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New Construction Bounces Back

The hotel industry’s new construction pipeline is on the upswing. But what does that mean exactly to the health of the industry?

Thursday, May 02, 2013
Cherryl Marie
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The hotel industry has been cruising along to heightened success as industry fundamentals remain solid. Demand is so strong in fact its propelling the industry to break the record for number of rooms sold in a given month nearly every month!

That means it’s time to build. And with banks getting friendlier when it comes to financing new hotel projects, the race is on to see which companies can get the shovels in the ground fastest.

But just how much progress are we making in this recovering and still very uncertain economy? Bruce Ford, SVP of business development with Lodging Econometrics said, “year over year, the industry is up 40 percent in the new construction pipeline. In the last 12 months, there have been approximately 141,000 rooms announced to be built or converted.”

“While I wouldn’t call it a boom, it’s trending upward,” said Mark Williams, Vice President of North American Development for Best Western.

This year, Best Western is working overtime with approximately 140 projects on its plate. “The conversation to build and expand started in 2008 but then the economy crashed and everyone took a hit. Since then, new construction has been down considerably but we’re coming back up.”

When speaking to Senior Director of Development with Starwood Hotel Group, Arik Kono, he explained, “the last time there was a hotel revival, it followed by an incredibly deep recession. But what’s important to note is that since then, people have continued to invest in hotel space, just in different capacities. For instance, they are buying challenge aspects – transactions have always happened.”

In the coming year, Starwood hopes to target markets where the company has yet to permeate. Just this past week, Starwood debuted The Westin in Sacramento, featuring 100 guest rooms and suites. Reacting to the demand for growth of all their brands across and around the world including St. Regis, Sheraton and Westin, Starwood is expected to double its global footprint over the next five years, building across Europe, Africa and the Middle East.

And they’re keeping in mind some of the tactics that have been proven successful for them in the past. “Over half the beds we fill in any given hotel on any given night are through our loyalty program,” said the company’s CEO, Frits van Paasschen. “It’s about knowing which of our guests to treat in an extra special way [because] taking care of them is good business for us.”

While Starwood is capitalizing on the success of its loyalty program and remaining confident that it will continue to drive business into its upcoming hotels, Best Western is rolling out with sub-brands known as “Premier” and “Plus”– brands that have been around for 15 years but are only about two years old in the US market.

“We’ve always been known as a highway brand. But since we introduced Premier and Plus into the US, it’s been getting a lot more recognition not just with customers, but with developers. Developers in larger markets are finally taking notice,” Williams said. “We are seeing more traffic from countries like Asia and Europe and those travelers are expecting a higher end product.”

In addition, Williams goes on to say that the extended stay concept is in high demand. “People want to stay longer. Our new extended stay properties are basically hotels with considerably better rooms…larger, more functional lobby space and gathering room on balconies.”

The extended stay hotels will offer rooms equipped with all the features of a traditional house, including refrigerators, kitchen and a sofa.

“There are pockets everywhere that are going to require this type of stay,” Williams said. “Think Downtown locations like Columbus, Ohio and Pittsburgh that are geared towards white collar workers.”

In February, Hilton opened Hilton Tampa, converted from Hotel Tampa and representing the first Driftwood Hospitality owned and managed property in the area. Hilton also announced the opening of Hotel MdR Marina Bay – a DoubleTree by Hilton hotel and a rebrand that marks the start of a $7 million transformation to be conducted later this year.

Across the nation, hoteliers are dedicating their days and nights into bringing these announcements into fruition. But the biggest hurdle to overcome, and quite possibly the one thing that will drive some hotels to push back their timelines or even adjust their plans entirely, is funding. We are on pace and the deals are there, but as Ford blatantly said, “it’s still not easy to get financing.”

And unfortunately, every hotel lost 10% of real estate due to the economy so working our way back to where we were when hotels were flourishing in business is still going to take time.

Kono explains that Starwood has seen a slight shift in the traditional “investor” right now and that predominately, there is a lot of business with institutional players. But there is a small population of them that are taking development risks.

“The banks are still taking a ‘wait and see’ attitude with guys like us,” said Williams. “It’s easier to get money in the Manhattan market right now then you would in California or Arizona but the problem is, the cost of doing business in Manhattan is extremely high.”

Only 35-40% of the projects that they are working on will be new construction. Perspective markets for Starwood in the future include Fort Lauderdale and Nashville.

“When we look at what we are doing brand wise, 80% will either be Plus or Premier and 15-20% will be a Best Western product – conversions that don’t necessarily need to have “Plus” designation but conversions designated for more highway markets.”

Ford discloses that the most active markets right now are metropolitan cities including New York City, Washington, DC, Dallas and Los Angeles.

Other leading hospitality groups making leaps with their growing portfolios include Hyatt Hotels which in the last several weeks alone debuted Manhattan’s first a Hyatt Place, Hyatt’s upscale service hotel sub-brand, as well Hyatt Place locations in Austin, Texas and future locations in Chicago, Minneapolis, Charlotte and Nashville.

Marriott International, the lodging company with more than 3,800 properties in 74 countries, grew by 6 percent in 2012 and anticipates performing at a similar level this year. Over the next three years, the company that owns recognizable brands such as The Ritz-Carlton, Bulgari Hotels, Renaissance, Courtyard and Fairfield, expects and expansion of more than 50 hotels across seven brands.

“We aren’t quite back to where we were in 2007,” Ford said. “We are seeing a natural progression of the cyclical climb of the lodging industry, nearly a 3% demand rate between February 2011 and February 2012 (2.9% to be exact).”
Cherryl Marie
Hotel Interactive® Editorial Division
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