LH_LODGING HOSPITALITY EREPORT_ A Penton Media Property October 20, 2009 2-20 If you want to view this on the web go to: http://enews.penton.com/enews/lodginghospitality/v/61 FROM THE EDITORS --Boutiques Point to a Silver Lining By Ed Watkins It's been hard spotting the silver lining in this difficult period for the hospitality industry. But I may have found it last week at the inaugural Lifestyle/Boutique Hotel Development Conference at the Fontainebleau Hotel in Miami Beach. As you'll see when you read this edition of our eReport newsletter, speakers and attendees at the conference were nearly universal in their belief that boutique and lifestyle hotels may point the way out of the downturn. Boutique hotels, as several speakers remarked, are good investment vehicles when properly designed, positioned, marketed and perhaps most importantly, operated. They're often more expensive to build and operate than a plain-vanilla hotel, but as Cambean Hospitality founder Brian Scheinblum contended, the rewards can clearly outweigh the risks when done right. It was also heartening to see the large turnout for the event (about 275 people), including many developers and entrepreneurs seeking to get into the business for the first time. Sure, times are tough, but smart, creative and well-capitalized business people will respond when given the right opportunity. CHECKING IN --Boutique Business Still Buzzing By Eric Stoessel Maybe Richard Russo, the director of development for Morgans Hotel Group, best answered the question posed in the title of the opening general session of the inaugural Lifestyle/Boutique Hotel Development Conference held Tuesday at the Fontainebleau Hotel in Miami Beach. It was titled "Why Invest in a Boutique/Lifestyle Hotel?" and Russo explained there are three simple reasons: strong financial returns, investment diversity and ego. "These are fun hotels to own and to be in," Russo said. The panel of four, and really almost 250 counting the interactive and engaged audience, discussed, and at times, debated the challenges and opportunities in the growing boutique and lifestyle segments. Brian Scheinblum, the founder of locally based owner/operator Cambean Hospitality, said these hotels are often more expensive to design, build and operate. Yet, when done right, the reward can clearly outweigh the risk. Scheinblum's company owns and operates four small properties in South Beach, including Hotel Clifton, which will debut this fall. The Brilla Group was a recent all-cash buyer of the nearby luxury beachfront boutique hotel, the Raleigh. CEO David Brillembourg said although transactions have been at a standstill for quite a while, he's now seeing a bigger appetite to get back into the game. "It's a great time to buy cheap," he said. Even without private equity, deals and new construction are possible, said Bill Meyer, chairman of Meyer Jabara Hotels, although the terms have changed. "You need equity," he said. "And it's not 70/30 anymore or even 60/40, but you can do a 50/50 with regional banks, but, and this is a big but, personal guarantees are a must." The panel touched on a wide array of topics, from design and development to operations and marketing. Meyer at one point challenged Russo about Morgans' service philosophy and questioned the direction of the industry if more hotels followed its lead of not using nametags for employees or any signage for meetings. Russo explained most of Morgans' properties didn't have much meeting space and the company trained its staff to engage guests at all times so nametags weren't a necessity. Size can matter in the boutique business, the panel agreed. Scheinblum, whose Hotel Clifton (35 rooms) is aiming for LEED Gold status, said many things can be lost in translation at bigger properties. Cambean takes advantage of shared resources and staff at its properties, all within walking distance of each other, to provide the necessary personalized service while still remaining profitable. The sweet spot for Morgans, Russo said, was 150- to 300-room properties. Meyer said his definition of boutique was unique, generally small and usually independent, while lifestyle properties were experiential and often educational in some way. The panelists agreed the segments have evolved in recent years with the growth of brands like Starwood's W and the debut of other branded concepts. Lodging Hospitality produced the Lifestyle/Boutique Hotel Development Conference in affiliation with HVS. Six breakout sessions followed throughout the day and keynoter Cheryl Rowley, a leading interior designer in both the boutique and branded worlds, treated the audience to an inside look at the evolution of the segments from her perspective and start with Bill Kimpton. --Investors Still Bullish on Boutiques By Ed Watkins When the market to buy and build hotels returns to normalcy, the boutique and lifestyle segments may lead the way. That was one conclusion from a panel discussion during this week's Lifestyle/Boutique Hotel Development Conference at the Fontainebleau Hotel in Miami Beach. Lodging Hospitality sponsored the inaugural event in association with HVS Hotel Management. "It took a long time to get there, but investors now view boutique hotels more favorably than traditional hotels because they understand the profit potential of these properties," said Peter Greene, first vice president, investment properties for CBRE Hotels, during a panel discussion on exit strategies According to one hotelier on the