Hotel Industry

The Boom in Rooms
Growing market demand and favorable financing are behind the continuing boom in hotel construction

Below: The lobby of the O'Henry Hotel in Greensboro. At right, the Sheraton Grand New Bern received a $2 million renovation to take advantage of a new convention center next door on the waterfront.

By Sandra L. Wimbish

You don't have to look far to see the boom in the hotel industry because new hotels are springing up like mushrooms across North Carolina. Just in the past four years the number of hotel rooms in the state jumped by more than 19,000, to 125,000, and the growth in some metro areas is stunning. In Wake County, there now are 66 percent more rooms than in 1996.

Wake's boom in hotels is due largely to its expanding convention center business and state government functions. The convention center trade also is spurring hotel construction in Charlotte, where a public/private partnership will soon break ground on a 700-room, four-star Westin Hotel and a 1,650-space parking deck across from the Charlotte Convention Center.

It's not conventioneers, but vacationers, that are clamoring for more hotel rooms in other parts of the state. Along the coast, in the Sandhills and the mountains, leisure travelers are filling up a lot of new rooms.

“There is very strong tourism in this state,” says Bob Winston, the founder and CEO of Raleigh-based Winston Hotels, which owns and operates 50 properties nationwide, including 16 in North Carolina. “Couple that with the fact that the state is in very good economic health, and it spurns growth.”

New hotels create many new jobs. Industry employment in North Carolina was 34,240 in 1996, according to Employment Security Commission data. But at a better-than 2 percent annual growth rate, the number of hotel jobs should grow to 41,910 within six years. In Guilford County, 13,600 people are employed in travel-related jobs and the county pulled in $752 million in 1998 in travel and tourism revenue.

Favorable financing is facilitating the hotel boom. Until October 1998, hotel financing was fueled mainly by mortgage conduit financing on Wall Street. “And then in 1998, the mortgage-backed securities for hotels basically hit the wall,” says Doyle Parrish, president of Summit Hospitality in Raleigh. “A lot of those mortgage-backed securities were priced by the Treasury bill, and the T-bill was at record lows. Financing opportunities within the Wall Street markets were plentiful.”

Financing was the lowest it's been in the past 20 or 30 years. Hotel loans were being put in place for a lot less than 8 percent; sometimes as low as 7 percent. “In our business,” Parrish adds, “it's very unusual to see that kind of rate, one that is so close to office building rates or commercial development rates. It's just been a good economic environment for us.”

Combine the good rates with increasing consumer demand, and you have the perfect combination for industry growth.

There are some in the industry who say the growth has been too fast and uneven, pointing out that most of the new hotels in the state are in the economy category — Hampton Inn, for example. Of the 19,000 new hotel rooms built in North Carolina in the past four years, only 1,200 of them are at full service hotels offering restaurants and meeting facilities.

Why so many new budget hotels? Because they make money. “Most of the construction of limited service hotels has been moderately to very successful,” says Hobbs.

One big reason so few full service hotels are being built, despite the availability of cheap money, is that they are just so expensive. “It's much more difficult to finance full service hotels because they require more equity from the ownership's side. In the '80s and '90s we saw a lot of developers going for selected serve. They understood that market, there was a need for rooms, supply was not that prevalent in certain areas, so they built selected serve,” says Parrish of Summit Hospitality, which manages 10 properties in the Charlotte, Wilmington, and Triangle markets.

Estimates range on a per-room basis anywhere for twice to three times as much to build a full service property as a selected service property. A limited service property that costs on average $70,000 per room to build in a metro market — excluding land costs — would cost upwards of $150,000 per room as a full service hotel. Additionally, says Parrish, “ a lot of full service properties had horrendous problems during the late '80s and early '90s when the (Resolution Trust Corporation) owned a lot of them — and the lenders have not forgotten that.”

Even when capital is not a challenge, there can be other barriers that prohibit the successful execution of a full service hotel. Getting a particular brand may become an obstacle, as may the problem of simply not having the expertise to manage such a large project.

When a developer finally does step up to the plate and build a full service property, there appears to be sufficient traffic to generate revenue. Summit Hospitality says that in the markets it serves, the Marriotts and Embassy Suites are doing well, and even turning away business a couple of nights each week.

