Newsletter - June 7, 2002

HVS INTERNATIONAL HOTEL DEVELOPMENT COST SURVEY 2002

By: Elaine Sahlins

Last year, the San Francisco office of HVS International announced the redesigned hotel development cost survey. While HVS International has tracked hotel construction costs throughout the United States since 1976, the 2001 survey introduced data for a larger range of hotel products, setting new 2000 baseline ranges for six lodging types: Economy/Budget Hotels, Midscale Hotels w/o F&B (without Food and Beverage), Extended-Stay Hotels, Midscale Hotels w/ F&B (with Food and Beverage), Full-Service Hotels, and Luxury Hotels and Independent Resorts.

With new baseline ranges established, the 2002 hotel development cost survey estimates changes for hotel construction costs in 2001. The year 2001 will be remembered for two events: the horrific events of September 11 and the national economic recession beginning in March. Both events had profound impact on all aspects of the hospitality industry, affecting property operations, management strategies, development costs and the appetite of hotel investors for new construction.

Concurrent with the slowdown of the hotel construction pipeline is the decrease in all real estate development. In 2001, the construction industry’s ten-year expansion period came to an end. With less competition for labor and materials, hotel development costs demonstrated lower growth. While the CPI was 2.8% last year, many material costs actually declined or experienced less than 1.0% growth. However, insurance costs, particularly post-September 11, soared. Although interest rates were low in 2001 and financing costs more moderate, the availability of mortgage capital for new hotel development was extremely limited. This combination of factors resulted in a modest year of change for hotel development costs.

Of the five categories, land is the most immediately and strongly affected by shifts in the development cycle. The lack of financing for new hotel construction put the damper on numerous projects. Land transactions for hotel development slowed to a trickle and prices retrenched. While land prices were declining as the economy receded early in the year, post-September 11 land sales were almost non-existent. There have been relatively few transactions to substantiate a national trend, however, HVS International is aware of a number of cases where available sites were pulled-off the market by sellers disappointed by low or no offers. In some instances, unimproved vacant sites with entitlements have been resold at below the initial transaction price. Land purchases for hotel development in 2001, particularly post-September 11, would likely have been at a discounted price, reflecting the risk in actually getting a hotel project financed during the year. As a result, hotel land costs declined significantly in 2001.

The costs of construction materials and labor were most affected by national trends of supply and demand. Costs for some materials changed dramatically. In particular, gypsum products and lumber dropped. Gypsum board prices declined by over 20% in 2001, while lumber declined by more than 5.0%. Prices for paving materials and sand increased at an above-inflationary rate, while other costs were relatively stable. Declining costs in materials were somewhat offset by increased labor costs. Union wage increases have been above inflation over the past five years. Most recently, union wages and fringe benefit packages increased by 4.6% in 2001. The Construction Labor Research Council in Washington, D.C., reports that the average hourly rate for construction workers is now $32.33.

The furniture, fixture, and equipment (FF&E) cost for new and renovated hotel rooms declined or only modestly increased in 2001. Hotel FF&E is subject to a greater number of influences now more than ever before. The propagation of boutique hotels has influenced interior designers of all hotels, from highway franchisees to traditional commercial downtown properties. Consumers are more aware of amenities and design than ever before. “Amenity creep” is now supplemented by “design creep.” Although the expectations of owners and guests are evolving, the pipeline for new hotel development is slowing and lower hotel profits in 2001 translated into fewer projects.  Furniture, fixture, and equipment manufacturers responded to the declining hotel development pipeline by discounting or holding prices. While the design of boutique hotels has influenced hotel products at all price points and hotel room FF&E standards are continuing to be elevated, fewer new hotel rooms and less renovation meant suppliers were more willing to negotiate, particularly in the last quarter of the year. As a result, FF&E costs in 2001 have mostly declined from those in 2000.

Other costs remained stable or increased slightly. In 2001, soft costs (fees, permits, financing costs) remained at or slightly above the prior year’s level. While mortgage rates declined, little financing was available for new hotels. The lower costs of capital, however, helped to stabilize soft costs. Working capital and pre-opening budgets remained at or marginally above the 2000 range. With a larger labor pool available for hotel operations in many markets, hotel wages stabilized over prior years’ growth. As hotel occupancies declined in some areas beginning in the first quarter of 2001 and plunged following the terrorist attacks, payroll costs were decreased. In many cases, promotional costs were not reduced and some were increased. As a whole, pre-opening and working capital cost increases did not exceed inflation.

