A new high-end hotel in Manhattan's Union Square will have either an art gallery, doctor's office or yoga center, part of a plan to generate more than 10 percent of the property's revenue through sources beyond its 175 rooms.
"We've done as much as we could on the cost-cutting side," said Neil Shah, president and chief operating officer of Hersha Hospitality Trust (HT), which will own and manage the hotel. "Now it's time to use our real estate and our position to help create profits."
As development of new properties climbs, hotel companies are building spaces that will bring in new streams of revenue. Lodging owners such as Hersha and Hyatt Hotels Corp. (H) are building meeting rooms that can be repurposed for nighttime cooking parties, locating lobbies on higher levels to accommodate ground-floor retail and flooding lawns to create ice rinks that charge for skate rentals.
Growth in lodging construction is expected to outpace building in other commercial real estate sectors through the end of next year. Hotel development is likely to increase 10 percent this year and almost 20 percent in 2013, the American Institute of Architects said earlier this year. The group will publish an updated report later this month.
While hotels have long been home to bars and conference space, milking every inch of real estate to increase earnings at new projects is increasingly important as owners move away from the expense-slashing of the last three years to focus on revenue not directly dependent upon room rentals, according to David Loeb, a Robert W. Baird & Co. analyst in Milwaukee.
Hersha, based in Harrisburg, Pennsylvania, has about a half dozen hotels under development. Non-room revenue at hotels the real estate investment trust owns, including such New York properties as Hotel 373 Fifth Avenue and Duane Street Hotel Tribeca, has risen to about 7 percent of total revenue from about 2 percent three years ago, according to Shah. That will probably climb to about 10 percent when Hersha's hotels under construction open -- and an even "more significant" increase in profits, he said.
Hersha agreed a year ago to buy the Hyatt Union Square, being built at 13th Street and Fourth Avenue, for $104.1 million, or $595,000 a key. The REIT expects to complete the purchase of the hotel, with three dining venues and a rooftop lounge, when construction is finished later this year. It plans to choose retail tenants closer to the opening, basing its decisions on rental income and neighborhood demands, Shah said.
In Washington, Hersha is completing the redevelopment of Capitol Hill Hotel, including the addition of 6,000 square feet (560 square meters) of salon and club space for guests as well as local residents, businesses and government officials, according to Shah. The hotel also rents space in the property's salon to a local artist.
In March, Hersha completed the purchase of Philadelphia's Rittenhouse Hotel, where the company plans to convert the "underperforming" bar into a venue that locals will be able to rent for special events, Shah said.
During and in the immediate aftermath of the U.S. recession, hotel operators focused on cutting costs as travel demand declined. Revenue per available room, an industry measure of occupancies and rates, slumped 24 percent in 2009 at luxury hotels, which were hurt the worst of any industry segment.
Reductions spanned from spending less on buffets to lowering swimming-pool temperatures, Andrew Cosslett, former chief executive officer of InterContinental Hotels Group Plc (IHG), said in an August 2009 interview. Now, lodging companies are focused again on increasing revenue.
Last month, Starwood Hotels & Resorts Worldwide Inc. (HOT) announced plans for the $100 million renovation of 10 W hotels in North America, including locations in New York and San Francisco. The revamp will entail the reworking of public spaces such as lobbies, bars and nightclubs, with a focus on "drawing in locals," the hotelier said in a June 4 statement.
"Maximizing every piece of real estate, especially at new hotels, is a growing trend as institutional and public ownership of hotels in major urban markets is on the rise," Loeb, the Baird analyst, said in a telephone interview.
For new, full-service hotels in the midscale to high-end categories that opened from 2001 to 2005, "other income," such as sales from retail shops and other businesses not operated by the hotel, was almost 36 percent higher last year than for hotels built from 1980 to 1999, according to Boulder, Colorado- based STR Analytics, a unit of hotel-data provider STR Global.
"Newer hotels were built with more revenue efficiency in mind, and space that might have been wasted in earlier- constructed hotels was replaced in newer hotels by additional outlets and revenue-creating facilities," Carter Wilson, a director at STR Analytics, said in a telephone interview.
While rooftop bars have been around for decades, they only recently have become a significant source of additional income, particularly at urban hotels in such cities as New York, according to a December study by Jones Lang LaSalle Hotels, part of Chicago-based broker Jones Lang LaSalle Inc. (JLL)
In New York City, there are 35 properties ranging from midscale to luxury with a rooftop venue, many of which were recently added, Jones Lang said. Such businesses may produce revenue of as much as $120 per square foot in a month with high demand and "tend to be profitable venues," Jones Lang said in the report. That compares to $40 a square foot of room revenue during a peak-season month at an upscale hotel in a large city, according to Amelia Lim, a Jones Lang executive vice president.
"What we've been seeing in rooftop bars and other additional revenue-producing venues is the use of under-used real estate," she said in a telephone interview.
Hyatt's Andaz 5th Avenue boutique hotel at Bryant Park features a meeting venue on the second floor, called Apartment 2E, that resembles residential space with a fully equipped open kitchen in its center, a bar and an outdoor courtyard. During the day, its individual rooms are used for business meetings, and in the evening the entire space can be rented for private cooking parties.
Strategic Hotels & Resorts Inc. (BEE), a REIT with stakes in luxury properties, has a goal of getting as much as 50 percent of revenue from sources other than rooms at each of its hotels, Chief Executive Officer Laurence Geller said.
The Chicago-based company has gone so far as to flood outdoor lawns and convert them into ice rinks at a couple of its hotels, allowing it to charge for skate rentals and lure more diners to its food venues. The REIT, whose assets include Hotel del Coronado in San Diego, also leases walls inside and outside its hotels for advertising and rents unused space on rooftops to telecommunications companies for antennas and other equipment.
"We look at our real estate as a mixed-use development, where rooms have become merely an anchor tenant, like in shopping malls," Geller said in a telephone interview. "It's been increasing across the industry as people realize they need higher returns on their hotels because hotels are expensive to run and not as profitable as they used to be."
Of Strategic's 20 hotels, five are back to pre-recession profitability levels, he said.
"Today you have to justify why you have a garden instead of something else that could make money," Geller said.
While additional revenue streams tend to boost the bottom line, owners need to be careful to not disrupt the look of a hotel, according to Bruce Baltin, a Los Angeles-based senior vice president at PKF Consulting USA, which advises hotel owners and investors on management, acquisitions and dispositions.
"What you don't want to do is put a Burger King into a luxury hotel," he said. "So coherency is probably the main challenge. You don't want your hotel to feel like a giant food court, but still make sure it has brand recognition."
Given that the hotel industry's recovery is likely to slow, the focus on additional sources of revenue will only intensify, Baltin said. Growth of average quarterly revenue per available room, an industry measure of occupancies and rates, is expected to decline to 4.9 percent during the second half of 2012, down from an estimated 6.9 percent during the first six months of the year, according to a June 20 PKF report.
"What we're seeing is a more active pursuit for alternative revenue streams," said Shah, Hersha's president. "It's really picked up and has become much more of an integral part of our thinking today than it has been in the last several years. It's about diversifying and not putting all your eggs in one basket."