Gone are the days of brands being exceedingly flexible when it comes to enforcing hotel property improvement plans. But owners and investors still have some room to negotiate PIPs if they do it thoughtfully, experts say.
Chris Stein, senior vice president for brokerage firm Hospitality Real Estate Counselors, said the current environment for PIPs is enough to cause some confusion in the transactions market.
"I think it's fair to say the brands have drawn a line in the sand as it relates to PIPs, but the bigger issue transactionally is when a seller doesn't fully understand or hasn't done the work on the front end to price out a PIP," he said.
In the immediate aftermath of the COVID-19 pandemic and the historic drop in hotel demand that followed, hotel brand companies gave many hotel investors more latitude than ever on scheduled renovations, particularly as many ownership groups used money earmarked for property improvements to fund operations.
Now nearly five years out from the global onset of that pandemic, patience on the part of the brand companies has all but run out as they make a greater push to maintain quality across their portfolios.
Stein noted that it's now beholden on investors to understand the implications of PIPs, both as buyers and sellers. He said when marketing a hotel for sale, just making assumptions on how much a brand will require for renovations can be fraught.
"If we're talking about a select service asset where the disconnect [between owner and brand on the PIP] is $10,000 a key, well on a 120-key asset, you're talking about real numbers," he said. "So sometimes that impacts pricing, and what we've been trying to do as a firm is make sure we're advising sellers on the front end to get that change-of-ownership PIP early."
As Stein noted, hotel assets are typically subject to property improvement plans on two major occasions: at a change of ownership or on a recurring time frame, which has historically been a cycle of seven years.
With more hotels delaying or deferring their typical seven-year renovations, brands have grown increasingly antsy about getting hotels back up to traditional quality standards. But while brands are less flexible than they had been on PIPs, both Stein and Noble Investment Group Senior Vice President of Design and Development Judd Ledet noted there is still room to negotiate with the brands.
Ledet said the approach should be unique to each specific hotel.
"The existing box, the age, the timeline since the last renovation, all affects it," he said. "There's a lot of different dynamics into how we ultimately are negotiating" with brands.
He said to get the most out of the investment, Noble tries "to focus the scope in areas that we know are going to have guest impact and truly add value."
He said that many ownership groups, including Noble, understand where brands are coming from.
"I think our brand partners are doing what they need to try to do to get these hotels renovated that have had an extended time through COVID," Ledet said.
And not all ownership groups have the same sway and ability to negotiate, sources said. Stein said that's it's significantly more difficult for the owner of one or two smaller hotels to get concessions from brands than large-scale institutional ownership groups.
Some ownership groups have pushed back on new signage requirements from brands, which can be costly and don't have a clear return on investment in the way some other renovations do.
"We have a couple assets in the market now where signage was in the PIP and the seller was able to negotiate it out," Stein said.
Ledet said it's important to approach signage like any other element of a PIP.
Paying for new signage "is something we evaluate based on what makes you relevant in the market and is it additive to your overall timeline as an owner," he said.
But he said in some cases, new signage is important to brands, who want to signify certain shifts they are making, and even the overall perception of a hotel.
"If you have one of those old signs, it might look a little dated from a guest arrival perspective," he said.
Updating door locks are another area of focus for brands right now, Ledet said. This became especially important after reports of some hotel room RFID locks being easily hacked.
"That was a big focus over the last year and a half because of the technology piece," he said, noting brands are trying to be proactive when it comes to security.