Development Dilemmas
For the most part hotel development has thus far been largely unaffected by the Coronavirus pandemic, but industry experts don’t expect that to be the case going forward as financing projects figures to become increasingly difficult.
Speaking during last week’s ALIS Summer Update – Dallas during a virtual session entitled “Evolving Development Strategies,” a handful of executives weighed in on current conditions as well as some potential shifts in strategies in the future.
Dewey Weaver, owner, InterMountain Management, specifically referenced financing issues. “If you aren’t under construction I don’t know where you’re going to get the money, I think that’s gone. I’ve seen several projects where you offer to put 50 percent of the cash in and there are no takers,” he said.
Weaver later added, “I think you’re going to have a hard time financing a new project in the near term. I hope it’s [hotel development] not over with. We’ll be developing again one day that’s what we do, but for the next two years it’s going to be very tough to get a bank to finance you,” he said.
Billy Brown, LodgeCap Chairman and CEO, pointed out that his company actually has an opportunity to move forward with a unique project but expressed concern nevertheless, particularly from the standpoint of local markets.
“The question is do we want to move forward with the project? I’m looking at leading-edge opportunities and I can’t find any place I want to go in Texas, not one single market. It’s pretty amazing with the transparency of numbers we have in Texas we can’t find one market we want to go to even if the capital were available,” he said.
Meanwhile, Chip Ohlsson, EVP and Chief development officer, Wyndham Hotel Group, assessed future development from a brand perspective. “The question is what is hotel development going to look like on go-forward basis? Some of the bigger projects that are out there, are we going to build those or is it going to be more road side and leisure travel for the forseeable future that we’re going to build upon? I think we’re also trying to figure out what this looks like, but I know the boxes that we’re designing now are more efficient. We’re really looking at our cost overall. So whether development means building a new product or conversion of an existing hotel we’re looking at it how do we build the most efficient box we absolutely can in these trying times,” he said.
Biran Patel, chairman of AAHOA, noted there are a lot of factors to determine if it makes sense to continue with current projects, most importantly what stage of development the project is in. “It depends on where you are at in that [development] situation is where people are kind of making that decision should we continue or kind of roll back for the time being,” he said.
Weaver noted the current health crisis makes it considerably more difficult. “We’ve got a lot of unanswered questions, hopefully by the turn of next year we’re going to be headed in a different direction but we’re going to have to do business differently if we’re going to stay profitable,” he said.
The panelists agreed that densely populated urban areas or high-barrier-to-entry markets are a challenging place to be and that the focus of future projects should be more on drive-to leisure markets. “I wouldn’t want to be in one of these big cities. I’ve heard numbers that in New York 20 to 30 percent of hotels may never see the light of day… These big cities have got a problem,” said Weaver.
Ohlsson noted, “I think people view downtowns as less social distancing if that makes sense than a roadside property.” He later added, “I think the great American road trip is back. You’re going to see a lot of drive-to business. You’re going to see people get in there cars with their families again and say ‘ok lets hit some roadside properties on our way down to Florida, Texas or out to California.’ I do think that people are going to take time to hit the drive-to destinations and that’s where you’re going to see a lot of development, especially in the economy and mid-market segments going forward.”
The discussion also touched on increased amenities and how they are impacting the bottom line for developers. Ohlsson emphasized the need for brands to make it more efficient and cost-effective to develop. “Development is a math equation, that’s all it is. I spend x amount of dollars, I make x amount of dollars, to operate it cost me this, at the end of day I have to show an ROI [return on investment], otherwise it’s not worth doing,” he noted.
He cited the company’s Microtel brand as an example of cutting costs for owners. “We said we got to make it more efficient so we took 26 percent [cost] out of the prototype and did it ahead of time. But I think every brand has to do that,” he said, adding that as an example to make up for having to carry hand sanitizer now the brand took conditioner out of the rooms.
Patel drove the home the point that owners need to see a return on investment. “Going forward I think that the brands will try to help cut some of the costs, but at the same time they don’t want to effect the customer experience or give another brand a competitive advantage. As owners we are incurring costs in all these amenities that we’ve been providing to our guests and they have come to expect that, but why can’t we start changing for these sort of things,” he said.