panel, the boutique properties with the highest margins are those operated by their owners. "The infrastructure and overhead created by a management company or brand manager suppresses margins," said Neil Sazant, a principal of the family-owned Sagamore, a Miami Beach boutique. "When we switched from a management company to in-house management we were able to drop $1 million to the bottom line." His remarks carried caveats, however. Many boutiques are small properties, which are easier to operate, and while the absence of brand fees means sales & marketing costs can be lower, it's imperative that boutique properties employ aggressive sales teams. While boutiques may see a boom once the economy and credit markets turn, existing owners and those looking to develop today face extreme difficulties in securing financing. And since there have been very few transactions recently, it's very difficult to determine valuations for boutique or lifestyle hotels. Values won't improve, predicted Greene, until 2012, even though operating results should see an upturn next year Cap rates for the few boutique transactions consummated have soared in recent months, said the panelists. While cap rates were as low as four to six percent during the mid-decade boom, they're now hovering between nine and 11 percent. In all, the panel was bullish on the lifestyle and boutique segments and believes the industry will find a way to right itself. "Capitalism is such a strong system it won't allow trillions of dollars to go into the abyss," said Robert Kaplan, principal of Olympian Capital Group. "Many smart people are working today to create a mechanism to liquefy the real estate and hotel debt that's coming due in the next few years." --Rowley: Good Design Has Won By Eric Stoessel Cheryl Rowley quoted the movie Back to the Future, got emotional while reminiscing about Bill Kimpton and declared good design has prevailed during her keynote address at the inaugural Lifestyle/Boutique Hotel Development Conference. Rowley gave more than 250 attendees an inside look at the boutique hotel movement from her perspective. She had a bird's-eye view, beginning in the 1980s while working on legendary hotels with James Northcutt , then branching out on her own in 1986 and then working for Kimpton, who was widely heralded as one of the creators of the concept. Rowley talked about the '90s, when she designed the first Hotel Monaco and Palomar for Kimpton, when she felt like Marty McFly after the mad doctor tells him "Where we are going, we don't need roads." She was given a blank canvass and used it to advance the concept of emotional design in hotels, which she said was at the heart of the boutique movement that has grown through all facets of today's society, including the hotel industry where similar approaches are now being applied to lifestyle brands like Aloft, Element, Cambria Suites and NYLO. "Boutique hotels are doing better than the rest," Rowley told the crowd at the Fontainebleau Hotel in Miami Beach. "The design revolution has had a huge effect on hospitality. Good design has won; it's not a question of if it will come to your neighborhood, but when." For her, it started with work at the legendary Hotel Bel Air in Los Angeles and the iconic Hotel Hana-Maui, a luxury vacation retreat that lets "place speak for itself," she said of the ranch set in the lush tropical paradise of Maui. "It's a connection of people and place." "How do we define that feeling," she asked. "Well, you know the Kimpton slogan: 'Every hotel tells a story.' That slogan came from us." That philosophy continues to steer Rowley today, with her recent work -- EPIC in Miami and theWit Hotel in Chicago -- telling as detailed and as beautiful stories as any of her previous projects. She said design doesn't have to cost a lot, but it has to be smart and all about innovation. She concluded her presentation by urging the crowd to go boutique, as both an investor and as a guest. --Service Key to Boutique Vibe By Eric Stoessel If design is where a boutique or lifestyle property starts, service is often where it ends. Service is the critical infrastructure that gives a property its vibe and culture, according to panelists at last week's Lifestyle/Boutique Hotel Development Conference at the Fontainebleau in Miami Beach. "We're selling experiences, not rooms," said Raul Leal, president and a partner at Tecton Hospitality and Desires Hotels. "Design is the backdrop to vibe," said Phil Belke, Cambria Suites' senior director of brand management, "but the culture inside those four walls is the key." Paul O'Reilly, the president and CEO of Newport Harbor Corporation, explained it as "systemic anticipation, the anticipating of every guest need." Certainly that's the goal at any property, but it takes on an even greater significance at a boutique hotel where guests expect first-rate service, but with an attitude. Leal said that attitude must be intended, but not contrived. "Service with a soul," Leal said. Belke added that although training is critical, hiring for heart and soul is more important. "It's about being genuine, not scripted," he said. All the panelists agreed TripAdvisor was a tool that couldn't be overlooked when it comes to a property's service culture. It is just another set of metrics that operators need to understand, O'Reilly said. "You have to embrace TripAdvisor," he said. "You have to want to be No. 1. It comes down to learning from it and getting better." Lodging Hospitality produced