Winston Hotels, meanwhile, has tailored its recent growth around mid-level hotels such as Hilton Garden Inn, Courtyard by Marriott, Residence Inn by Marriott and Homewood Suites. In the past five years, Winston Hotels has built four properties in North Carolina — two Homewood Suites in Raleigh, and a Courtyard by Marriott in both Winston-Salem and Wilmington.

“We think that they capture the largest demographics of the whole industry,” says Winston. “They have the greatest overall appeal.”


How Hotels Capture Markets

The hotel industry is different from many other businesses in at least one important way: Hotels only “capture” the business that surrounds them. “Only in the most extreme circumstances does a property create demand,” Hobbs says. So when businesses move, hotels start packing; and wherever business parks are built, hotels are sure to follow — even if there are fine properties located just minutes away.

“When a community's economic center shifts away from where it has been located, you'll see people come in and build new hotels,” says Hobbs. “So the properties that were built in the '70s and '80s, and even more recently, will find themselves no longer the most convenient property to this new center. Someone goes in and builds a new property and then gets all the business.”

It's a cold, hard truth. Regardless of its quality and nearby location, a property can feel the squeeze when it is no longer the closest one to the economic center. And no longer being the new kid on the block doesn't help either.

“There's been tremendous new hotel construction in Research Triangle Park, and it's been able to capture the business from RTP and western Wake County,” says Hobbs. “It's been dramatic. There's not been that kind of development in other areas of Wake County. Demand has gone up — the total number of rooms sold grows each year. But demand has not grown at the same level as construction within the same time period. So it's not like you build a new hotel and there are new people to fill them up. What you see is a shift of properties that were running at 70 percent occupancy in the mid-1990s are perhaps now running at 60 percent or even somewhere just above 50 percent occupancy. Again, you've got a lot more rooms dividing up a growing amount of business, but it's not growing at the same rate as we've had construction in Wake County.”

When new hotels spring up, older ones are forced to trim expenses. They may change brands; they may become independently owned; they most certainly will lower their rates and reduce amenities. But do they go out of business? Typically not, says Hobbs. “The bottom line is the property is no longer in the destination — the location — that can generate the kinds of revenue that can pay for upgrades and keeping the property well maintained. An older hotel is not going to make the money because it can't get the rates that the new property can get because it's newer and more convenient,” he adds.


The Convention Center Strategy

One bankable strategy for making yourself convenient, if Lady Luck shines on your location, is to build a convention center. Convention centers have been sprouting up all along the mid-Atlantic region, including new facilities in Washington, Charlotte and Baltimore. But recently, smaller markets have become interested in tapping into the revenue possible through the convention business. While a convention center's operating costs nearly always exceed its revenue, the traffic it brings to local hotels, restaurants and other commercial interests makes it profitable over the long haul.

New Bern, for example, has taken the plunge. Craven County purchased a parcel of land in the late 1990s with the intention of building a convention center. The city seemed a natural for further economic development. New Bern, founded in 1710, is the historic home of Tryon Palace, the residence of British Royal Governor William Tryon. It's also the birthplace of Pepsi, and boasts a picturesque location on the river front.

Ground was broken in September 1999 for the Riverfront Convention Center, with Virtexco as general contractor. The design was based on a feasibility study conducted five years earlier with funding from the Craven County Tourism Development Authority.

“The study results suggested that we build a small, high-tech center for a customer base that would include association groups and corporate groups from within North Carolina,” says Nancy Richardson, director of the center, which is funded largely by revenues generated from occupancy taxes. “We've booked some regional business that is from South Carolina and West Virginia, but we are not a first-tier or second-tier destination. We don't have the infrastructure for national meetings . . . although one day we will.”

Moving to capitalize on the influx of visitors the convention center will bring, the neighboring Sheraton Grand New Bern launched a $2 million renovation. Sonjay Mundra, president and CEO of First American Hotels, and Dicky Walia, chairman of the board of Welcome Hotels Inc., acquired the hotel in January 1999. “We basically gutted all the rooms and made everything brand new in the building,” says Mundra.

To make itself stand out in the market, the New Bern convention center will offer state-of-the-art technology. It's being wired with more than 40,000 feet of data cable, 38,000 feet of voice cable, fiber optic cable with Category 5 telephone cable, and complete teleconferencing and video-conferencing capabilities.

Farther down the coast, Brunswick County is enjoying a boom in business fueled by golf. The Sea Trail Golf Resort & Conference Center, covering 2,000 acres of coastal property in Sunset Beach, has greatly expanded its conference space to accommodate the surging number of groups that want business meetings built around golf.

