Starwood’s growth in hotel rooms in 2014 is below its expectations, and some of the sluggishness can be attributed to roadblocks and financial issues in China, as well as the shift in product in North America toward lifestyle hotels.

Starwood, which reported its third quarter earnings yesterday, indicated that net room growth this year is around 2%, well below the 4% to 5% forecast at an investor day in 2013 in Dubai.

“Part of the drop is a function of longer development lead times in a few markets, especially China,” CEO Frits van Paasschen told analysts during the earnings call. “As you’ve just heard, our hotels are performing well in China, but as our development pipeline has shifted to large mixed-use developments in Tier 2 and Tier 3 cities. These projects are taking longer to build. Also, while the numbers are small, we are seeing financial issues among some developers.”

Despite all the public relations hoopla about Starwood temporarily relocating its global headquarters to China in 2011, everything isn’t going as smoothly as hoped in Starwood’s largest market in Asia.

Aloft and Element

It seems as though hardly a day goes by these days that another hotel chain isn’t announcing the launch of a new lifestyle hotel brand to attract millennials.

For Starwood in North America, there has been a shift to what van Paasschen calls specialty select brands, and that is crimping room growth because these properties have fewer rooms than than Westins or Sheratons, for example.

“At the same time, in North America, our pipeline mix has shifted to specialty select hotels, which have about half the room count of our overall average,” van Paasschen said. “The good news is that Aloft is taking off. The brand has 15% more rooms than a year ago, and we’re on track to get to 100 Aloft [properties] by year-end 2015.”

“We also have 13 Element properties and another 12 slated to open in the next 24 months,” he said.

Because of the new emphasis on these lifestyle brands, van Paasschen said he doesn’t expect to see an increase in the U.S. in the average number of rooms per property — and this is an issue if it dampens growth.

Looking for Acquisitions

van Paasschen said it will be “key is to find new ways to accelerate our growth in the specialty select segment in North America and that’s something that we’re intent on doing.”

That means that Starwood will be looking for acquisitions and new partnerships, although it expects to maintain an “asset light” approach, and it isn’t seeking to own more hotels.

“We have and we’ll continue to look at acquisition opportunities.” van Paasschen said.

A New Model?

A case in point may be Design Hotels, of which Starwood has a minority stake.

“For example, we recently completed a transaction with Design Hotels, a company in which we took a position two years ago,” van Paasschen said. “We’re working closely with Design Hotels’ leadership to explore ways to put the power of Starwood behind this collection of over 280 hotels.

“With an average rate above $300, these are independent, unique, and as the name implies, design-led properties. In other words, just the kinds of experiences that SPG (Starwood Preferred Guest) members are looking for.”

The precise model for Starwood-Design Hotels collaboration hasn’t been decided, but such a relationship could be a harbinger of others to come as Starwood tries to compensate for its changing mix of U.S. hotels.

“Design Hotels gives us a platform to explore how we can create value for independent hotels that appeal to SPG members, but they don’t fit our current nine brands,” van Paasschen said. “We see this platform opening up a new avenue for growth spreads as we explore opportunities along these lines.”

Starwood’s stock price fell 5.68% yesterday to $76.44 as third quarter net income fell 30% year over year to $109 million.

Photo Credit: Starwood hopes to form a collaborative partnership with Design Hotels as a means of spearheading growth. Pictured is Hotel Vernet in Paris, a Design Hotels property. Design Hotels