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Luxury Hotels Defy Economic Woes

In the rarified air that is the luxury hotel market, several new projects by leading hotel names — Four Seasons, Trump, Shangri-La and Rosewood — are casting more attention on the timing of luxury property developments amidst the widespread economic gloom and doom.

Just a week ago, Four Seasons Hotels & Resorts announced it is opening its first luxury property in New York City in 15 years. The deal with local developer Larry Silverstein, who is spearheading redevelopment of the World Trade Center site, will see the Four Seasons brand occupying 22 floors in a new 80-story tower set to break ground in June, just one block north of Ground Zero.

The 175-room hotel, located at 99 Church Street and designed by architect Robert A.M. Stern, will feature a spa, indoor pool and restaurant. It will also include 143 residential condominium units, and is scheduled for completion in 2011.

A companion Four Seasons property in Midtown Manhattan on 57th Street ranks as the most expensive hotel in the city. And just blocks away from the downtown site, the six-year-old Ritz-Carlton Battery Park is set to undergo an extensive renovation later this year.

In Chicago, the new Trump International Hotel & Tower featured a “soft” opening last week. While construction finish-out has only reached the 60th floor of the 92-story building, four floors of hotel guest rooms have already opened, and an official grand opening is scheduled for March 17.

The much-anticipated $800 million tower occupies the site of the former Chicago Sun-Times building along the Chicago River. The hotel features 339 guest rooms on floors 14-27, each being marketed to buyers in condo-hotel units. Trump execs say 70% of the units have been purchased, with prices ranging from $850,000 to more than $3 million.

In nearby Minneapolis, downtown’s venerable Foshay Tower office building is being converted into a W hotel, featuring 229 guest rooms and 18 suites. Conversion of the Art Deco project is on a fast track for completion later this year.

Down in Atlanta, Dallas-based Rosewood Hotels is building another Stern-designed property, the 127-room, 42-story Mansion on Peachtree. The hotel includes 95 guest rooms and 32 suites in the Buckhead market just north of downtown. Another 45 units are being sold as luxury condominiums.

Also jumping into the luxury fray, Hong Kong-based Shangri-La Hotels and Resorts is entering the North American market for the first time with new properties set to open starting in 2009 in Chicago, followed by Miami, New York (Midtown), Toronto and Vancouver.

So why exactly is the luxury market booming? It all comes down to supply and demand dynamics. There are only 260 luxury hotels in the United States, and in 2007, the average room rate rose 6.9%, a full percentage point higher than the increase in room rates across all other hotel segments.

Another key metric is revenue per available room, or RevPAR. In the luxury segment, RevPAR was up 6.8% in 2007, to $206.34.

“It seems those hotels have a lot of pricing power,” says Jan Freitag, director of Hendersonville, Tenn.-based Smith Travel Research. “There appears to be little rate sensitivity on the upper end of the market. The clients make a decision on brand and amenity levels, but not so much on price. The usual economics where when you increase your price the demand goes down doesn’t seem to hold.”

According to Freitag, luxury room occupancies held at a high 71% in 2007. “Occupancy is so high that seven of 10 rooms are being sold on average. We don’t expect that pattern to change, and we don’t expect the high-end business travel market to drop off dramatically.”

Building a luxury property is no easy chore, and supply in the segment has been constrained. It takes just over five years to build a luxury property, nearly 63 months, from pre-planning to opening, and only 8,700 luxury rooms are now under construction in 38 new properties across the U.S., according to Smith Travel.

Chicago-based Strategic Hotels, which owns 21 luxury hotels with 10,218 rooms in North America and Europe, saw its RevPAR increase 7.4% in the first nine months of 2007 on its North American properties, driven by a 5.7% increase in average daily rate and a 1.7% increase in occupancy.

“We chose to go to the high-end market for a variety of reasons, where we could forecast supply better and see that there were constraints on supply,” says Strategic CEO Laurence Geller.

“I’ve never seen an undersupplied environment in this country, but for the first time, especially on the higher end, this resembles the major European markets where the barriers to entry are dramatic. I see no indications in our portfolio of recession, and so I don’t buy into it at this point. My bet today is that 2009 and 2010 will be really good years in lodging because of lack of supply, especially at the high end.”

Jeffrey Donnelly, who covers Strategic Hotels as a senior analyst with Wachovia Capital Markets, is forecasting 6% RevPAR growth for the company in 2008 and a 4.5% increase in 2009. “We expect luxury leisure demand to hold up relatively well in 2008, but believe there could be a level of attrition in corporate meetings,” cautions Donnelly.

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