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VOL. 127 | NO. 39 | Monday, February 27, 2012

Room Service

Hotel market sees improvement as change looms on the horizon

By Sarah Baker

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The good news for the local hotel industry is that last year notched the most rooms ever sold on a daily basis with 4.8 million – 115,628 more than 2010 and 76,780 more than the previous high set in 2007.

Doorman Charles Muhammad transports a guest’s luggage at The Peabody hotel.

(Photo: Lance Murphey)

The bad news, however, is that 2011 revenue was still $23.3 million below the 2007 high mark because average daily rate (ADR) fell $8.43 below the peak four years ago, according to Memphis-based hospitality consulting firm Pinkowski & Co.

“The market – the customer side – has not been willing to pay higher rates,” said company founder and namesake Chuck Pinkowski. “It’s been a buyer’s market for a couple of years. That’s why the business is getting stronger, but the rates still haven’t come back. That’s why we’re still way below the room revenue figure for the peak. And it’s going to take a few years to get back to that level.”

A major part of that challenge is that the Memphis market is comprised of a community of small hotels. So when a hotel is running an ADR of $72, a 5 percent increase is $3.

Compared to the other end of the spectrum, where hotels tally a $150 ADR, a 5 percent increase is $7.50.

“The recovery really starts at the upper end of the scale – the luxury and the upper upscale properties are showing good growth in rates,” Pinkowski said. “That has a trickle-down effect to the other chain-scale properties, but it takes awhile for that to happen.”

It’s certainly taking longer than Doug Browne, general manager at The Peabody would like for it to.

“For the last three years or so, we’ve been down. We’re above everybody else in the city, but we’re down to ourselves,” Browne said. “We’re also above the national average, but we’re down to where we used to be in 2006 and 2007. Average rate is down slightly, but occupancy is what’s probably down the most.”

The Westin Memphis Beale Street hotel sits across from FedExForum a block from Beale Street. 

(Photo: Lance Murphey)

Perhaps one positive indicator for 2012’s performance is the recent uptick in both the individual corporate traveler and group business, even more so than transient business, said Patrick Jordan, general manager at The Westin Memphis Beale Street.

“You keep reading in a lot of periodicals and different things, not even just hotel-specific, that the economy is rebounding and I don’t necessarily know that that’s the case,” Jordan said. “But I do think it’s gotten to a point where people need to conduct their business, and that’s why the travel may start to pick up a little bit this year. People have got to get out and do the things that they kind of cut back on when the economy first got bad. There’s only so long you can stay at the corporate office or do things over the phone. You’ve got to get out and meet clients, shake hands, build rapport and do the things necessary to grow your business.”

On the flipside, as the season approaches spring break and summer, there’s evolving speculation about what gas prices will reach.

“That’ll have an impact on travel because Memphis is very much a drive-in market – we’re a medium-sized city surrounded by a lot of suburban areas,” Jordan said. “Drive-in travel will be reduced dramatically if gas prices get up to $4 or $5 a gallon again, so we’ve always got to be careful of that.”

Meanwhile, the Madison Hotel is anticipating 2012 to be a strong year, said general manager Mohamad Hakimian, as evidenced by the advance bookings of the Memphis Convention & Visitors Bureau.

“We have already had a January that was much stronger than last year by 15 percent,” Hakimian said.

But that being said, many of the big conventions coming to the city this year were booked as far back as four years ago, Pinkowski said.

“We’re going to experience business in 2012 that’s going to be strong, but … if they booked it in ’08, ’09 or ’10 when the rates were really going down, they were getting a deal for 2012,” Pinkowski said.

And since demand is in the driver’s seat, the current hotel landscape is highly competitive, said McLean Wilson, vice president of Kemmons Wilson Cos.

“The economy has not rebounded such that we can institute some big price increases in our local negotiated rates (LNRs), or local businesses that contract with the hotel for a negotiated rate,” Wilson said. “That’s why there’s not much of a rate growth with LNRs from the past year – that’s why it’s kind of zero growth.”

That’s why the supply pipeline is the silver lining for the industry as new construction remains in check. While a handful of vacant properties plague the market – such as the Best Western Benchmark Hotel on Union Avenue Downtown; the Chisca Hotel on South Main Street; and The Artisan Hotel/Country Hearth Inn & Suites at Union and South McLean Street – there’s also a couple that have gained recent momentum from investors.

