The Inn Crowd
Dismissed as money-losing dinosaurs a few years ago, the nation’s big-city, full-service hotels are now hailed as the star performers of the booming lodging business, as hoteliers raise their rates and still turn away customers.
It’s not uncommon for some of the nation’s giant downtown hotels to be booked solid for days with business people, conventioneers, international visitors and tourists. On Tuesday, for example, the nearly 2,000-room San Francisco Hilton & Towers, the largest hotel in California, was sold out. The giant 1,700-room Sheraton New York Hotel & Towers was full Wednesday, as were two nearby sister properties.
Sheraton’s large portfolio of lucrative, full-service properties explains in part why Beverly Hills-based Hilton Hotels Corp. has doggedly pursued its hostile takeover of Sheraton’s corporate parent, ITT Corp., during the last 10 months.
“The full-service [hotel business] is the place to be,” said Hilton’s chief financial officer, Matt Hart, who noted that 10 of the company’s largest, full-service properties account for about 60% of the cash generated by the entire chain of more than 240 hotels. “They are very important to us.”
With the notable exception of downtown Los Angeles, which was hard hit by the region’s economic slump earlier in the decade, most centrally located, full-service hotels have outperformed the industry in terms of profits and occupancy. Last year, the average occupancy rate for full-service hotels in New York City exceeded 80%, while the nationwide occupancy rate for all hotels stood at 71.1%, according to a survey by PKF Consulting. Operating profits at the New York hotels were nearly three times higher than the national average.
The grande dames of the lodging industry are complex and costly creatures that cater to tastes ranging from cost-conscious vacation goers to visiting royalty. The scope of operations often includes hundreds of guest rooms, conference centers, restaurants, indoor swimming pools and shops. The 1,117-room Westin St. Francis hotel, for example, employs about 800 people and generates about $100 million a year in revenue, according to Raymond Jacobi, who oversees the landmark hotel on San Francisco’s Union Square.
“It’s not like a manufacturing or other kind of business where things can get mundane,” Jacobi said. “It’s like [running] a company that takes up a complete city block.”
The complexity and high costs of full-service hotels proved deadly in the early 1990s, when the recession and a glut of newly built properties sent occupancy and room rates plunging. Hotel operators were stuck with large operating costs and high debt payments, and many prominent hostelries were sold at bargain-basement prices after falling into bankruptcy.
“Because they are the most expensive properties to run, they are also the ones that hurt the most during a recession,” said Robert Mandelbaum, director of research at PKF Consulting.
But the big hotels began to reap big rewards as the national economy and the travel business bounced back while new construction remained nearly nonexistent. With strong demand and no new, significant competition, Hilton’s Waldorf Astoria hotel in Manhattan was able to hike the average room rate nearly 10% during the last year to about $250. The legendary hotel’s occupancy rate rose five percentage points to 85% during the same period.
The outlook for major downtown hotels looks bright despite a recent jump in new hotel construction. That’s because most of the building is going on in suburban locations, where a new, limited-service hotel can be opened in less than two years for as little as $4 million. A new, full-service downtown hotel could easily take more than five years to build and cost more than $100 million, according to industry analysts.
