NEW YORK — New-build hotel projects remain a struggle for developers, but industry fundamentals are strong enough to drive them to keep trying.
During a panel discussion on hotel development at the 2024 NYU International Hospitality Industry Investment Conference, hotel brand executives spoke about the overall optimism in the space that's pushing developers to find ways to move projects forward.
Hotel owners are both bullish on their outlook but patient as well, said Agnès Roquefort, global chief development officer of lifestyle and luxury at Accor. In Europe and America, there are many new investors exploring hotels for the first time.
“They’re joining the market from real estate to diversify their portfolio,” she said.
There is a bit of uncertainty short-term, but they’re bullish on the long-term return prospect, Roquefort said.
Julienne Smith, chief development officer for the Americas at IHG Hotels & Resorts, said she spoke with an owner who has been a prolific hotel developer for 30 years. During the pandemic, the owner thought about transitioning to light industrial, storage and senior living, but ultimately decided to stay with hotels as it was a familiar industry the owner knew well.
“The pain of the interest rates today and the cost is not fun, but the fundamentals are still there,” Smith said. “The returns are still there.”
The tried-and-true developers have been through a lot of different types of downturns, though the pandemic-related downturn was different, Smith said. Everything’s expensive, and trades aren’t happening.
“It’s a different place, but that’s still what they do,” she said. "They’re bullish because that’s their whole business.”
There are more owners in distress today than there have been in recent memory, especially given that the U.S. economy is generally good, said Bill Fortier, senior vice president of development for the Americas at Hilton. The problem is commercial real estate generally is in a bad place right now, mostly because of the office market. Banks are not lending as much as they used to, and borrowing is expensive.
“So, owners are having a tough time,” he said. “We are dealing with some owners that actually have to sell some really good hotels to use that money to go and keep other hotels from being defaulted or taken back by the bank, so it’s a very odd time.”
Managing Higher Costs
Developers are generally optimistic people, but there’s some more pain out there, Fortier said. It’s going to require interest rates coming down and an end to the office crisis to change things for people who have borrowed a lot of money.
When interest rates were near zero, everyone was smart, said David Pepper, chief development officer at Choice Hotels International. Now that rates are much higher, it’s harder to find the right types of deals. There’s some distress out there, but the sellers can’t find buyers for their hotels. Some hotels are going back to the bank while other owners are working out a deal.
“They try to push it out, push it out and wait for those interest rates to drop,” he said. “When those interest rates start dropping, then the buy-sell spread will start to close.”
No one really expects to return to the low interest rate environment of the past decade, but the stabilization of rates in the past two years has resulted in net positives, said Noah Silverman, global development officer for the U.S. and Canada at Marriott International.
“At least at that point buyers can start or developers can start to underwrite their projects based on the new environment,” he said.
It’s easy to talk about the challenges of today as if nothing is happening, but that’s not reality, Silverman said. Things just aren’t happening at the pace hoteliers have been accustomed to in a decade of relatively healthy expansionary growth.
“It’s worth reminding ourselves that at the peak of that, from a new supply perspective, we really never exceeded, at least in this market, what had been the historic average of new supply,” Silverman said.
Working in development as a brand often means being a connector, Smith said. There may be developers working in a small region and don’t have a national reach, so brands can take up the role of introducing those developers to lenders and other forms of capital to help them move their projects forward.
“For those who have smaller portfolios and maybe don’t have those 30-year relationships, that’s our role to do that or maybe participating in some way and helping to get that pipeline unstuck,” she said.
Hotel Conversions
Roughly a third of every brand’s pipeline is conversions, Smith said.
“In a market where there’s occupancy and great [average daily rate], we might be looking at a variety of different sites to build our projects,” she said. “Well, now we’re all as competitors looking at the same asset, so that pie has suddenly gotten smaller, but it’s not really smaller because the markets are doing well.”
Conversions can be difficult when taking an old hotel and moving it to another or to a soft brand, Fortier said. There can be a lot of work to do, and sometimes developers spend money in the wrong places with soft brands. Soft brands in particular need to have a great food-and-beverage offering because that’s what brings people in, especially if there’s a name change.
“We have seen some people make mistakes and put money in the wrong places and they don’t get the value out of it, or the customers don’t recognize it and enjoy it enough to come back because the food and beverage wasn’t great,” he said. “Food and beverage is always going to get them back.”
Brand conversions aren’t a zero-sum game, Pepper said. It’s not just converting a hotel from one midscale brand to another. Sometimes it's moving a hotel up the chain scale from economy to midscale or upper-midscale to upscale or boutique.
“It’s not exactly like, ‘He’s going to steal from me, I’m going to steal from him,’” he said. “Sometimes its even within your own system moving up and down.”