(Reuters) - Kevin Sanders spent much of the past year bolstering his sales force, banking on a recovery in the hotel business.
Sanders, vice president of the hospitality group at Shaw Industries, the world’s biggest carpet maker, hired 15 new sales representatives in 2011, added 17 regional vice presidents and formed a strategic account team that created four new jobs.
He’s glad he did. Despite ramping up, Shaw, which is owned by Warren Buffett’s Berkshire Hathaway Inc (BRKa.N), is scrambling to keep up with orders from hotel owners looking to renovate their properties as quickly as possible.
“There’s a tremendous amount of pressure for each hotelier to be competitive,” Sanders said. “The last thing you want to be is the old tired hotel when the one across the street is fresh and new.”
During the last recession, major U.S. hotel companies allowed their franchise hotel owners to put off property improvement projects to conserve capital as bookings fell. But with room rates and occupancy now recovering, franchisees are taking on those delayed renovations and giving a lift to the contractors and goods companies that supply them.
“We’ve had two, three, four years of somewhat tenuous times. People have deferred spending the capital, and it’s time and in some situations overdue to spend that money,” said Simon Turner, president of global development at Starwood Hotels & Resorts HOT.N, whose brands include Sheraton, W and Westin. “So we’re seeing a lot more renovation.”
Analysts say they do not expect many new hotels to be built this year as construction financing remains tough, which makes upkeep and upgrades of existing properties more important for revenue and profits.
At the end of 2011, the number of U.S. hotels due to start construction stood at 883, down 15 percent from 2010, according to data from Lodging Econometrics, a research firm. In contrast, announced hotel renovations more than doubled in the fourth quarter to 427, from 203 in the year-earlier period, Lodging Econometrics said. (See graphic link.reuters.com/jyw96s)
“Consumers are not accepting anything less than very contemporary products to stay at,” said Steve Faulstick, area general manager for DoubleTree by Hilton in Portland, Oregon. His 477-room hotel is finishing up a $20 million renovation.
While limited supply should allow hotels to increase room rates on renovated properties for the time being, there are economic risks.
Chad Mollman, a Morningstar equity analyst who follows hotels, said rising gasoline prices in the United States could lead consumers to cut their travel and threaten the recovery. He also said a recession in Europe could hurt growth in the United States.
“It’s a very cyclical industry so if we see any type of economic contraction, you’ll see a pullback in travel,” Mollman said. “Our outlook right now is for slow growth this year but we think there’s some risk of a recession in 2013 to 2015.”
Bjorn Hanson, divisional dean of the Preston Robert Tisch Center for Hospitality, Tourism and Sports Management at New York University, said spending on hotel upgrades in 2012 will be “significantly higher” than the estimated $3.5 billion set aside for 2011. But he expects such expenditures to be lower than the $5.5 billion hotels spent in 2008, when building starts were near a peak.
While renovations typically require big investment, the longer-term payoff can be substantial.
The Westin Bonaventure Hotel and Suites in Los Angeles completed a three-year renovation in 2011. The $33 million project included makeovers of more than 1,350 guest rooms, 125,000 square feet of meeting space, restaurants and pool.
The hotel’s general manager, Michael Czarcinski, said customer service ratings and group room rates have improved after the renovation. Revenue per available room, an important metric that multiplies occupancy rate by room rate, is projected to rise 18 percent to 20 percent this year, up from 14 percent growth in 2011, he said.
“We’re seeing more groups booking simply because the building was dated,” said Czarcinski.
Marriott International MAR.N has renovated the lobbies of at least 400 Courtyard by Marriott hotels, giving them front pedestals for guests to check in, bistros selling fresh food and Starbucks (SBUX.O) coffee bars. The cost was $500,000 to $800,000 per hotel, and the project is scheduled to be completed at the more than 850 Courtyard by Marriott hotels in early 2013.
Hotels with the new lobbies have grown their market share by 4 percent, and guest satisfaction scores have risen 2 to 10 points, said Janis Milhelm, brand vice president for Courtyard.
With the volume and scope of renovations increasing, large and small contractors that provide products and services to hotels are boosting their hiring, showing one way in which the recovering hotel industry is contributing to overall job growth.
Recent employment data shows some improvement among non-residential specialty trade contractors, a category that includes businesses that provide site supervision, remodeling and repair for office buildings, hotels and other structures that are not houses.
In February, these contractors added 6,500 jobs year-over-year, following gains of 42,300 jobs in January and 12,000 jobs in December 2011, according to the Bureau of Labor Statistics.
“Most companies like ours and even the subcontractors have downsized over the last three years,” said Dinesh Chandiramani, chief executive of Hyphen Construction Group, a hotel builder and remodeling firm in Addison, Texas. “Now work is coming back so we’re all looking to increase our staffing just to accommodate the clients we have.”
Hyphen Construction has 20 workers, after having cut up to 40 percent of staff in 2009-2010. Chandiramani said he recently hired one senior project manager at a salary of at least $80,000 a year and is looking to hire another. The company is also spending in the six figures on accounting and project management software to upgrade systems and training.
Kimball Hospitality, a division of Kimball International KBALB.O that makes custom-designed furniture and upholstery for hotels and casinos, added more than 80 workers since 2010 to meet demand for renovations. That year, it invested $1 million to open a seating-manufacturing plant in Virginia. The company has 234 workers.
Kellie Sirna, who designs tile, wallpaper, furniture and lighting for hotels, said the pick-up in hotel renovation work has kept her boutique hospitality company, Studio 11 Design, busy “right out of the gate” since she and a partner launched it last year. The Dallas company has six workers.
“Everybody thought we were crazy when we decided to start a new hospitality design firm,” said Sirna, who previously worked for a much larger firm. “We’ve been fully staffed and are continuing to hire,” she said.
Reporting by Karen Jacobs; Editing by Patricia Kranz, Gary Hill