“Are you traveling for business or pleasure?” It’s a common question heard at hotels the world over, and the answer can oftentimes provide a glimpse into an area’s offerings. If you’re a hotel investor, however, the ideal answer to that question is “both.”
Cities that can capture the business and leisure travelers enjoy a perfect marriage of sorts, with diversified offerings and reasons for the traveler to elongate their stay. This dynamic duo has become so popular within the hospitality industry that it’s coined its own phrase: bleisure.
“There is now a heightened demand for in-person meetings, particularly in bleisure destinations, which combine elements of both leisure and business travel,” explains Carlos Rodriguez, Jr., president of Driftwood Capital. “Guests are increasingly seeking destinations that offer social opportunities beyond the conference setting.”
Business
The pandemic has allowed Phoenix to emerge as one of the top bleisure destinations. Though 2020 was a bad year for most everyone, this metro remained relatively unscathed.
“The strength of the pre-pandemic first quarter of 2020 in Phoenix resulted in the lowest RevPAR decline among the top 25 markets for the year,” says Zabada Abouelhana, director and leader of the Arizona region for HVS. “Transient demand from areas with stricter COVID-19 restrictions bolstered occupancy in the second half of 2020 and in 2021.”
By 2022, Phoenix hotel occupancy had rebounded to 97 per cent of its pre-pandemic (2019) levels. ADR and RevPAR well surpassed these levels, Abouelhana adds. She believes this was driven by an improvement in pricing power, a shift in segmentation and the continued evolution of the destination.
“Greater Phoenix has become a more economically diverse market over the last decade, which has contributed to the market’s resilience, growing population and higher ADR potential,” she continues. “As such, the hotel market in Greater Phoenix has become more attractive to hotel investors, who have focused more on upscale, select-service and extended-stay hotels due to their greater resiliency during the pandemic, ability to maintain higher rates and streamlined operational models, which allow for higher profitability levels.”
Abouelhana forecasted Phoenix hotel rate growth at 7 percent in 2023. She also noted ADR had surpassed 2019 levels by 30 percent. ADR growth in Scottsdale’s upper upscale/luxury hotel segment surpassed its 2019 figures by 36 percent, Rodriguez adds.
Driftwood Capital is one investor betting big on the Valley’s bleisure trend. The firm secured a $115 million refinance in October on the Scottsdale McCormick Ranch, which is billed as the “first true conference center resort in the country.”
The refinance will replace the in-place debt with more favorable terms as Driftwood wraps up its $40 million renovation, which will add luxury elements to compete in that sector. This includes 12, five-bedroom villas, along with a full-service luxury spa. The resort will be repositioned as the Scottsdale Resort and Spa, Curio Collection by Hilton.
For Rodriguez, entering the luxury lifestyle category was a natural play for this property – and this market.
“The lifestyle hotel segment is experiencing rapid growth within the hospitality industry,” he says. “Phoenix's cultural and leisure-oriented activities make it an ideal location for this concept. Since the pandemic, our guests have demonstrated a willingness to pay a premium for unique experiences.”
Mike Montoya, director of Colliers, notes that hotel investors have been busy in Phoenix ever since the pandemic. There have been more than 6,000 rooms added to the market since then, while limited acquisition opportunities have spurred record prices.
“Owners have been experiencing record years, so if owners were not forced to sell because of debt maturities, PIP or capital calls, they are not interested in selling since buyers’ pricing power was reduced given cost of debt,” Montoya says. “Although the market is still strong, the transaction volume is slowing down for that reason.”
Owners have reasons to remain optimistic about business travel to Phoenix. Attendance at the Phoenix Convention Center reached pre-pandemic levels in 2022, spurring a convention center expansion announcement in summer 2023. This will include a new 150,000-square-foot exhibit hall, a convention center hotel and an entertainment district that Abouelhana believes will further bolster Phoenix’s profile.
Leisure
Phoenix hotel owners can also remain optimistic about ADR and RevPAR, which had record years in 2023.
“Positive [momentum] continued in 2023, supported by an ADR boost in February because of the Super Bowl, and RevPAR reached an all-time high that year,” Abouelhana adds. “Rates are expected to continue to grow, but at a more moderate pace than seen in the last few years given inflationary pressures. With the increased demand from major events, such as Barrett-Jackson auctions, as well as major sporting events, such as the WM Open and the NCAA Men’s Final Four basketball tournament, we anticipate a continued increase in leisure ADR.”
This strong performance doesn’t mean investors can simply sit back and rake in the dough, however. It comes with the added expectation that owners will renovate, Abouelhana states.
That’s the plan for Global Hospitality Investment Group (GHIG), which purchased the 378-room DoubleTree Resort Paradise Valley Scottsdale for around $115.5 million in August.
"With this acquisition, we will leverage our team's expertise in interior design, branding and asset management to elevate an already best-in-class, ideally located institutional property with an outlook for continued growth in the years to come,” said Kevin Colket, CEO of GHIG, in a press release announcing the transaction.
The release also emphasized the renovation would “support meaningful enhancements to the guest experience for both leisure and business travelers.”
Hyatt Hotels Corporation is also rebranding the Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch. The $110 million renovation will include a name change to the Grand Hyatt Scottsdale Resort & Spa when the asset opens later this year.
Rodriguez notes that it’s easy to see why reinvestment is the current play, given the competition for assets.
“Constructing a ground-up resort with a large footprint is prohibitively expensive, but the opportunity to ‘upbrand’ a hotel at a significant discount to replacement costs is an attractive investment prospect,” he says. “The market's robust rate, along with the runway provided by the fact that occupancy has not returned to pre-pandemic levels, presents an opportunity for developers to capitalize on a market that is still progressing toward previous stabilization.”
That stabilization (in the form of occupancy rates) is expected to occur at the end of 2025, per CoStar/STR. Until then, investors are doing what they can to stay ideally positioned within this market.
Despite the cost, some investors are undertaking major hotel developments. These new projects are expected to increase Phoenix’s hotel supply by nearly 20 percent, or 4,900 rooms, over the next five to seven years. The 141-room Global Ambassador in Phoenix, the 237-room Hilton North Scottsdale at Cavasson and the 300-room Omni Tempe Hotel at ASU opened last year. On deck is the 265-room Caesars Republic (March 6) in Scottsdale, the 215-room Ritz-Carlton Hotel and Residences in Paradise Valley (mid-2024) and the 1,100-room VAI Resort in Glendale (late 2024), among many others.
Though not every project may come to fruition in this market, the supply should be a consideration for investors. Even so, Abouelhana sees reasons for investors to remain optimistic about the Valley of the Sun.
“The Phoenix outlook for 2024 is favorable given the continued strengthening of meeting/group events and population growth,” she says. “There’s always added risk when so much new supply is entering a market, however, as Greater Phoenix continues to experience significant growth…this risk is limited for the next five to seven years.”