The following table sets forth the results of the 2002 Hotel Development Cost Survey. Due to the wide variety of development projects and their diverse geographic locations, ranges of development costs per room for all of the other property type categories overlap. Additional differences in site characteristics, density, building and zoning codes, local labor markets, and other construction costs account for the wide range of per-room costs in each category. As an example, extended-stay and limited-service hotels may be more expensive (on a per-room basis) to develop in downtown urban areas than full-service hotels in suburban or tertiary cities. 

It is important in this analysis to note that there is no uniform system of allocation for hotel development budgets. Hotel development costs are accounted for in numerous line items and categories. Individual accounting for specific projects can be affected by tax implications, underwriting requirements, and investment structures. For example, in a development project, furniture, fixture, and equipment installation and construction finish work can overlap. Accounting for these items is not always the same from one project to another.

In addition, users of the HVS International Development Cost Survey should consider the per-room amount in the individual cost categories only as a general guide for that category.  The totals for low and high ranges in each cost categories do not add up to the high and low range of the sum of the categories. None of the data used in the survey showed a project that was either all at the low range of costs or all at the high range of costs. A property that has a high land cost may have lower construction costs and higher soft costs. The totals, therefore, represent the overall lowest and highest per-room amount for each category indicated by the survey data.

All material used by HVS International for the development cost survey is provided on a confidential basis and is believed to be reliable. Data from individual sources is not disclosed.

To view the Hotel Development Costs 1998 - 2001,click here.  

SVP FOR INVESTOR RELATIONS REPORTS ON MARRIOTT INTERNATIONAL’S BALANCE SHEET

TWST interview with Laura Paugh, Marriott International  /  LAURA E. PAUGH is senior vice president for investor relations at Marriott International, Inc.

TWST: Could we begin with a brief overview of the history and evolution of Marriott International (NYSE:MAR)?

Ms. Paugh: Our vision is to be the world’s leading provider of hospitality services. In the broadest sense, we are a worldwide hospitality leader with the most comprehensive portfolio of hospitality brands and businesses, with nearly 2,600 operating units in 65 countries and territories. We either manage, franchise or own 435,000 hotel rooms across the world, and over time have evolved to where the lodging business is really the overwhelming driver of the company’s strategy and philosophy and vision going forward.

TWST: How would you describe the competitive landscape today?

Ms. Paugh: First of all, the environment, as I’m sure you’re aware, has clearly been dramatically affected by the events surrounding 9/11, as well as the worldwide economic slowdown. So obviously there is a fair amount of managing through crisis that was going on in the fourth quarter, which we think the industry did a very, very good job of. Clearly the industry showed much greater resilience than it had a decade ago, when you saw the Gulf war and substantial oversupply issues that were going on. Then the companies were much less able to bear the brunt of a big, abrupt shift in demand and in financing availability. So I think from that standpoint the industry has shown that it’s doing quite well. The business has consolidated quite a bit over the past five to 10 years. The branding of hotels, moving from lots of independent hotels everywhere in the world toward a branded strategy, is clearly evident. The US has moved quite far along this spectrum. In the rest of the world the percentage of branded hotels is lower. But worldwide, the trend is clearly moving in that direction, and competitively, obviously, as there is consolidation, there is increased distribution amongst brands, which as been beneficial.

TWST: Are you confident that at this point the balance sheet is in the type of condition to help follow through as effectively as you’d like?

Ms. Paugh: Absolutely. It’s one of the driving reasons for our strategy of not being a real estate owner. We are a manager, a franchiser of hotels — brand company that is expanding our distribution system, but not by owning the real estate. By using third-party owners and franchisees who want to add our properties in various markets, we’re able to add market share and obviously add to earnings at a rate that we believe is faster than the overall market, without taking on an undue amount of real estate risk.

TWST: What are you expecting over the next couple of years as far as a rate of gain in sales and earnings?

Ms. Paugh: Sales will be flat down in 2002 as a result of the economic downturn in 2001 and terrorist attacks. In 2003, we expect they’ll increase in the mid to high single digits. As to earnings, in a longer-term view, we are a mid-teens EPS growth company. As a result of 9/11 etc., 2002 earnings are expected to be flat to 2001 levels, but could increase in the mid-20s growth rates for 2003 and 2004 as the industry recovers.

