How owners get the best ROI from renovations

LOS ANGELES — When thinking about how to get the best ROI from hotel renovations, Jeff Wagoner starts with what’s already in the room that can stay.

“One of the main ROI pieces to this is: how do you start and what do you already have in the room? What do you have in the lobby, in the public space to begin with?” said Wagoner, president and CEO of Honolulu-based Outrigger Hospitality Group.

“I try to look at this from a practical perspective. If we put away 4% reserves annually, from a capital perspective, we would utilize half of that annually on supplies related to the hotel’s operation. Then 2% put aside, even for 10 years, gets you nowhere near a full renovation of a hotel, and owners have to pony up out of their pocket to be able to do that renovation.”

Wagoner brought up the example of using green marble in hotels.

If you walk into a hotel today and see green marble done incorrectly, you’ll say that’s dated. It could be put there yesterday, and it’s going to [look] dated.

Jeff Wagoner

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“If you walk into a hotel today and see green marble done incorrectly, you’ll say that’s dated. It could be put there yesterday, and it’s going to [look] dated,” he said. “When you look at showers and the tiles in showers, you could walk into some hotels that were done 10 years ago, but you wouldn’t know that it was done 10 years ago. If you think it was done yesterday, because of what they did… within those showers, that becomes important.”

Wagoner mentioned another example of being in a meeting with interior designers recently where they had an emerald green velvet-type chair that looked pretty cool, but he mentioned that it was going to be dated in a few years and would need to be replaced in the next five years. 

“That designer called me afterward and said, ‘Thank you for being honest with us. That helped us,’” he said. “They want to do something unique, different, and high quality. It might be in a magazine somewhere, but at the end of the day, they really want something that lives.”

Wagoner said this is the benefit of coming from an owner-operator mentality. 

“It’s important to me that when we get to that stage where when we need to renovate again, I’m not having to gut an entire guest room because we made the coolest, sexiest room on the planet, and five years later, it was out of style,” he said. “To me, that’s the ROI concept -- that you can still do things that are incredibly sexy with art or pillows or other color items, but the real hard case goods of a property need to be able to live, quite frankly, even more than 10 years now.”

Wagoner was part of the “View from the C-Suite: 2025’s Musts to Amplify the ROI of Design” panel at the ALIS DESIGN+ by Northstar conference in Los Angeles. The panelists included Evens Charles, found and managing principal of Washington, D.C.-based Frontier Development & Hospitality Group; Douglas Dreher, CEO of Edmonds, Washington-based The Hotel Group; Kendra Plummer, founder and CEO of Atlanta-based Elise Capital; and Wagoner. Kevin Carey, COO and senior executive vice president of AHLA, moderated the panel.

Operational perspective

Charles said that boutique hotels and bringing an experience to guests have had a major impact on the direction of hotel design. He brings up an adaptive reuse project his company is currently working on in Philadelphia as an example of the challenges of prioritizing ROI in renovations.

“Some of the challenges that can come with it, if you think about how custom you’re going to go and how unique you’re going to make some items or the availability to reorder things, you have to think about that from an operational perspective,” he said. “For some of the items that you may put into your hotel, does it have the same energy efficient standard as something that’s not as custom? Could it have an impact on utility costs?”

As an owner, Charles said he is always looking at the bottom line. And when he thinks about operational efficiency, the biggest driver is labor.

“We have a lot of our labor costs in the housekeeping department. We have it down to a science related to how fast housekeepers are getting out of these rooms by the minute and what we design will impact that. So, if there’s anything that we design that has special cleaning instructions that we have to teach our employees, or new employees, that can have an impact on time. You would have to be careful about when it comes to that.”

We’ve learned at the ALIS Conference that the brands are back. They’re absolutely enforcing higher-quality audits and PIPs, and some brands even have fixed renovation cycle management. It’s absolutely central.

Douglas Dreher

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Plummer said the hospitality industry always tends to be great with flexibility. “We tend to do things more after they become trendy and stabilized, and we need to be moving more into the future and thinking of the next step because things in the world right now are moving so fast,” she said. “If we stay behind, then it ruins the guest experience.”

One of the ways to do that is by having modular and flexible design, Plummer said. 

“How do we ensure that we’re protecting the assets so that the design of those things, one, are durable, but two, can be easily replaced,” she said.  

Plummer said that one of the best examples of flexibility is the industry moving from full rolled-out carpeting in rooms to having carpet tiles.

“If something happened, for example, a spill on the carpet that was a stain that you can’t get out, or a hole running through that rug, you are able to take out just that tile, which is much less of an expense than having to replace the entire carpeting in that room,” she said. “Being able to remember and keep in mind how we design in ways like that so that we can replace pieces and parts versus the whole thing [is important]. Because capital expenditures, you do not want them to be very high, especially in this current economic climate.”

Dreher said the effects of COVID, which can still linger today, have impacted cash flow. “There’s never been a bigger critical time to look at your ROI, be it you’re building a new building or renovating,” he said. “We’ve learned at the ALIS Conference that the brands are back. They’re absolutely enforcing higher-quality audits and PIPs, and some brands even have fixed renovation cycle management. It’s absolutely central.”

Dreher brings up an example of one of The Hotel Group’s properties where the brand wants to scape off all the popcorn ceilings, but they have something else in mind.

“This particular hotel would rather replace the pool that never gets used at this big airport property… and create a world-class gym. That has more of an ROI than a popcorn ceiling,” he said. “We have to dive into those details and work with our brand partners to ensure what we spend our money on.”