the conference in association with HVS Hotel Management. --Financing Boutique Hotels a Challenge By Eric Stoessel Bob Sonnenblick, chairman of real estate development firm Sonnenblick-Del Rio LLC, said if you hit a homerun with a boutique project and it becomes the "hip" hotel, the results will be off the charts, but if you miss, it can be a costly mistake. Like with any segment in the lodging industry, the problem is finding the money to buy or build a hotel to take that chance. That was the consensus during a session titled "Who's Got Money: Sourcing Debt and Equity" at last week's Lifestyle/Boutique Hotel Development Conference in Miami Beach. "Traditional lenders just don't exist now," Sonnenblick said "And the bank's first word to you now is 'recourse.'" The panelists agreed, like in the opening general session, that you needed at least 50-percent equity to borrow and maybe as much as 60 percent. Josh Heiney, a senior associate with HVS Capital Corp, said boutique hotels can be financed, but you need a captive audience. Finding that, though, is the trick. Sonnenblick thought bigger branded hotels were easier to fund than boutiques, but Paul Adan, of Aguirre Newman America, said financing was almost impossible for any type of hotel. John Campo, president of his own architectural firm, said historic and new market tax credits are a great way to fill the equity gap and ideal for adaptive reuse projects common to boutique developments. He said he's currently involved in three projects and that these incentives can be complicated, but well worth the effort. "New market tax credits give clients a competitive advantage to high barrier markets," said Campo, who's based in New Orleans. "There's a lot of money left on the table. Everyone in New Orleans knows this, but not everywhere else." He cited an example showing historic tax credits could provide nearly 25 percent equity and a project taking advantage of both new market and historic incentives could add up to almost a 40-percent chunk of equity, meaning in either example, it could be the difference between breaking ground and being grounded. Transactions are also at a standstill: Moderator Jonas Niermann of Hospitality & Leisure Consulting, PricewaterhouseCoopers, said there have only been four hotel transactions in Miami Beach this year, for $186,940 per key, compared to eight at this time last year at $242,244 per key. Sonnenblick said there are billions of dollars on the sidelines waiting for foreclosures, but he expected another year of bloodshed before new deals got going again. He said his firm is buying land now and getting ready for "when the world will be all rosy in three years." Lodging Hospitality produced the conference in association with HVS Hotel Management. COMING UP IN... --The November Issue * ABVI Plays Ball A decade after its start, Americas Best Value Inn is still proving skeptics wrong and continuing to grow at a staggering pace * New Face of Lancaster Marriott at Penn Square and Lancaster County Convention Center is a seamless blend of old and new, public and private CHECKING OUT --Links to Stories from the Sept. 15 Issue Design & Decor Handbook: Lodging Hospitality's annual guide to everything design: easy-to-read charts highlighting vendors by product category, a directory of those companies as well as an in-depth listing of the top design firms focusing on the hospitality industry. http://lhonline.com/design/0909-design-decor-suppliers/ Stabilizing Force: Outrigger Enterprises helps support local growth in Waikiki with its massive mixed-use Beach Walk development. http://lhonline.com/development/realestate/outrigger_waikiki_beach_walk_0904/ ON THE ITINERARY --Upcoming Industry Events Oct. 21-23 International Hotel Conference Hilton Molino Stucky, Venice, Italy http://IHConference.com Oct. 22 Association of Hospitality Recruiting Executives Conference Acapulco Marina Pacifica, Long Beach, CA http://www.ahre.org Oct. 21-24 Best Western Annual Convention Phoenix http://www.bestwestern.com Nov. 3-5 JMBM'S Hotel Developers Conference Westin Diplomat Resort & Spa, Hollywood, FL http://www.jmbm.com Nov. 4-6 American Resort Development Association Fall Conference Fairmont Hotel, Washington, DC http://www.arda.org Nov. 7-10 AHLA Fall Conference Javits Center, New York http://www.ahla.com Nov. 7-10 International Hotel/Motel & Restaurant Show Javits Center, New York http://www.ihmrs.com Nov. 10-13 IHG Americas Investors and Leadership Conference Washington, DC http://www.ihg.com ABOUT THIS NEWSLETTER Thank you for reading the Lodging Hospitality eReport You are subscribed as #email#. You've received this e-newsletter for one of three reasons: 1) You signed up for it on one of our web sites. 2) You are a reader of Lodging Hospitality Magazine. 3) You are an attendee to the Strategic Conference on Hospitality Operations and Technology. Manage Your Subscription To subscribe: http://www.lhonline.com/newsletter.php To unsubscribe: http://email.lhonline.com/webforms/newsletter/unsub/?email=#email#&lid=#list_id#&mid=#message_id# To change your email address, unsubscribe your old email address, then re-subscribe with your new email address. Contact Information Subscription questions: http://www2.starrcorp.com/lhm/ Industry Update questions: Ed Watkins mailto:editor@lhonline.com Advertising/sponsorship opportunities: Gary Dietz mailto:gary.dietz@penton.com Penton Media, Inc. 1300 E. 9th Street Cleveland, OH 44114 Copyright 2009 Penton Media, Inc. All rights reserved.