment
Feb 29, 2020