Haute Hospitality

Luxury hotels roll out the red carpet for guests -- and ring in the profits.

O 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 spa.

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.
P 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 located overseas.

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 Indianapolis 500.

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 202-room Ritz- 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 Ritz- 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 redevelopment.

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 services industry.

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.


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