Navigating hotel property-improvement plans and the key to unlocking value

The global hospitality industry has undergone significant changes in the last five years, experiencing both major disruptions and a dynamic recovery. While the initial phase of the pandemic presented unprecedented operational challenges, the subsequent economic rebound has introduced new hurdles, especially concerning property-improvement plans, or PIPs.

Hotel owners face growing challenges in managing the rising costs of mandatory renovation programs. Crucial for maintaining franchise affiliation and brand standards, PIP expenses have significantly increased due to supply chain issues, persistent inflationary pressures and labor shortages.

This confluence of factors has increased the availability of hotels with substantial capital expenditure and PIP requirements as many owners grapple with sticker shock, potential refinancing hurdles or special servicing challenges. But for savvy investors who recognize a PIP as a value-added investment rather than a liability, these assets offer an advantageous entry point to acquire properties at a discount, unlock significant embedded value through strategic PIP execution, stabilize operations and increase revenue per available room yields.

This strategy may be contributing to the shrinking bid-ask spread, as sellers contemplate two options: Executing the PIP themselves, or selling the asset to a buyer willing to complete renovations and monetize future benefits.

Accurately budgeting PIP renovation costs is crucial for investors to make informed acquisition decisions. Successful hotel acquisitions hinge on several core elements: location, market viability, brand strength or franchise opportunities, functional suitability and past performance. Additionally, PIP-driven acquisitions need a well-defined strategy for how the redeveloped property will compete in its local market, focusing on top-line revenue generation and achieving operational efficiencies. Value creation is not an inherent outcome, but rather the result of a deliberate and well-executed plan.

Not all brand-mandated improvements contribute equally to revenue generation. When approaching a PIP for a newly acquired asset, the overarching strategy should prioritize maximizing ROI, focusing on impactful renovations that will most significantly enhance the guest experience, transform the guests’ perception of the hotel and thus drive revenue performance.

Brands share this objective and may be willing to amend less impactful requirements to facilitate high-impact PIP components. Key areas for strategic investment include:

• Public spaces: The arrival sequence, encompassing the lobby and other communal areas, influences the guest's initial impression of the hotel. Strategic investments in these zones set the tone for the entire guest experience.
  
• Guestrooms: The guestroom remains the primary focal point of the hotel experience. Updates to furnishings, bedding, bathrooms, door locks and in-room technology directly enhance guest satisfaction and average daily rate. Incorporating elements such as plank flooring, tub-to-shower conversions and closet systems can contribute to faster room turnover, serving the dual purpose of decreasing labor costs while enhancing the guest experience.
  
• Amenities: Judicious amenity investment can serve as a potent differentiator. Evolving guest preferences have influenced brand mandates for expanded fitness centers, collaborative lobby workspaces enhanced breakfast options and manager receptions, outdoor lounge areas and robust technology packages. Guests tend to be willing to pay more for amenities that align with their expectations for a specific chain scale. However, it is crucial to avoid over-improvement, which may not yield a net positive return.

PIPs are negotiable! A change in ownership presents a crucial opportunity for the buyer to negotiate the scope and timeline of the renovation. The new owner can leverage the size of their current portfolio, established brand relationships and comprehensive market analysis to gain an advantage.

Brands are often more open to flexibility when a committed owner presents a strategic plan for achieving profitability. For example:

• Focus on high-ADR-impact improvements.
  
• Use a qualified PIP contractor to identify “value engineering” opportunities that can reduce costs by refurbishing serviceable items.
  
• Advocate for phasing the project to align with cash-flow cycles and low-demand periods. Strategically scheduling rooms to be taken out of service for PIP implementation will minimize operational disruption and lessen revenue impact.

Completing the PIP is just the first step. To fully maximize value, owners must implement operational strategies that boost top-line revenue and minimize expenses. The goal is to optimize NOI.

• Market the renovations: A refreshed property is a marketable asset. To inform guests and drive demand, showcase the renovations through updated website photography, social media campaigns, OTAs, brand marketing channels and targeted sales blitzes.
  
• Update pricing strategy: The completed renovation justifies a revised pricing strategy. A thorough post-renovation marketing analysis can guide owners in determining optimal room rates. Leveraging revenue management strategies, brand sales teams, local relationships and internal sales efforts can help ensure that the property recoups its PIP investments. Owners should quantify the necessary ADR increase to achieve the desired ROI and compare it against the competitive set to ensure the market can support the increase.
  
• Use guest feedback: Guest feedback regarding their experience and perception of the price/value relationship — whether from online reviews or internal surveys — provides invaluable quantitative and qualitative data. This feedback loop should inform and, if necessary, adjust the marketing plan to align with guest expectations.

Although the immediate financial outlay associated with PIP implementation can seem formidable, the long-term benefits typically supersede the initial investment. A modern and brand-compliant hotel is more attractive to potential investors and guests, thereby strengthening its competitive standing in the market.

In hotel ownership, creating value is a dynamic and consistent process. Maximizing value rests on three pillars: consistent asset maintenance, timely and strategic completion of PIPs, and consistently sound operational strategies.

Though external variables such as economic cycles, interest rate fluctuations, and new supply additions inevitably influence market dynamics, rigorously managing controllable elements demonstrably enhances ROI. Ultimately, a blend of strategic foresight and opportune timing is essential for optimizing hotel disposition, culminating in a successful investment trajectory.

*The authors thank John Dehner, CBRE Vice President of Hotel Valuation & Advisory, for his assistance with this article’s research.

Eric Belfrage is a Senior Vice President for CBRE’s Columbus office and serves as a member of the Investment Properties and CBRE Hotels teams.

Laurel Keller is a First Vice President in CBRE’s Columbus office, where she is a member of the Investment Properties and CBRE | Hotels groups.

This column is part of ISHC Global Insights, a partnership between CoStar News and the International Society of Hospitality Consultants.

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