During the Luxury & Lifestyle breakout session at last month’s Americas Lodging Investment Summit (ALIS), the conversation included a discussion about whether it best to build or buy today in those high-end segments. The clear answer, and to no one’s surprise, was to buy to avoid the multiple risks surrounding building today.
Yes, there were some exceptions cited but with the replacement cost, on average, sitting at 45%, according to panelist Carolina Bernal of JLL, buying has more potential upside.
The conversation then turned to whether a newly acquired asset must have the support of a major brand to thrive. David Duncan, president and CEO of First Hospitality, Chicago, said while it depends on the location and attributes of the building, independents can succeed and, if they do, deliver a much higher profit for the buyer.
“We look at real estate as a very local undertaking, and our Hutton hotel in Nashville is a good example,” Duncan explained. “The hotel has been on its own and successful as an independent hotel for quite some time. We’re sort of reinventing that with a fair amount of CapEx.”
Duncan said in this particular case, First Hospitality looked at the market, Nashville, Tennessee, with strong inbound travel and judged that they didn’t need a brand based on the location relative to the trade-offs and residual valuations and pipeline of potential customers there.
“But in other locations, we’d say ‘absolutely you need a brand,’” Duncan continued. “So, we really look at if the hotel is in a place where there’s enough demand to generate sufficient use, sufficient trial, or, if not, what brand do you need?”
When choosing a brand, Duncan called the decision “an interesting puzzle match” based on what the location really looks like, the brand’s flexibility for the location, what the brand is offering in terms of customers, pipeline and percentage of travelers from the brand family, et cetera.
“That’s one of the things we really studied really closely at the beginning [with the Hutton],” he said.
Going back to the question about building versus buying, Duncan said there are some amazing buying opportunities today and the real sweet spot in real estate investing has always surrounding finding a lover basis for the development.
“Today you can buy at a discount to replacement cost,” Duncan continued. “If you can find an asset that needs some love from capital, from a branding perspective, and do it well, you don’t necessarily have to overinvest in the finest marble or the finest spa to bring what we think is really the sweet spot of what we do, which is that experience.”
Again, Duncan referenced the Hutton, which is located close to a lot of music venues, and it just so happens that the hotel has a studio right behind the building where artist write and collaborate. He brought it up because he said being able to thread the customer impression from the first time they hear about the hotel into the experience they have when they first walk in the door, including the way they’re greeted, the team’s attire, etc., gave them the impetus to buy the asset at a relative discount.
“Be very thoughtful about the brand or the theme or the experience that you’re bringing to that place because in my own experience, there’s a lot of people that have built really nice buildings that do not necessarily deliver a superior return.”
He closed by adding that the opportunity is making sure to buy at a discount to replacement cost and deliver the story to the customer in an authentic way. “From an investment perspective, there’s some real good opportunities there.”
By Jeffrey Weinstein