According to Marketing Director Nancy Foster, “the demand for our conference facilities was outpacing our ability to meet it. Because of our meeting space limitations, we turned away groups who had been coming here for years, but they had just gotten too big. At our maximum we could not handle groups of more than 300 people.”

So Sea Trail added 30,000 square feet of meeting space. The Carolina Conference Center opened for business in December 1999 and received its final cosmetic touches in April. All told, Sea Trail is now the largest conference facility on the North Carolina coast, and can handle in the vicinity of 2,000 people.

To make it easier for tourists, North Carolina is about to enhance its web site so computer users browsing travel and tourism information can go ahead an make room reservations. The service, available at http://visitnc.com, covers at least 240 hotel, motel and resort properties.


Wish You Were Here

Economy hotels may dominate the market in numbers, but properties at the top end of the scale also seem to be doing well and are confident enough in their business to wager major new investments.

The Grove Park Inn in Asheville knows that its upscale clientele wants more amenities, so it's building a $36.5 million spa of world-class proportions. But Grove Park doesn't want anything to block the scenic mountain vista, so it's constructing a 40,000-square-foot, lavishly designed facility underground, set below the inn's Sunset Terrace. In addition to pools, saunas and steam rooms, the Grove Park spa will offer treatments from massage and aromatherapy to body scrubs, herbal wraps and mud wraps.

Pinehurst, too, has announced plans to develop a spa and golf fitness center. The grand opening is slated for late 2001, with the expectation that guests will enjoy a more complete resort experience. Because golf is the raison d'etre at Pinehurst, there will be special golf fitness features, with cardio, toning, strengthening and stretching equipment, as well as treatment specifically geared toward developing the body and mind of the successful player.

Another segment of the full service hotel market is addressing the same trend, but with a different twist.

The boutique hotel movement first took hold in cities like New York and San Francisco, where there was a niche for smaller hotels, unique in decor, that were part of specific communities. The rooms were typically smaller than those of larger, full service properties (at least in primary markets), but they offered an appealing ambiance to guests who wanted a community experience while traveling. The O. Henry Hotel in Greensboro and The Sienna in Chapel Hill are two boutique hotels that have craftily carved out a piece of the hotel industry pie.

“When people travel today, they want to be taken care of,” says Nancy King Quaintance, vice president of Quaintance-Weaver Restaurants & Hotels Inc., which opened the O. Henry in Greensboro last year. “The length of stay for the leisure traveler is much shorter today. Instead of taking a two-week vacation, people will take a one-week vacation and a few weekend trips here and there. But they want more pampering during that shorter time. Likewise, business travelers who spend a lot of time on the road want to be taken care of, too. If they have to be away from home, they want to be someplace that is at least as comfortable as home.”

To make certain that the O. Henry (named after the author and Greensboro's native son) met its guests' high standards, the hotel conducted focus groups to find out just what amenities travelers wanted. “We found that our customers wanted windows that opened. So when we designed the hotel, we decided to use good old-fashioned double-hung windows that can be opened for fresh air,” says Quaintance. Once Quaintance-Weaver had the laundry list of dos and don'ts nailed down, it built a model room in a downtown warehouse and invited comments from its client base. After the kinks were addressed, the 131-room hotel was built near Friendly Shopping Center in Starmount, one of Greensboro's oldest neighborhoods.

Amenities like triple-sheeted beds, in-room microwaves, afternoon tea and cocktails in the lobby, and dry cleaning service make the O. Henry special, as do the nine-foot ceilings, but the greatest boon is its community setting, which is even convenient to Wendover Avenue and Benjamin Parkway, two of Greensboro's most traveled thoroughfares.

Chapel Hill's Sienna Hotel bills itself as a European-style luxury hotel, and indeed its Four-Diamond rating suggests it carries it off with panache. Like other boutiques, the Sienna banks on offering the highest level of personalized customer service. The decor was inspired by the art, architecture and ambiance of Italy, much like a Tuscan villa, and each of the 80 guest rooms is individually appointed. The Sienna is just a 15-minute drive from Raleigh-Durham International Airport, making it a choice location for business meetings.

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COPYRIGHTED MATERIAL. This article first appeared in the June 2000 issue of the North Carolina mgazine.