Developers are shunning luxury hotels in the U.S. as room rates fail to rebound to peak levels and profits are squeezed by the costs of offering swanky amenities such as spas and trendy restaurants.
Six luxury hotels are expected to open in 2013, the same as in 2012 and down from 23 just three years ago, according to Lodging Econometrics, a Portsmouth, New Hampshire-based research and consulting firm. Investors are instead focusing on the so- called upscale category, where new properties are forecast to climb 49 percent from last year to 131 hotels.
The decline in construction, combined with conversions of existing properties into cheaper options, signals there may be fewer five-star choices in the future for travelers seeking the highest-quality rooms and amenities. Lower margins for luxury hotels have made them less attractive for property owners, said Steven Goldberg, head of real estate investment banking at Robert W. Baird & Co. in McLean, Virginia.
"It's nearly impossible to do a new five-star built in the U.S. that makes economic sense today," Goldberg said. "The total number of luxury hotel rooms is very likely going to be less in five years from now as compared to today."
Luxury projects currently under construction — which include Marriott International Inc.'s Clock Tower Edition New York and the Loews Chicago Hotel, developed by Loews Corp. (L) and DRW Trading Group — are limited to six cities, according to STR, a Hendersonville, Tennessee-based research firm. The share of luxury hotel rooms as a percentage of the U.S. total fell to 2.2 percent last year from 2.6 percent in 2010, STR data show.
Less Willing
After the last recession, high-end hotels have had to reduce pricing to maintain occupancies because consumers are less willing to pay top dollar, said Nikhil Bhalla, an analyst at investment bank FBR & Co. in Arlington, Virginia. Luxury hotels' revenue per available room, an industry metric of rates and occupancy, was $202 last year, down from the 2007 high of $213, according to STR. In the upscale segment, which includes such brands as Hilton Garden Inn and Wyndham, revpar has caught up to the peak at $84.
"There was a time when a hotel could super-charge the whole five-star experience to whatever they wanted," Bhalla said. "That's not the case anymore. Today, there's a cap as to how much you can charge. After this last recession, things have changed. Consumers have changed."
Net operating margins tend to be in the "mid-20 percent range" for upper upscale and upscale hotels, compared with the "mid-teens" for luxury, which have higher costs for employees and amenities, he said.
Restaurants, Spas
Luxury hotels, including such brands as the Four Seasons and Ritz-Carlton, and those rated as upper upscale and upscale – – one and two notches below the top, respectively — are different in the amenities they offer. Luxury properties have valet parking, 24-hour room service, multiple restaurants and full-service spas, said Jan Freitag, senior vice president at STR. Higher nightly rates accompany the superior service.
A room at the Four Seasons Hotel New York in Manhattan starts at $895 a night during the week of April 15, according to its website. A stay at Starwood Hotels & Resorts Worldwide Inc.'s (HOT) Westin New York at Times Square, considered an upper upscale brand by STR, starts at $499 for the same week, while the upscale Courtyard New York Manhattan/Midtown East by Marriott has $399 as its lowest rate.
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