ATLANTA — The high costs of materials and labor, coupled with supply-chain challenges, have made hotel construction perhaps more difficult than ever for developers over the past few years.
With the development environment remaining dire, hotel executives are calling for change.
During the “Main Street Talks” panel at the 2024 Hunter Hotel Investment Conference, Mitch Patel, president and CEO of Vision Hospitality Group, said the hope was that construction costs would go down when the pandemic initially hit. Inflation, however, has been a huge fork in the road, and labor shortages have just added to the despair.
“This is probably the most challenging time that I have probably ever seen in development,” he said. “We are still in a very challenging environment for construction.”
Finding a solid lending partner after the banking crisis last year has proven difficult, said Al Patel, president of Baywood Hotels. He added his company has had to do business with smaller banks that might need a participant to complete a loan.
Contractors have been “so busy,” and nearly every project has a subcontractor that needs to be replaced, Al Patel said. For most branded properties, a designer has to be hired, and they are backed up on projects as well.
“It’s getting out of control now. All those things combined are causing some headaches on the development side and causing the prices to go up,” he said.
These headaches all contribute to longer construction times, and that adds costs. Mitch Patel said it takes 18 to 24 months to build a hotel that used to take 12 months.
To harbor some positive changes, there needs to be some disruption in the construction industry, he said. Modular construction could be that disruption.
“We’ve been talking about modular construction for 25, 30 years, and no one has quite been able to figure that out. I think that there’s so many benefits in going with modular construction,” he said. “With modular, I’ve heard that you could get [a property] built within four to six months. We’re going to put a lot of effort into figuring that out because … we’re developers and the supply/demand metrics are in our favor.”
Mitch Patel said he still battles with the budget of each construction project he completes, even 15 to 20 years down the line. But he said he’s always been satisfied with the results five to 10 years after development.
“I guess it’s like wine; you might not be thrilled … [in] year one, [but] after five or seven or 10 years, it might taste a little better,” he said.
Building in the Extended-Stay Segment
Given the labor challenges, Mitch Patel said Vision Hospitality wants to stay in the select-service space. He added his company favors extended-stay properties.
“It’s been the darling of the industry. Those are probably our best-performing hotels in the last five, six years, so we’re going to double-down on the extended-stay segment,” he said.
Al Patel said 80% of Baywood’s pipeline and 65% of the properties in its portfolio fall in the extended-stay space. Baywood has also signed a few hotels in the economy extended-stay segment.
“We’re still a little apprehensive to see how [the economy extended-stay segment] all works out. Today, the name of the game is rate,” he said. “Like we’ve done with all the other brands, we’ll dip our foot in the pool a little bit, see how it goes, and if it goes well then we’ll accelerate that side of our business.”
Greg Friedman, CEO of Peachtree Group, said while he likes some of the extended-stay brands, the popularity and amount of supply coming into the segment might not warrant pursuing those hotels.
“Everyone is going after that segment right now in the same space that it almost feels better to go develop transient hotels,” he said. “With all these new budget extended-stay brands, you almost wonder is there just way too much supply coming in at the same time? Is the better opportunity set to go after the traditional select-service, the limited-service, the lifestyle-type hotels that have done well?”
“Leave it to the brands to kill something that’s good,” Al Patel said in response.
Jimmy Merkel, CEO and co-founder of Rockbridge Holdings, said there’s been an uptick in interest in the extended-stay space because the deals are smaller, the financing is more certain and the construction time frame is shorter.
Banking Environment
Most banks that deal in the hotel industry today are community-focused and regional banks that are overallocated to real estate, Merkel said. It’s been a struggle to find somewhere for loans to go.
“One of the challenges that I want to continue to amplify is you can’t underestimate the challenge of the banking industry right now,” Merkel said. “I always joke that there’s not a banker out there that wakes up and goes, ‘Let’s go do a hotel construction loan today.’ They want cash flow.
“Now it’s just especially hard to get that loan, and ... no matter what’s been announced or what land that they bought, it’s going to put constraints to supply. Supply is going to be slower to hit the market.”
The hotel industry “is a growth business,” meaning value is created over time, not instantly, Merkel said. There’s value to be had, even in a downturn, if the time is provided.
“What we’ve done is tried to be really well-capitalized, do smart deals in the right locations,” he said. “When you hit a tough period of time, survive with your assets, continue to take care of them, but then be really opportunistic when the opportunities come. And they will.”
Friedman said the current banking model is broken, and the regulatory pressures banks are facing aren’t going away in the near future.
“I think you’re entering a new phase of just credit and lending, where you’re going to need other sources of capital to sort of bridge or take over the portion that traditional banks are going to … leave behind through all of this,” he said.