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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2011

Marketing Hotels in a Downturn

A strong sales force can be key to financing a viable property

To state the obvious, hotels make money by selling hotel rooms. There are other revenue sources, such as food and beverage, spa, golf, parking, rents, etc., but typically, 75 percent of hotel revenue is derived from the rental of hotel rooms. Potential hotel buyers and investors must understand the hotel-room sales cycle before they make purchase or investment decisions. Commercial mortgage brokers working on these deals must advise clients on how hotel-room sales and marketing function in tough economic times -- and how they can affect the value of a property and its financing.

When the economy strengthens, it fuels demand for hotel rooms. In these periods of prosperity, hotel management is frequently more focused on managing and maximizing the flow of revenue rather than on revenue growth. The financial results of the property improve each year because of demand generated by a robust economy. In this environment, the sales department can spend more time answering the phone and writing contracts than actually making sales calls. 

"Hotels are operating businesses inside a real estate wrapper."

Prosperous years increase profits, but they also can drive complacency, particularly in the sales area. Revenue keeps coming in and guests keep coming in. Many investors take for granted that this trend will continue for an extended period. There are hospitality consultants who project a continued positive trend into the future. These projections can become the base used to make decisions on the acquisition of hotel assets. Often, buying decisions are made without the advice of a hospitality adviser with strong operational experience.

This scenario could describe the present cycle. Starting about nine years ago, demand in the U.S. began to improve steadily. By 2006 and 2007, hotels were prospering, and some industry experts predicted a sustained period of growth. Unfortunately, a lot of investors believed these forecasts and bought hotels using future growth as the stabilizer and using debt as a major component in the acquisition. Many of the loans originated from 2006 to 2008 will mature from 2011 to 2013. Obviously, the drop in business has deteriorated the net operating income of these properties and valuations have fallen below the loan amount. Investors are losing their hotels and their equity.

We are now in a serious economic downturn. When this happens, demand for hotel rooms diminishes. Hotel management begins to scramble and cut costs. They turn to their sales departments for help, but because of the previous years of prosperity, the sales office is smaller and inexperienced with finding business. Often during drops in demand, hotel management actually tries to cut costs by eliminating sales positions, but this can further weaken the property. Instead of cutting costs in sales, there must be a contingency plan with strategies that can point the sales team in the direction of business.

Create a plan based on clearly defined business segments and strategies to meet them. These include business coming from government; social, military, educational, religious and fraternal groups; and corporate and group segments. The strategy could also include adding sales strength and looking closely at the sales team you have to make sure it can survive in a downturn. The sales department in a downturn is different from the department in periods of prosperity. Business does not walk through the door. You have to go get it. The sales team has to have that kind of talent and drive. 

Hotel owners should reach out to professionals who have experience with downturns and know how to react quickly to the needs of a hotel that faces declining demand. Owners, working with management, must put plans and actions on the table and get these plans and strategies implemented as soon as possible so that it doesn’t adversely affect the property’s underlying value. 

Hotel-management companies and hotel brands often are caught in the turmoil of the downturn and may not be proactive. There are instances when they protect their own interests, and the hotel can suffer financially. For example, some brands will not allow deviations from strict brand standards even though the deviations might allow the hotel to save money. In some cases, the brand fears cutting back on amenities will hurt its name and the equity in its name. Its concern should be with the financial deterioration of the hotel and meeting ownership’s financial goals, however. There are times that brands will avoid lowering rates, which could create business and cash flow, but might damage the prestige of the brand. 

In economically chaotic times -- and even in periods of prosperity -- hotel ownership should seek asset managers with strong operations experience to give the property and management the oversight necessary to survive and represent ownership interests in downturns. This oversight, in some cases, might not be welcomed by a management group or by a brand, but it is critical for ownership. The asset managers’ experience is in operations and their job is to work closely with the property team. Together, they must implement a contingency plan to control costs and be proactive with sales. Owners need this extra layer of support to be their advocate, especially in downturns. 

Commercial mortgage brokers who understand the working of hotel properties -- and how they affect values -- can be valuable advisers to their clients. The hotel asset class has enormous potential because it is not just real estate. Hotels are operating businesses inside a real estate wrapper. The operating business and results can change the value of the real estate. With the right operator, the right asset and the right price, financing the property will be much easier. 


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