By the fourth quarter, Atlanta-based Noble Investment Group plans to complete its $20 million transformation of the 243-room former Holiday Inn Select Memphis East at Poplar Avenue and Interstate 240 into a 233-room Memphis Marriott East.

The exterior of the Memphis Marriott East will be modernized and the interior will include upgraded guest rooms, reconfigured public spaces including a new restaurant and bar, the incorporation of the Marriott Great Room lobby, and enhancement of the more than 10,000 square feet of meeting and event space.

It’s an undertaking that will create more than 300 construction jobs for the rehabilitation process, and up to 100 full-time jobs once it opens, said Noble Investments principal and executive vice president Ben Brunt.

“Our entire strategy is in rebranding, investing capital into the asset, bringing in a new management team and really kind of positioning the asset within the market so it can succeed,” Brunt said. “Whereas the property has good bones, it was a dated program that is no longer relevant to how people use hotels. Every finish that is in the property now will be changed.”

The fate is also on the horizon for the once French Quarter Suites Hotel in Midtown’s Overton Square district. Two new local owners, Jay Kumar and Rishi Chopra of Meridian Hospitality, are under contract to buy and convert the vacant 103-room hotel at 2144 Madison Ave. for $2.3 million and pump about $3.7 million into renovations.

It’s a project that’s still in the planning stage, but already has seen opposition from neighborhood stakeholders, many of which long for a more upscale development to match Loeb Properties Inc.’s planned $19.2 million revitalization of Overton Square.

Ron Kirkpatrick, one of French Quarter’s five owners, vowed in December to redevelop the vacant building into “a four- or five-star hotel and day spa,” contingent upon Memphis City Council’s approval of $16 million in city funds for a parking garage and detention pond in Overton Square. He said the $10 million to $12 million project would alone create 125 jobs.

But Chopra said investing $12 million into the 28-year-old, 77,866-square-foot hotel at the northeast corner of the Cooper-Madison intersection isn’t economical, given it’s not a roadside location and billboards can’t be installed to draw people into the area.

“A $12 million hotel, today, I don’t know if anybody could open it up and succeed, however they fix it,” Chopra said at the Feb. 1 public meeting at Memphis Heritage Inc. “If you open a $12 million hotel, you’re opening an independent, boutique hotel. You’re not necessarily opening a brand name, which is not going to have a reservation system, and you’re just going to have to take a chance on that. It could close in six months and you could be down the drain.”

To avoid that possible loss, Chopra and Kumar have partnered with Choice Hotels International, an international lodging company with a strong reservation system. Since rooms in the old French Quarter site are already laid out as suites, the switch to a Comfort Suites is feasible, Chopra said.

“The economy is tough and it’s hard for people to spend $200 on a room,” Chopra said. “I’ll give you an example. There was a boutique hotel on Madison, the Gen X, all the way down Madison, and they converted it to Best Western because it didn’t work. It just didn’t succeed. They couldn’t get enough of that clientele in there for a boutique hotel.”

There’s also potential in the former Greyhound Bus Station at 203 Union Ave., across from AutoZone Park and near one of Downtown’s busiest intersections. CB Richard Ellis Memphis has recently lowered the property’s price from $2.3 million to $1.9 million, and associate Bobby Daush said the site would be ideal for potential hotel or retail redevelopment, giving its sports-and-entertainment zoning status.

And then there are two Downtown properties on Linden Avenue near FedExForum. One is at Linden and Fourth Avenue, where Royal Phoenix Hotel LLC is considering building a 300-room Hilton-branded hotel. The other is at the southwest corner of Linden and Danny Thomas Boulevard, where Texas-based Lowen Hotels has cleared the former public health site and is in the preliminary stages of trying to nail down the hotel brand and financing.

Overall for 2012, Pinkowski predicts a year-end occupancy of 60 percent – up 3.5 percent from last year – and an ADR of $78 – up 3 percent from 2011. He said there’s a natural growth of the business based on an improving economy, but Memphis still has a ways to go before it reaches the capabilities of peer cities like Nashville, where the state-of-the-art Music City Center convention facility is being built.

“There’s a lot of new hotel projects that are under construction in and around that convention center that’s going to create new business for Nashville that hasn’t been in Nashville before,” Pinkowski said. “That’s what needs to happen for Memphis. The city has natural assets, but the challenge is putting a plan together to maximize those assets.”

PROPERTY SALES 0 291 21,272
MORTGAGES 0 160 16,194
BUILDING PERMITS 258 692 41,920
BANKRUPTCIES 1 117 6,579