SHANGRI-LA HOTELS & RESORTS TO UNVEIL 11 NEW AND INNOVATIVE RESTAURANTS AND BARS

Hotel Asia Pacific Report

By Steve Shellum

Shangri-La Hotels and Resorts is set to unveil plans for 11 new and innovative restaurants and bars over the next 12 months, with many additional concepts under development. 

The group plans to create vibrant restaurants that will heighten the guest experience as part of the US$130 million renovation programme announced earlier this year. New concepts are also being designed for the company’s new hotels in Dubai, Oman and China. 

“Today, restaurants are theatre. They are backdrops for the guest experience,” says group F&B director, Jean Michel Offe. “Our guests have told us they want restaurants that offer an exciting ambience and great food, and this is what we’re creating for them.” 

Renowned international designers working on the restaurant concepts include: New York-based Adam D. Tihany; Charles Robertson, of Hong Kong-based Leese Robertson Freeman Designers; Bilkey Llinas, of West Palm Beach; Singapore’s Wong Chui Man; Paul Hsu of Hong Kong-based Elite Concepts; and Tokyo’s Super Potato. 

A number of recent openings give a glimpse of what lies ahead at other hotels in the group, including: Coast at Shangri-La’s Rasa Ria Resort in Kota Kinabalu; cafe TOO at the Island Shangri-La, Hong Kong; and Restaurant Lafite and Zipangu at the Shangri-La Hotel, Kuala Lumpur. 

Shangri-La Hotel, Kuala Lumpur

The haute-French Restaurant Lafite, which reopened in April, features a striking design by Adam D. Tihany, who is acclaimed for designing such restaurants as Le Cirque 2000 in New York and Aureole in Las Vegas. The decor, which “balances modernist simplicity with rich extravagance”, features an entrance paved with dark polished marble accented by pin-strip lighting and a floor-to-ceiling glass wine display. 

A dedicated wine-tasting room offers a selection of vintage and young wines, as well as rare Chateau Lafite vintages. 

The focal point is the main circular dining room, which is concealed by curtains of ivory gold fabric. Dramatic structural glass beads cascade from the ceiling and the ambience is enahced by diffuse designer lighting and chandeliers. 

Meanwhile, the hip Japanese design firm Super Potato has transformed the hotel’s traditional Japanese restaurant, Nadaman, into a modern Tokyo-style brasserie, Zipangu. According to the company, the restaurant, which also opened in April, is like no other Japanese restaurant in Southeast Asia. 

It features a floor-to-ceiling glass-enclosed wine and sake cellar and a separate wine and cigar area featuring live piano and jazz music. Glass is featured predominately, creating an expansive sense of space, while stone and water gardens at the entrance and inside the restaurant inspire a Zen-like feeling of calm and peace. 

Besides serving sushi, yakitori and other Japanese specialities, it also offers private kotatsu dining rooms and open-seating and individual sushi, grill and kappou counters.  

Shangri-La’s Rasa Ria Resort, Kota Kinabalu, Malaysia

Nature is the focus of Coast, which opened in February. The design “brings the beauty of the coast indoors”, with floor-to-ceiling windows overlooking the sea and gardens. The 160-seat restaurant’s interior design, created by Singapore-based Wong Chiu Man, is simple and airy, with a seven-metre roof and central raised bar with mother-of-pearl backdrop. 

“The main drama happens at night when modern, two-metre-long chandeliers made of fibre-optic tubes shimmer like phosphorescent jellyfish floating in the air,” says Joffe. 
The Coast’s chefs, who hail from New Zealand and Australia, have created an inspired “East-meets-West California” menu to complement the New World wines offered.. 

Island Shangri-La, Hong Kong

The idea behind Super Potato’s design of cafe TOO, which opened in October, is “all the kitchen’s a stage”. The high-energy, 252-seat restaurant blends organic earth tones and textures with modern white oak furniture and dramatic lighting. 

The expansive room is jazzed up with stainless-steel accents and glass walls displaying ochre, mustard, and cinnamon-coloured grains, herbs and spices. But  the main attractions are the seven open kitchens, where clay pots, cast-iron woks and bamboo are juxtaposed with stainless steel pots, pans and graters. Adding to the ambience are the staff, all sharply attired in bright, modish Chinese-style uniforms. 

Shangri-La Hotel, Singapore

The Shangri-La Hotel, Singapore’s sky-high restaurant, BLU, lives up to its name with blue table lamps designed by Philippe Starck, blue waves of light dancing on the barrel-shaped ceiling and a floor twinkling with fibre-optic blue stars. 

