Luxury hotels roll out the red carpet for guests -- and ring in the profits.
h those luxury destinations: New York, London,
Cairo ... and Indianapolis?
Yes, according to Hilton Hotels Corp., which just opened the $100
million, 243-room Conrad Indianapolis, the newest addition to its luxury brand.
Or, what about checking into the Four Seasons in East Palo Alto, Calif.?
Or the Ritz-Carlton in Charlotte, N.C., or Denver? And what U.S. city
epitomizes luxury more than St. Louis? Las Vegas-based Pinnacle Entertainment
is bringing Sin City to the Gateway City with a $400 million development that
includes a 200-room Four Seasons hotel, luxury condominiums, a casino, and a
Together these projects represent the current confluence of high-end
hospitality trends. The time is right, because luxury is the new American
standard, according to marketing experts. In the hospitality industry,
lower-tier chains are adding spas and chef-branded restaurants while upgrading to
plusher mattresses and plasma TVs. But the flags already competing at the upper
echelon are looking for new ways to differentiate themselves, and one method is
to promote service and the experience of luxury in new places. While most of
these new locations are international markets, U.S. cities with enough money
and moxie sometimes can land a five-star brand to boost their hospitality
offerings to the next level.
At the same time, luxury hospitality brands are diversifying into
condominium development, time shares, and global locations. Fueled by investor
money from real estate investment trusts and private equity groups, luxury
brands are pushing international development in China in advance of the Summer
2008 Olympics, as well as in other areas with favorable economic outlooks, such
as India, Southeast Asia, Eastern Europe, and the Middle East. Increasing local
tourism in those areas, as well as interest from Western business and leisure
travelers, and a lack of standardized luxury product are all driving
international expansion plans.
hoto caption:Private residence and destination clubs such as this resort in Cabo San Lucas, Mexico, account for an increasingly larger share of the luxury lodging dollar.
photo credit: Exclusive Resorts
Movin' on Up
While not frequent enough to be considered a trend, luxury brand hotels
cropping up in secondary markets offer insight into how local developers and
investors are filling an evolving niche. The fact that top luxury brands now
see themselves as operating companies concerned with the management rather than
ownership of properties has smoothed the entry path into secondary markets. The
popularity of combining luxury condos with hotel properties also has made it easier
for local developers to obtain financing. And in some cases, local governments
offer support to make these deals happen.
Old-fashioned boosterism played a major role in bringing the luxury
Conrad brand to Indianapolis as this dynamic market looked for ways to heighten
its profile among business and leisure travelers. Local investment group Circle
Block Partners LLC developed and owns the newly built property, which opened in
March. The company, along with the mayor's office, wooed Hilton Hotels by offering
$8 million in property tax incentives and $24 million in public financial
support to franchise the hotel as one of Hilton's top luxury brands. The
property is only one of four U.S. Conrad hotels while the other 16 hotels are
The Conrad Indianapolis includes a spa and fine restaurant as well as 15
condo residences on the top floor. It is located adjacent to the city's
Artsgarden and Circle Centre Mall and skyways link it to the convention center.
Indianapolis, which began its downtown revival in 1995 with the mall creation,
is the nation's 12th largest city and host to national events such as the
Luxury forays into other secondary markets also include local investors
and developers. A Denver hotel development group has bought an existing
367-room Embassy Suites hotel and is spending $75 million to convert it into a
Carlton with 23 private residences. Also in the works is the
construction of a new 230-room Four Seasons Hotel with 140 private residences that
is being developed by the locally based owners of the Hotel Teatro, a 111-room
luxury boutique hotel across the street from the Denver Arts Center.
In Charlotte, corporate resident Bank of America is building North
Carolina's first Ritz-Carlton as part of its new corporate center. The
financing giant had to obtain permission from federal bank regulators to
proceed with the project, as banks are not permitted to own property. The
office of the comptroller agreed to the development after Bank of America said
it would use 50 percent of the rooms for lodging employees and visitors to the
bank's corporate campus - much to the dismay of the National Association of
Realtors and other organizations that are fighting against bank ownership of
real estate. Bank of America will own the 150-room $60 million property while
Carlton will manage it. The property is expected to open in 2008.
The Four Seasons Silicon Valley Hotel is located on what used to be
known as Whiskey Gulch, a seedy strip of liquor stores in East Palo Alto,
Calif., just north of Silicon Valley. The centerpiece of a local redevelopment
effort started in 1999 before the tech bust, the hotel broke ground in 2003 and
finally opened in January. Again, the developers were a local group of investors
who, along with the hotel, developed a three-building 451,000-sf class A office
complex with about 15,000 sf of retail space adjacent to the hotel. Last year
Wells Real Estate Funds bought the office property for more than $290 million,
or around $650 per square foot, the highest office price Silicon Valley has
seen since 2000.
St. Louis also is priming for a luxury-class Four Seasons Hotel through
Pinnacle Entertainment's redevelopment of LaClede's Landing at the foot of the
Gateway Arch. The project will include a $25 million 10-story luxury
condominium tower that is being developed by local company Rodgers Group
Development. Pinnacle recently purchased an existing Embassy Suites Hotel that
may become part of the development. Having only broken ground, the complex is
fueling other developers to take action. Four additional buildings in the area
have been sold or are under contract with plans for retail and residential
Diversity - the Big Luxury Trend
While luxury properties in secondary U.S. cities create an impetus for
redevelopment and increased tourism, the U.S. is not the main focus of most
luxury development. For every high-end hotel being developed in a U.S. city,
several more are being developed in global markets, particularly in China,
India, and Saudi Arabia. By 2008, Conrad Hotels will open one U.S. property in
Las Vegas and six international properties in Phuket, Thailand; Bimini, in the
Bahamas; Jakarta, Indonesia; Dubai, United Arab Emirates; and Beijing.
