How brands, owners manufacture ‘a product that doesn’t exist’

ATLANTA — For hospitality brands and owners, a big part of development is creating new products and ones that are used differently than they were in the previous generation.

“There are a lot of products out there where the way customers use the product is different than it was 15 or 20 years ago,” said Wes Whitman, co-managing partner and co-founder of Westlake Village, California-based Whitman Peterson. “Whether that’s industrial or other parts of the real estate business, it’s consumer led. If we can acquire a nice building on a great basis, we will do that all day long, but in many of our strategies, we have to manufacture a product that doesn’t exist.”

One of the products Whitman Peterson is involved in is a modern customized Airstream hybrid hotel for RV parks like AutoCamp Yosemite. Whitman said the opportunity comes from the lack of modern services in many of the best places to camp — the U.S. National Parks.

“In many cases in these national park locations, most brands are not represented there. A lot of the products that are there are 30 or 40 years old and unrenovated,” Whitman said. “We create customized hotel rooms within the Airstream. They’re boutique hotel finishes. We put about 80 of them around a really beautiful mid-century modern clubhouse.

Whitman said they often service couples where one really loves the outdoors and the other doesn’t want to sleep in a tent. He said the ADR the experience can create can yield a top return on investment.

“It creates a great opportunity to access the outdoors in a comfortable way… The rates people are willing to pay to have that unique experience would surprise you,” he said. “It isn’t uncommon in the summer for us to hit a $400 to $500 ADR for that product, and annually in the high $200s, low $300s across the country.”

Whitman and other hospitality executives participated in a “Brands + Owners: A development perspective” panel during the second day of the Hunter Hotel Investment Conference in Atlanta. The other panelists were J.B. McKibbon, president of Tampa, Florida-based McKibbon Equities; Julie Richter, CFO of Raleigh, North Carolina-based Concord Hospitality; and Noah Silverman, global development officer, U.S. and Canada for Marriott International. The panel was moderated by Julienne Smith, chief development officer for IHG Hotels & Resorts.

Capital stacks

When asked how Concord Hospitality is putting capital stacks together, Richter said the credit market is tough.

“The debt money is out there. It’s expensive, which makes it hard to make all the deals underwrite when combined with the increased construction costs and so on, but there’s enough out there,” she said. “Then from an equity side, we’re seeing that we need probably slightly more equity than we historically needed because, as well as the cost being higher, the leverage is just slightly lower in those various pieces of the capital stack.”

She said Concord has always been a conservative investor, and coming out of COVID, the risk appetite isn’t any higher. “We were never a high-levered company from a deal-by-deal basis… We’re also comfortable with less leverage than we used to be.”

Still, Richter said Concord still hopes to be an active acquirer. “We acquired one last year, and we have offers out on multiple deals right now to acquire things… I don’t know that we always adjust our return thresholds for development, risk versus acquisition, pricing, etc. Sometimes we’re not the highest bidder, but if we’re in the right place for the right deal, we’re also looking to acquire,” she said.

Beverage-forward F&B

McKibbon said his company has succeeded in the F&B business by focusing on the latter.

We tend to lean towards the rooftop bar sort of destination outlet that’s more beverage-focused because it is profitable.

J.B. McKibbon

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“With independently branded rooftop bars and outlets, we target a 30% range and margin. We focus more as an organization on beverage-forward operations,” he said. “The target is 70% sales from beverage and 30% from food, and that allows us to maintain a decent margin. 

“Generally speaking, when looking at new product development, we tend to lean towards the rooftop bar sort of destination outlet that’s more beverage-focused because it is profitable. A lot of these outlets are extremely expensive to develop. So, we want to get some return before even counting on the incremental ADR driver you will get on the room side.”

Hotels from office buildings

Silverman was asked about lessons learned from a recent conversion of an office building to an AC Hotel by Marriott. He said they can be challenging architecturally.

“Something built as an office and then turned into a hotel is not easy to do… You do need to pick your building very carefully,” he said. “If you’re going to think about doing something like that, and there’s probably a lot more to pick from today than there might have been in the past, you do have to be careful. I don’t think we’ve seen a material increase in [hotel conversions from office buildings] despite it being an obvious thought for what you might try to do with office buildings.”

McKibbon said his company did an office-to-hotel conversion, which wasn’t easy. “The mechanicals and the footprint need to actually line up for the room space to lay out and be efficient. Then, you still don’t know what you don’t know about an old building. Once you are in there tearing things out, the cake is baked, if you will,” he said. “We would do one again, but we wouldn’t want to do it programmatically because it’s challenging, and it needs to be the right opportunity for it to work and make some sense.”