The hotel’s signature restaurant, which features California cuisine and a 500-label wine list, opened in January 2000 as part of the property’s extensive S$95 million (US$53 million) renovation. 

BLU’s decor is complemented by original artwork, including large glass murals by the renowned artist Danny Lane and a series of paintings by the Singaporean artist Peggy Leong.

Shangri-La’s New Concepts 2002 and Beyond 

Shangri-La Hotel, Kuala Lumpur

Adam D. Tihany is designing the Shangri-La Kuala Lumpur’s new international cafe restaurant, which opens in August, replacing the former Coffee Garden. It will cater to all-day dining with a “three-in-one” concept that includes a trendsetting coffee shop. It will feature Italian, Malay, Indian and Chinese open kitchens and will offer fresh seafood from two large fish tanks. There will also be an a-la-carte dining area where chefs will pluck herbs from an in-house herb garden. A garden terrace will also be converted into an open-air dining area.

Makati Shangri-La, Manila

The hotel’s signature restaurant, Cheval Blanc, is being transformed into a “smart-casual” two-storey venue serving “contemporary” cuisine. It reopens in September. 

The designers will inject bold colours into the predominatly white scheme by painting a striking garden landscape across the high ceiling, with the main dining room spotlighted by crystal chandeliers and flowing silk curtains. The lounge area will feature plush Philippe Starck-type furniture and offer separate gallery seating. The bar, topped by glass covering rows of roses, will be accented by a concave steel mirror. 

Kowloon Shangri-La Hotel, Hong Kong

The lively Tapas Bar, scheduled to open in October, will feature a large selection of New World wines to complement antipasti, mezze, ethnic breads and tapas. Wines available by the glass will be on display in a custom-built Eurocave wine wall, while frosted glass shelves will feature arrangements of food and drinks. The open kitchen will have a glass wall facing the lobby below. 

Shangri-La’s Far Eastern Plaza, Taipei

The Atrium Cafe is scheduled to open in December, with a design that mixes Chinese art and decor with contemporary furnishings. It will offer guests a “dynamic visual experience:, with an open kitchen, live food stations and small stand-alone units serving ethnic and Western food. 

Other restaurant projects include: the redesign of the Coffee Garden restaurants at the Shangri-La Hotel, Bangkok, the Kowloon Shangri-La, Hong Kong, the China World Hotel, Beijing, the Makati Shangri-La Hotel, Manila and the Shangri-La’s Rasa Sayang Resort, Penang.

Renovation will also take place at Shang Palace restaurants at the Kowloon Shangri-La, Hong Kong and the Makati Shangri-La, Manila. 

Innovative outlets are also being designed for the group’s new hotel projects, including the high-profile Shangri-La Hotel, Dubai, which will be the group’s first hotel in the Gulf region. It is scheduled to open in March 2003.

Hotel Asia Pacific Magazine
http://www.hotelasiapacific.com      Subscription Information

SURVEY FINDS U.S. BUSINESS TRAVELERS ARE TAKING FEWER TRIPS

St. Petersburg Times   -  The slump in business travel will likely get worse before it gets better, a survey of frequent business fliers says.

About 80 percent of "road warriors" polled last month by the Business Travel Coalition, which represents large corporate purchasers of air travel, said they expect to cut their airline trips nearly 11 percent from already reduced travel this year.

The 403 frequent business fliers surveyed cited high fares and the hassle of getting through airports as the biggest reasons they cut back on flying, said Kevin Mitchell, the group's executive director.

"I'd be concerned very if I was with a major carrier," he said. "The problem is worse than they thought."

Airlines lost a combined $ 7-billion last year as planes were grounded after the Sept. 11 attacks and passenger loads plummeted.

But many had begun losing money months before the attacks as companies cut back on business travel to cope with the souring economy. Now, major carriers continue to bleed red ink as high-paying business customers stay home and leisure travelers pay less.

The number of people flying in April, for business and leisure, was down 13 percent from the same month last year, said the Air Transport Association, a trade group representing major U.S. airlines. The average domestic fare declined 12 percent, to $ 124.80 for a 1,000-mile trip, the group said.

Nearly three-quarters of those surveyed said fares were an "important or very important" reason for reducing their trips. Fifty-one percent called increased airport time and security hassles important or very important. About 23 percent gave the same weight to security concerns.

