GLOBAL REPORT—Changes in development and financing over the next five years will be dependent on market-specific conditions, but from a global perspective, there could be more branded hotels than independent hotels in many parts of the world.
Looking at the U.S. hotel industry as it is currently, almost 80% of the rooms in the pipeline are under six parent companies, said Jan Freitag, SVP of lodging insights at STR. The brand trend is going to continue, and is happening globally, he said. (STR is the parent company of Hotel News Now).
“Globally, it’s not six brands that have 80%, but if you look at the ratio of independent versus branded properties, what’s in the pipeline, I would expect that to continue to evolve toward more branded properties.”
Soft-branded properties are factored into that expectation of seeing more brands by 2025, he said. In the developing world, or regions such as the U.S., Europe and some parts of Asia, “we’re going to see more soft-brand play where you have the front of house that looks independent but the back of house is hooked into one of the top 10 companies,” he said.
Freitag added that “the future is limited” for U.S. hotels.
“What I mean by that is the future is limited service,” he said. “We will continue to see more development in the limited-service side when compared to the total pipeline, and there will therefore also be more limited-service brands to participate in that because owners will look for new limited-service vehicles.”
Derek Olsen, SVP at CHMWarnick, said soft-branded lifestyle hotels will remain front and center over the next five to 10 years, a development driven by millennials with growing incomes and representing a larger share of the traveling population.
“(Millennials) really seem to like the independent-feeling hotel,” he said. “I do think you need the soft branding for the distribution, but I think you’ll see that’s going to be the segment that grows the most.”
While soft brands will continue to grow in popularity, there will likely be consolidation within the major brands, Olsen said.
The hotel industry currently has a lot of brands, which the big companies have been able to sustain in recent years because markets are strong and companies have been able to justify the number of brands “by saying they can position the different brands at different rate levels,” he said, adding that that could change in the face of a downturn.
“But once the economy and (revenue-per-available-room growth) starts to go south, which it looks like it will over the next couple of years, it’s going to be harder for (companies) to differentiate by rate,” he said. “Once rate starts to drop in the industry, I think it’s going to get really challenging for the brands to differentiate themselves, so I think you will see a lot of consolidation.”
Kevin Davis, managing director at JLL, had a different perspective, explaining that he’s seen a proliferation of select-service brands and that more brands will be introduced in the next five years.
“I think you’ll continue to see the big brands introducing new brand concepts and also becoming increasingly flexible with brand standards so they can increase the number of units in their systems,” he said. “Based on the economics, I think the construction of premium select-service will continue.”
Luxury development will be a challenge, “unless there’s a residential component, which enables you to pay down your basis on the hotel component,” he said.
Development and financing
Development costs have been high in recent years, and that’s not expected to change going forward, Olsen said.
Some developers are currently experimenting with modular construction to save on costs, which could become more popular in the next five to 10 years, he said.
“(Modular) hasn't really driven down the price of the cost per room yet, but I think as more people, more companies do it and it becomes more popular, I think you will see the price come down, and I think you will definitely see more modular construction,” he said.
In terms of financing over the next five years, Olsen said the banks will still be the senior lenders.
“I think you are going to see the loan-to-values stay where they are now … in that 50-60% range (for new development),” he said. “And then I think you are going to see more activity from the debt funds on the mezzanine piece because the development costs themselves are going to remain close to their record levels right now, but I think you’ll see more of the debt fund continue as a step in to do the mezzanine financing on the more highly leveraged deals.”
With development costs staying high and equity capital becoming less available as RevPAR decelerates, Olsen said lenders are tightening their underwriting standards, and the capital stack will be more challenging with other factors such as labor cost increases.
He said those factors could lead to more gap funding, such as historic tax credits and EB-5 to get hotel projects done.
Historic tax credits will definitely be used at the federal level, but some states could use these credits to “revitalize cities that are trying to turn around certain areas,” which could include hotel development, he said.
New York City
New York City has been hit with a lot of supply in recent years, but sources expect conditions in the market to improve by 2025. Though today’s performance data for New York doesn’t look great, many hoteliers are fairly upbeat about 2021 and beyond in the market, Freitag said.
There’s currently a moratorium banning hotel-to-condo conversions that’s expected to run out in 2020 or 2021, which could mean some hotels will be taken off market and turned into condos. Turning hotels into condos could lead to less hotel supply growth in the market, he said.
If new supply doesn’t play as much of a role in the performance of NYC hotels and room demand continues to increase, “occupancies will continue to be healthy,” he said.
Olsen agreed that market conditions in New York City should improve since there’s not a lot of new supply on the horizon past 2021. Once the supply being built through 2021 gets absorbed, “developers are going to see that transaction activity and what it’s like on a per-room basis, and then they’ll start to … redevelop in New York,” he said.
London
The future of hotel development and financing in London is hard to predict with Brexit being such a large uncertainty, Freitag said.
If there’s a hard Brexit and the finance and legal communities move out of London, which is currently one of the top three financial centers in the world, that could hurt hotel developers targeting the business traveler, he said.
While it is hard to predict how London hotels will fare when it comes to demand from business travelers, Freitag said it will remain a leisure market that sees guests from other countries and family vacations.
“It will always be a strong leisure market on the very, very high end, with Saudi money and oil and Russian money coming in and spend months on end there in very expensive suites,” he said.
Paris
Paris is another market filled with uncertainty due to recent events such as the Yellow Jacket protests, terror attacks from a year and a half ago and the Notre-Dame Cathedral fire that have put the market in a bad light, Freitag said.
Paris will also host the 2024 Summer Olympics, which will make 2025 a tough year for the market in terms of performance, he said.
“There will be local and regional developers that would never bet against Paris and will continue to develop there, but the question is (if) global money will continue to flow,” he said.
Philippe Doizelet, managing partner at Horwath HTL, said via email that France “is on a good trend” until the Paris Olympics, and Paris’ new metro system could also impact travel from 2024 to 2030.
Hong Kong
With the political unrest and other uncertainties surrounding Hong Kong, Olsen said hotel development likely will be restricted in the market in the next five years.
“No one wants to invest not knowing if Hong Kong is going to be completely controlled by Mainland China in the coming years,” he said. “Once that uncertainty is resolved, whether or not they stay semi-independent or if they become part of China, I think eventually once that gets settled, I think there will be more (hotel) development.”
While Hong Kong’s future is uncertain, Freitag said Mainland China will remain a hot spot for hotel development.
“Local developers will continue to drive development there with their own money targeted at regional and national travelers, not necessarily international travelers,” he said.
