Webinar: Owners share conversion best practices

NATIONAL REPORT – With labor costs, interest rates and other instability in the market weighing on their minds, hotel operators are becoming increasingly quick to pull the trigger on hotel conversions. But such deals need to be entered into thoughtfully, panelists said during a Hotel Investment Today webinar last week sponsored by Sonesta International Hotel Corp.

To watch “Success Secrets Every Hotel Owner Should Know About Conversions” on-demand, click here.

Jyoti Saolia, president and CEO of Ellis Hospitality, can attest to the growing interest in conversions. Her company recently walked away from a 25-year relationship with one brand in the San Francisco Bay area to convert to another.

“We were very stagnant with the existing brand and we thought there was a high saturation of that particular brand in the market,” she said. “Going with another brand was our best option.”

Ellis isn’t alone. The number of executed conversions/renovations broke records at the end of 2023, totaling 3,291 projects comprising 510,584 rooms in the final quarter of 2023, according to Lodging Econometrics data. And in the U.S. alone, there were a total of 2,028 such projects encompassing 303,330 rooms during the same time frame.

Those numbers come as no surprise to Brian Quinn, Sonesta’s chief development officer. Conversions, he said, have proven a reliable way for hotel companies to grow considering the challenged market developers have been dealing with the past few years.

“If you think about the dynamic that we came through post-COVID, you had supply chain issues that impacted our ability to get construction projects started,” Quinn said. “And then you couple that with the rising interest rates we dealt with the last 18 months. It just made it a much more challenged environment.”

Smart spending

Panelists said that while it’s understandable owners might pay closer attention to the conversion market, they still need to be smart about how they are approaching the market.

For instance, Mike Johnson, president of Management Consultants, Inc., said it can be tempting to jump to convert to the latest brand offering. But developers need to have deep knowledge of the market in question prior to making that leap.

“It takes in-depth knowledge of what the (average daily) rates can be and might be and you’ve really got to sharpen that pencil because that’s, to me, where this whole question starts,” he said. “What can this market afford? What can we do with this market?”

Developers also need to leave themselves some wriggle room when it comes to changing market tastes. Hotel guests today, he said, are sensitive to price but still want a unique, boutique experience.

“The consumer is saying they want a different experience,” Quinn said. “I think the entire industry is trying to get their arms around the fact that what worked for the last 30 years – consistency – is no longer the customer’s primary need.”

He implored owners to look closely at guest service scores to understand what their customers want and use that data to be smart about the upgrades that might come in converting to a new brand. For instance, brand standards will likely dictate that pests should be kept out of a hotel. But the addition of a living wall – a popular boutique element that a franchisor could want the owner to adopt – might not be a smart addition.

“We think that we should be rational and have common sense,” Quinn said. “And if we’re saying, ‘Keep pests out of the hotel,’ then find another way to be green.”

Discretion is sometimes the better part of valor, said Jatin Patel, principal at BHGAH Hotels. While franchisees might want the latest and greatest added at a hotel, the process of making that happen can bring up additional headaches. He pointed to bathroom conversions where the franchisor might want a bathtub converted to a shower, but in the process of doing that aspect of the renovation, other issues, such as with the plumbing, can arise.

“It’s really a domino effect,” he said. “You think you just want to do one scope of work, but while you’re in there, the plumbing has to be moved.” Patel encouraged owners to talk over with franchises where the renovation fund might have the biggest impact.

Panelists pointed to luxury lifestyle, extended-stay, premium economy and midscale hotels as attracting renovation debt today. It’s incumbent on owners to have a good feel for the kinds of renovations these properties can support, said InterMountain Renovations President Jared Walker. For instance, he called out extended-stay hotels and the unique issues that pop up when renovating these hotels, such as redoing the kitchenettes, dropping in a new dishwasher or cooktop.

“Those implementations can stress or overload the existing infrastructure or building,” he said.

Walker also said owners should focus renovations on where they get ROI. “What are the guests going to pay for?”

At the end of the day, the panelists agreed one of the most important lessons to be learned is to remain flexible on scope. For example, Quinn said that while business travelers might love to have a standup shower instead of bathtub, there are other ways to bring value to a bathroom without having to crack open every bathroom floor in the hotel, possibly opening the door for other renovation headaches to pop up.

“Maybe you just take 20 of the rooms and provide the shower experience because when you crack the tub, you are going to expose the things that my colleagues have mentioned around plumbing and electrical and extra cost,” he said.