Joe Brancatelli, editor of the business travel Web site JoeSentMe.com, said airlines should recognize that fare structures that penalize travelers who make last-minute travel plans -- most often business travelers -- must change.

"It won't get better for the major airlines until the fares are fixed," he said. "This is killing the airlines. They can't survive without business travelers."

IRELAND SEES WORST TOURISM SEASON IN YEARS

One of bleakest outlooks for tourism in years
The number of tourists coming here could be down by as much as 20 per cent. Alison Healy looks at some of the factors contributing to one of the worst seasons in years  


The Irish Times  -  The tourism sector was already facing a difficult year in the aftermath of September 11th and the foot-and-mouth crisis but the latest woes at Aer Lingus have created one of the bleakest outlooks for the industry in years.

A depressed German economy is also adding to tourist industry worries. The German market is the third largest after Britain and the US.

The Irish Tourist Industry Confederation is concerned that the regular airline disputes will give the State a bad name in foreign markets. "The danger is that Ireland will be seen as an unreliable or difficult market," says Mr Brendan Leahy, the confederation's chief executive.

"It's happening already. People are afraid they will be stranded here. It's damaging our image and it won't be forgotten."

He says the strong investment in marketing after the foot-and-mouth crisis is being negated by the spate of holiday cancellations coming in.

Tourism Ireland will be reviewing its forecasts as the effects of the Aer Lingus dispute are calculated, according to Ms Niamh Fitzpatrick, marketing director of the all-Ireland body, which promotes the country overseas.

It had estimated conservatively that business from the US market would fall by 10 per cent this year. "We have to review it now," she says. American trade is more valuable than that from other countries as US tourists stay longer and spend more money. "One American tourist is worth about the same as two tourists from Britain."

CIE Tours is vulnerable to any reduction in US tourists, who make up 60 per cent of its customer base, managing director, Mr Brian Dowling, says.

The company brings up to 80,000 visitors to the State every year, Mr Dowling says. CIE Tours had "spent a lot of money" trying to win back customers in the wake of September 11th and it was beginning to get results. "But then this happens."

He expects business will have fallen by about 15-20 per cent on last year and points out that last year was poor because of foot-and-mouth.

It's extremely difficult to predict what will happen in the coming months, according to Mr Malcolm Connolly, Bord Failte's corporate development manager. The only obvious trend is that tourists are booking much later.

Bord Failte had predicted a nine per cent fall in business from the US this year, but with a 20-25 per cent drop in airline seats between the US and this State, the target is "extremely challenging" and the drop in business could be closer to 14 or 15 per cent.

Mr Connolly says the fall in business was not a major surprise as the market would have taken 18 months to recover from last year's setbacks.

"A key strategic goal is to get the route network structure back in place and to try to get Ireland at the top of the pecking order."

Dublin Tourism has already noted a 30 per cent drop in the number of visitors to its six tourist offices between January and the end of April this year. Its chief executive, Mr Frank Magee, estimates that the number of tourists visiting the city will drop by between 10 and 20 per cent this year.

The loss of American custom is a particular worry for the hotel sector as some hotels rely on the American market for up to 65 per cent of their business.

Now, even if some Americans have conquered their fear of flying, the reduction in airline capacity places more obstacles in their path.

"There is very serious concern out there at the moment," says Mr John Power, Irish Hotels' Federation chief executive.

Hotels are promoting the home market to make up the shortfall. The overseas market accounted for 50 per cent of bed nights in 2000. This reduced to 46 per cent last year.

The Incoming Tour Operators Association predicts a fall in business of at least 15-20 per cent this year.

"It could be worse than that. It's a matter of guesswork as people are booking very late," says Mr Alan Glynn, chief executive.

The American market accounts for almost 50 per cent of business for tour operators and they are concerned that the Government is not taking the matter seriously.

"The problem is not being recognised," says Mr Glynn.

Figures are being distorted when people quote numbers of people travelling through airports, he says, as many of these are not tourists.

"We need more money for marketing. Britain has put additional millions into the promotion of tourism," he says.

"It's the same in the rest of Europe. They are all trying to capture a shrinking market post-September 11th. But the problem is not being recognised here."

The Irish Tourist Industry Confederation is calling for a once-off fund of at least €20 million to compete with the intensive marketing campaigns of countries such as Britain and Canada.

The €32 million marketing fund for this island has almost been allocated at this stage, while the British Prime Minister, Mr Blair, is appearing in US television advertisements promoting Britain as a holiday destination.