Hotel 101: So, You Want To Open A Hotel? (Part One)

by McLean Robbins (RSS feed) on Oct 4th 2012 at 11:00AM

Let's say that one day you woke up and decided you wanted to build a hotel (hypothetically, of course). Where would you begin? What's next? That's the fundamental question we'll be asking of hoteliers and hospitality experts over the course of the next few months in "The Birth of a Hotel" series on Gadling.

To illustrate our point, we'll be following the development, from conception to opening, of Capella Washington D.C., Georgetown, a boutique luxury property in DC that will serve as the brand's US flagship. We'll go inside to show you the construction process, introduce you to the key players and show you not only how a hotel is built, but how a brand establishes its presence in a new market. And, to add in a little twist, we'll showcase the hotel in its race to the finish line, as it prepares to open in time for one of DC's biggest events – the presidential inauguration – in mid-January, 2013.

Think of the series as a hotel reality show: "How It's Made" meets Bobby Flay's "Three Days to Open" meets (just a little bit) of "Hotel Impossible." Only we won't be giving out cash prizes and we hope to keep the on-camera hissy fits to a minimum.

So let's begin at the beginning. "One of the biggest misconceptions people have about the hotel business is that it's simple," says John Hughes, Ed.D., CHE, industry veteran and the director of hospitality management and associate professor of hospitality at the York College of Pennsylvania. "It's not."

We're inclined to agree.

Hotels are often a losing gamble. The hotel industry took a huge hit post 9/11 and has been slow, particularly in the luxury sector, to recover. Choosing a location that can support your endeavor is often the first and most important step.

Step One: Where Am I Building?

Capella's decision to establish their U.S. flagship in Washington was a smart one. While New York City is often thought of as a more traditional choice to launch a brand (and, in fact, Capella manages The Setai in the city), Washington is a grounded market offering opportunity for luxury brands.

According to Smith Travel Research, Washington, DC's overall hotel occupancy hovered around 70% in 2011, up from just 66.5% for the nation overall. Revenue, which declined in 2009, grew in 2010 and 2011, and is predicted to grow again in 2012. Supply is also growing, showing the market is expanding, although not fast enough to meet demand. Despite the recession, opportunities in the luxury market remain high in Washington.

Step Two: Show Me The Money.

Hotels aren't cheap – the 49-room Capella Washington will cost about $45 million, The Washington Business Journal estimated. In comparison, Donald Trump will open a $200 million, 250+ room hotel in a historic post office in 2016, and $547 million, 1,200 room Marriott Marquis is currently under construction.

Capella Washington will be a privately owned hotel, property of Castleton Hotel Partners, LLC. Capella Hotels and Resorts will manage the property, but does not have an ownership investment in it.

Step Three: What Am I Building?

There are many opportunities to build hotels at any level of service in the DC market. This year, 23 hotels are currently in the development pipeline in Washington, adding to those 121 properties and 28,000 hotel rooms in DC proper and more than 660 properties and 106,000 rooms in the greater Washington Metropolitan Region.

In contrast, 379 hotels comprising 38,909 rooms opened in the United States in 2011, STR data showed. New York's pipeline exceeds Washington's only slightly, with 172 hotels in development.

Step Four: What Flag Do You Fly?

Hotels can be owned by an individual, a management firm or a brand. Many names, such as Marriott, Four Seasons and Hilton, are primarily management companies – they often don't own the hotels they operate, instead securing multi-year management contracts. Others choose to operate as independent properties. Around 70% of US hotels are branded, STR data shows.

Ownership groups, which often have multiple brands at differing levels within their portfolio, spend significant time weighing the pluses and minuses of each.

Capella Washington managing partner Bruce Bradley says that he believes Capella represents a high-quality product that is not in any way standardized, instead melding to fit the country or city the property is located in.

In terms of popularity, IHG or InterContinental Hotels Group, is the largest hotel brand worldwide, with over 650,000 rooms and more than 4,500 hotels worldwide. You may not know IHG, but chances are you've heard of their properties: Holiday Inn, Staybridge Suites, Candlewood Suites and Crowne Plaza, as well as their more upscale or boutique brands, InterContinental, Hotel Indigo, Even and Hualuxe. Each brand has unique selling points.

Names like Marriott (which also owns Ritz-Carlton, Autograph Collection, Bulgari and Edition) and Starwood (St. Regis, Westin, and W) are also in the top ten. Capella, in contrast, has just five open properties, with four more to come by 2014. Only one, The Setai, is currently open in the United States.

Nick Gregory, general manager of boutique brand Kimpton's newest property, Hotel Monaco Philadelphia, says that a brand name can have distinct advantages, ranging from corporate structure to a deeper talent pool to economies of scale on the sales side. The lessons learned from previous mistakes can also be valuable. And, of course, brand recognition doesn't hurt.

Bradley agrees. The ability to cross-market and leverage Capella's strong client base in a global capital like Washington was an important part of the decision-making process.

Many more properties operate without branded names – for various reasons. "We like to start with a blank slate," said Abigal Tan, Director of Corporate Affairs and International Investments for London-based St. Giles Hotels. Currently, the company is renovating The Tuscany, a former Starwood property.

"I'm very hands-on," says Hank Fried, President of The Impulsive Group, a New York-based ownership and management firm that operates, among others, independent luxury property the Sanctuary near Times Square. The freedoms afforded by eschewing a corporate brand let him incorporate the best of his travels and experience in hotels into his properties. Operating as an independent "lends itself to a much more family friendly hotel – everything is a little bit warmer," he says.

Step Five: Where Do We Go From Here?

Think you're ready to invest in a hotel? We're just getting started. Next, we'll begin the marketing, development and planning phase. Find this, and more, in the next installment of the series.