MANY OWNERS OF aging hotel assets who want to keep a brand flag are facing high-cost PIPs these days. The options are to either renovate to meet the new design standards, move to a lower price segmented brand if there is one available or exit the franchise agreement, which can be another cost factor depending on the length of the licensing term.
HVS has released a study looking at the cost and benefits of two PIP programs – the Forever Young Initiative for Hilton’s Hampton Inn and Formula Blue for Holiday Inn Express, a brand by InterContinental Hotels Group. The brands were selected for the study because they delivered the highest RevPAR in their segments.
HVS Director McKenna Luke authored the report.
Both brands were dealing with hundreds of aging properties that had also suffered from relaxed improvement standards during the Great Recession, Luke said. FIY and Formula Blue were intended to “expand the economic life of the hotel to compete with new supply.”
“It is important to note that the vintage of the asset, structural and roofline configuration, and the timing and scope of recent renovations are key considerations that can significantly affect the scope and cost of the required renovations,” Luke said.
The FYI plan introduced mid-2014, focused on properties that fit basic design standards, such as being higher than two stories, to extend their life. Under FYI, Hampton properties built before 1995 generally require the most extensive renovations, and the cost of renovating properties built in the 1980s may exceed the financial benefits. “Our research indicates that the cost of these renovations typically ranges from $20,000 to $30,000 per room for properties built between 1990 and 1995, and can exceed $40,000 per room for 1980s properties if the property can be renovated to meet brand standards,” Luke writes.
Renovating Hampton hotels built after 1995 typically cost between $15,000 and $25,000 per room, a range determined by the scope of previous renovations and the property’s basic structure.
“The exterior updates, namely the roofline change from a mansard to a signature cornice, can be one of the most expensive items, estimated to cost between [$1 million to $1.75 million], or $8,000 to $17,000 per room,” Luke wrote. “More modern roof lines may limit the exterior costs to only $250,000 to $500,000.” Most Hampton properties underwent public-space renovations as part of the company’s “Perfect Mix” lobby design in 2012 to 2013, reducing the cost of the FYI renovations. In its 2016 earnings report, Hilton last month noted a little more than 2,000 franchised Hampton Inns (197,000 rooms) in the U.S.
The Holiday Inn Express Formula Blue PIP, introduced in 2014, intends to modernize properties across the brand with exterior, public space and guestroom renovations.
Under the plan, properties built before 2001 generally require the most extensive renovation, ranging from $20,000 to $35,000 per key, Luke said. “Hotels built after 2001 typically cost between $10,000 to $20,000 per room based on issued PIPs,” Luke said. “This is consistent with the brand estimate of $1.2 million to $1.3 million, or $15,000 per room for a typical 86- or 87-room [hotel]. However, the cost can be as low as $5,000 per room if the hotel was recently renovated to another design scheme.”
InterContinental Hotels Group said last month 175 Holiday Inn Express hotels in the Americas had renovated to the new design standard by the end of 2016. Those hotels have experienced an average RevPAR uptick of 4 percent.
While brand-mandated PIPs can maintain high RevPAR levels if done correctly, Luke said they may end up being financially unfeasible if the properties physical structure doesn’t meet brand standards, or if the market in which they are located does not allow enough rate growth to justify the expense. “Taking the time to understand the market and demand generators, the impact of retaining the current affiliation, and the competitive hotel supply is crucial for an owner upon deciding whether to move forward with a multimillion-dollar PIP,” Luke wrote.
No one brand is responsible for the PIP surge as most are demanding owners upgrade.
La Quinta Holdings Inc. for the first time in its franchising history parted ways last year with owners of 25 older, midscale assets. The company has also divested more than 100 of its own older, underperforming properties over the past couple of years.
Best Western Resorts & Hotels has adopted redesign standards across all three of its descriptors, which is pushing owners of its lower-segmented Best Western to opt for its new SureStay flag. The two owners who are the first to become SureStay franchisees both said last month they did so because they could not justify the Best Western PIP price tag that would keep them flying the flag in their markets.
Over the past few years, Choice Hotels International has seen hundreds of Comfort Inn hotels undergo the PIP that is moving the brand firmly into the upper midscale competition today. Average rate in 2016 was $92.56 for Comfort Inn, a 4.2 percent increase; and $96.32 for Comfort Suites, a 4 percent climb. Owners that chose not to participate either moved into a midscale or economy brand or exited the system. In 2016, Choice reported 43 fewer Comfort Inns (less 3,235 rooms) and four fewer Comfort Suites (less 339 rooms) ending the year with 1,113 inns and 565 suites.