Ritz-Carlton has five properties under development in China, and the Four
Seasons has new projects in Shanghai, China; Macau; and Barbados.
Intercontinental Hotels plans to open 125 hotels in China by 2008, and Hilton
plans to add 42 in that country in the next two years.
While the 2008 Summer Olympics is spurring some hospitality development
in China, economic growth is the real driver. Foreign tourism into China is
expected to grow 8 percent to 9 percent annually in the next five years while
domestic tourism increases 5 percent to 6 percent, according to Ernst &
Young's 2006 global hospitality report. In addition business travel to Shanghai
alone increased 20 percent last year.
Other international markets are providing expansion platforms as well.
In India, luxury and upscale hotel product posted 90 percent occupancy rates in
2005 compared with 70 percent occupancy in 2004, with hotels in Mumbai, Delhi,
Bangalore, Chennai, and Hyderabad posting all-time high room rates. Dubai is
expected to increase its supply of rooms by 100 percent in the next four years.
Capitals of Eastern European countries that are recent entries into the
European Union - Prague, Czech Republic; Budapest, Hungary; and Bratislava,
Slovakia - along with Moscow are hospitality investment opportunities, according
to Ernst & Young and CB Richard Ellis Hotels, which also pegs Bulgaria,
Romania, and Croatia as emerging markets.
In addition to new locations, luxury flags are diversifying product
offerings. Most new and redeveloped luxury hospitality product has a condominium
component. Hilton, Ritz-Carlton, Starwood, Four Seasons, and Millennium also
are strong players in the time-share market, which many analysts see as the
next big hospitality push. Fourteen percent of leisure travelers now are
interested in purchasing time shares, according to the 2006 National Leisure
Travel Monitor survey. Time shares, which are known by several different names
including fractional interests, private residence clubs, and destination clubs,
are undergoing a marketing facelift as major hotel companies lend their brands
to the product. Forty-seven companies operating 280 time-share resorts had
sales of $5.6 billion in 2004, a 15.4 percent increase over the previous year,
according to the American Resort Development Association. Sales from the seven
largest time-share companies comprise 60 percent of the total industry sales,
according to PricewaterhouseCoopers.
Hotel companies are doing well in the time-share business: Marriott
International receives 24 percent of its operating income from time shares,
Starwood, 19 percent, and Hilton, 12 percent. As of early this year, 100 condo
projects and 125 private residence projects were in the pipeline, according to
Marcus & Millichap.
Photo caption: Branded spas are an integral part and profit center for luxury accomodations. The 20,000-sf Avanyu Spa and Fitness Center at the Lodge & Spa at Cordillera in Vail Valley, Colo., offers everything from a simple manicure to Reiki treatments.
Photo credit: Red Rock Resorts
Demanding the Best
Whether Americans can afford their taste for luxury or not, they are
trading up in record numbers in all categories. Luxury spending on experiences
such as travel doubled from an average of $11,632 in 2004 to $22,746 in 2005,
according to Pam Danziger, president of Unity Marketing, which tracks consumer
luxury spending. And while luxury hotel brands look to retiring baby boomers -
who comprise 57 percent of all households with incomes over $100,000 - to fill
their rooms, they shouldn't forget about Generation X, those born between 1965
and 1978, who grew up in the lap of increasingly available luxury. They are
traveling more - and more lavishly - than baby boomers, despite earning less,
according to Bjorn Hanson, head of PricewaterhouseCoopers' leisure and
hospitality group. "The good news is that a spoiled generation is coming
up," he said at the 10th annual U.S. Lodging Industry Briefing. "The
Gen X traveler spends more per trip on leisure than a baby boomer."
Although leisure travel has been outpacing business travel since 2004,
many luxury properties still cater to corporate meeting planners looking to
opulence and exotic locations to increase attendance. Strong corporate sectors
such as the financial services industry are increasing the number of high-end
executive and incentive trips, according to Business Travel News Online. But
because of increased shareholder scrutiny, they are booking venues closer to
home and often opt for independent luxury hotels in urban settings. The New
York-based Carino Collection, a member organization of 75 independent luxury
hotels in 16 countries, reports a 20 percent increase in revenue and bookings
over last year. About half their corporate meetings are from the financial
Rising corporate profits have increased business travel budgets, and road
warriors, both on and off the expense account, have been trading up to luxury
brands. Year-over-year demand for the luxury segment increased 4 percent in
2005, which contributed to an 11.9 percent rise in luxury revenue per available
room rates, the highest growth in all the pricing tiers, according to Smith
Travel Research. Last year was the first time luxury average daily rates rose,
and the average of $251 is expected to rise $18 higher this year, according to
Business Travel News Online.
But luxury also continues to cross U.S. borders. Increasingly
corporations are booking meetings in international destinations and business
travelers are hopping continents on a regular basis, as are leisure travelers
looking for new experiences. In addition, cross-border travel is expected to
grow worldwide. More than 100 million Chinese tourists and 50 million Indian
tourists are expected to travel internationally by 2020.