PHOENIX — New construction for hotels was almost nonexistent in 2020, but activity is starting to pick up for the back half of 2021 and beyond.
Stephen Siegel, principal of Fairfield, New Jersey-based full-service construction project management firm H-CPM, which specializes in hospitality, said during the "Construction update: Leading indicators and long-term sentiment" panel at the 2021 Lodging Conference that many hotel owners over the past year and a half have not had capital to build after exhausting furniture, fixtures and equipment reserves to cover operating expenses.
However, he said, there's now a pent-up demand for contractors.
Jason Cowan, senior vice president of development for signature brands at Choice Hotels International, said the company is starting to get "a decent percent more of new construction applications" after basically taking a year off of new projects.
Choice's owners are "betting on the future," he said, and are locking projects in now to start the building process, with hopes that the supply chain normalizes and more lending opportunities open up.
Choice's hotel portfolio includes a mix of limited-service and extended-stay brands, which are "low risk," having shown resiliency during the pandemic, he said.
Brian Mitchell, loan officer of Dallas, Texas-based Hall Structured Finance, said he is more optimistic about new projects going forward, predicting that more capital will enter the hospitality space.
"One takeaway from COVID is hospitality is stronger than anybody thinks," he said.
Considerations For Approaching New Builds
As material prices have escalated, supplies have also been harder to come by.
Keith Mack, director of development services at Atlanta-based real estate development and acquisitions company Regent Partners, said developers should move quickly to select vendors and write purchase orders for furniture, fixtures and equipment so that projects are not delayed.
"The longer you wait, the more risk you're exposing yourself to. You certainly want to get the [purchase orders] and specifications written as quickly as possible," he said, noting kitchen equipment is among those that are highly delayed. "For construction pricing, at least in the Southeast, what we're experiencing is 5% to 6% escalation."
He said he anticipates those percentages will continue for the next 12 months.
In August, Hyatt Hotels Corp. debuted the Thompson Savannah, it's first property of the brand in Georgia. The hotel was developed through a joint venture with Regent Partners, Mariner Group and Cadre.
Mack said some of the supplies for the hotel were ordered a year ago, and there are still issues obtaining them.
While there's not much that can be done about the supply chain disruption, Cowan said Choice encourages its owners to build better relationships with the franchisor and set clear expectations on the timeline.
"The worst thing they can do is not tell us what's going on," he said. "We try to balance leniency and still keeping our brand standards."
Labor to complete the projects is hard to come by, too. Siegel said the team of contractors he uses are from all over the country, not just local, and because of the lower hotel occupancies right now, the company can give them rooms on-site or at extended-stay properties.
Mack said it's tougher in the coastal markets to attract subcontractors and tradespeople to work on projects. When developing in Savannah and Charleston, he said, about 85% of his team's workforce will come out of Atlanta.
Considerations for Approaching Renovations
Cowan said Choice has been lenient with owners over the past year and a half, allowing them to focus more on the property's condition rather than its design. However, guest scores are showing that satisfaction is declining as a result.
"You really have to balance that because the guest doesn't care [if there's not any capital to invest.] They want value for their money; they want a good experience. It's tough to get a guest back when they have a bad experience," he said.
But if an owner is swamped financially and must ask for more time to complete a renovation, Cowan suggests taking a look at what the hotels in that property's comp set are doing.
"You don't want to get buried by your local comp set," he said, adding if it's possible, now is the time to take advantage of the lower occupancies and renovate. "I do think that the hotels that can renovate right now, and can time it correctly where they come out of this with a fresh property, they're going to be the winners."
Mack said renovations to prioritize in a post-COVID-19 world include upgrading HVAC systems, but investors must first ensure the bones of the hotel can handle it.
Siegel emphasized the importance of the due diligence process when building or renovating.
Reducing Costs on Design Prototypes
Cowan said Choice is approaching prototypes in a different way now, drilling down to what's most important to the guests and which amenities make the most money for the owner.
Earlier this year, Choice rolled out a new prototype for its Comfort brand. When meeting with an advisory board to decide what this prototype would be, one of the first things that every developer wanted was to reduce square footage to lower construction costs, he said. Choice added "flex spaces," where a breakfast room becomes a meeting room.
One addition to the prototype, which wasn't a cost savings but created value, was an outdoor porch space.
"It becomes a huge amenity, people like being outside now ... [and it will] help with bookings and revenue," he said.
Choice also unveiled a "secondary version" of its Cambria brand, where square footage is reduced to lower cost-per-key, and food and beverage offerings are slimmed down.
Mack said because the Thompson brand is a custom brand for Hyatt, it's key to work with Hyatt to curate public spaces from a design perspective.