ATLANTA — Leaders of privately held companies in the hospitality industry say it’s become necessary to step back from regional banks as a solution for funding hotel development projects.
Navin Dimond, chairman and CEO of Stonebridge Companies, which owns and operates 64 hotels in the U.S., said during the “Main Street Talks” panel at the 2023 Hunter Hotel Investment Conference that his company typically looks to regional banks when in need of construction financing that’s $20 million or below.
“I think that’s out of the question for [now],” he said in response to how the banking crisis is affecting the ability to get construction financing. “I think it’s going to be harder. If you’re a good sponsor, good project, I think it can happen, but I think we have to take a pause pill right now for ground-up” construction financing.
OTO Development, which develops, buys and manages hotels, has long-term relationships with a dozen banks. CEO Todd Turner said, and some of those banks are putting a pause on financing until things settle.
Turner's company is selective with new-construction deals, he said. OTO currently has two hotels under construction — an AC Hotel by Marriott International in Naples, Florida, and an AC Hotel in Jacksonville. Another hotel is in the pipeline, with a scheduled start date in two years.
“We have a little while for the dust to settle, but we’ll see,” he said. “Right now, I don’t think you could get a ground-up loan.”
OTO obtained a construction loan for a Residence Inn project on Long Island in New York seven years ago when the cost to build was $275 a foot. For a new one today, it would be $450 per foot, Turner said.
“You'd better be in a damn good market that can absorb that type of increase in cost. I think that effect is also going to keep the new supply really down," Turner said.
Over the past two years of doing the due diligence and entitlements for the Naples hotel project, he said costs have gone up $1,100.
“Fortunately, it’s Naples and that market is killing it,” he added. “Some of that is hard to stomach. If you go into underwriting very reasonable costs, and costs go up 37% in two years, that’s rough.”
DJ Rama, president and CEO of Auro Hotels, a privately held owner, developer and manager of upscale hotels, said he’s heard that block-and-plank construction costs are at about $220 per square foot in the Southeast U.S.
Stick-frame construction, he said, is only $11 cheaper than block and plank.
“I think [the] cost of construction will keep rising,” Rama said, adding his company built its first Hampton Inn in Augusta, Georgia, in 1986 for $30,000 to $45,000 per room. Today, his company is building select-service hotels at $330,000 per room.
On top of inflation and the banking crisis, there’s still supply-chain disruption, Rama said.
“I feel, when I hear these stories, I don’t want to take on any project [new construction] now … keep kicking down the road,” he said.
Turner said he, too, is dealing with supply-chain hurdles, particularly in finding lighting fixtures. He said most of those fixtures are coming from China. On renovation projects, he said, it’s taking double the amount of time it should take to procure furniture, fixtures and equipment, but the situation is better than it was 18 months ago.
“So far we’ve been OK; we’ve had to find a few replacement items for some things that were supposed to be delivered … and we’ve had to build in backups in the very beginning — if this order doesn’t come [in] from China, what are we going to do domestically that’s more reliable?” he said.
Buying Opportunities
Mehul Patel, managing partner and CEO at NewcrestImage, a family-office investment firm based in Dallas, said there won’t be much in terms of distressed pricing for hotels in 2023, but there will be “a number of opportunities” available to acquisitive.
This is due in part to owners not having the capital to execute renovations, Patel said. Costs for property-improvement plants "are probably double what it was pre-pandemic," he added.
“If you have 15 hotels and you have to invest capital in 10 … where do you get the capital?” he said. “[Banks] are not providing capital today, and so the question is what do you do? The owner would be [forced] to sell some assets. That’s where I see opportunities.”
Other opportunities could come from loan maturities, Patel said.