value-of-hospitality-renovations

The value of hospitality renovations

Interior designers can assist owners in determining budgets and space planning
Tuesday, February 21, 2017
by Doris Hager

Sooner or later, every owner of a hotel or restaurant must take a hard look at renovations – the fading paint, the tattered wall vinyl, the wearing carpet, at the slightly, or hugely outdated furnishings and make that financial decision. Is it time for a minor or major facelift to breathe new life into their hotel or restaurant or can it wait a bit longer? The timing question is easily answered if the establishment is a franchised one since most franchisors have stringent renovation requirements as part of their franchise agreement with their franchisees. Independent owners also regularly ponder renovation issues, and must choose their timing just as wisely.

As an interior design firm, it has been our experience that a hotel or restaurant that undergoes a minor facelift can expect an increase in profit or sales of 10 per cent on average and 30 – 50 per cent for a full renovation. Effectively designed renovations protect current market share and hopefully gain new clients. As well they can decrease operational costs either through new or upgraded equipment, or improved space planning and flow for customers and staff which both contribute to the end profitability.

In a recent article, Lauren Keller and John Burke for Hotel News wrote on the financial impact of hotel renovations. They followed a hotel three years prior to renovation, the year of the renovation, and two years after renovation. The hotel underwent an extensive $9-million renovation and went from a 3.8 Trip Advisor Rating (its lowest ever) to a 4.3 after renovation. Additionally, the property benefited from a 33 per cent greater net operating income than prior to the renovation. The hotel not only increased its market value to justify the renovation costs but also outpaced the nearby competition.

Franchised hotels typically have Property Improvement Plans (PIP). The purpose of a PIP is to ensure consistency within the brand, not only to protect the brand’s standards but also the investments of other franchisees. Some brand’s PIPs can be quite restrictive and owners can fall into default with heavy penalties or even lose the flag if they don’t comply within the allotted timeframe or negotiated agreement. Improvements are triggered at various stages of a hotel’s life span. Some of the numerous factors dictating the type of renovation needed include: the overall age of the property, the maintenance or upkeep, and the amount of foot traffic it has received.

For either hotel or restaurants typically, small renovations like carpet and soft goods replacement are required at the five-year mark. This is where the designer comes in. This includes carpet in hotels/restaurants, lounge seating in guestrooms or reupholstering booths and banquettes in restaurants. More extensive renovations like tile replacement, millwork or case good updates, and wall vinyl replacement take place after eight – 10 years. Major renovations include bathroom upgrades and often consider new space planning and reconfiguration such as relocating bars, service stations, counters, and reconfiguration for larger or smaller suites or rooms. A qualified designer can assist the owner not only in FF&E selections but also in space planning and detailing that enhances the overall guest experience and flow of the facility.

Required renovations also apply to restaurant chains and fast food locations. For the food and beverage industry, these are required either by the franchisor or the landlord in the lease agreement. In cases where the franchisor is on the head lease, the franchisor enforces the landlord’s requirements in addition to franchise required renovations that protect the brand and provide a consistent offering to its customers. This ensures that if a customer visits a restaurant in Toronto and one in Calgary, there are not only consistencies in the food, but also in the quality of the interior concept and operation.

There is resistance from franchisees and independent owners alike to spend new money when they feel they are finally getting ahead and have just recently paid off their last debt from either a new build or previous renovation. Since penalty fees or default terms don’t apply to independent owners, it may be especially tempting for them to think their establishment can continue as is without a decrease in revenue. It has been shown that an asset in need of renovations generally has a loss of continuous market share and profits that average 10 per cent per year compounded.

Each type of establishment and property is different yet is faced with the same challenges – when is the right time and how much to spend. The decision of when to renovate, beyond just maintenance is an essential one for every owner as it will have a lasting impact on the current income and success of the property, as well as the ultimate value of the asset. An interior designer can assist the owner in determining budgets or phasing of the FF&E replacement or renovations for proper planning of the needed renovation.

Doris Hager is the founder and principal of Hager Design International Inc. in Vancouver, an international interior design firm specializing in the hospitality industry.

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