The hotel industry ended 2022 in its most stable state since before the pandemic, and despite lingering uncertainty the sector is not pausing for a breath before resuming development.
While U.S. hotel construction is up year-over-year for the first time since the end of 2020, most of these projects consist of renovations and conversions of existing properties to rework aging hotels whose property improvement plans were sidelined as COVID-19 emerged. Simply put, hoteliers are playing catch up to maintain relevance as new brands and hotels continue to open.
Make no mistake, new brands are already here — arriving in both primary and secondary markets all over the U.S. Marriott, Hilton, Hyatt, Wyndham and Best Western have all launched new brands over the past year and much of the growth is through conversions of existing properties if they meet the brand standards.
Hoteliers know it isn’t easy to compete against properties with a fresh coat of paint, let alone a fresh brand. New brands and updated properties have a magnetic quality when attracting new guests — as well as higher rates. The recovery cycle has not yet reached the point where robust investors have begun acquiring existing properties in bulk. Instead, they are funneling their money into conversions and existing PIP requirements as a means to maintain market relevance and increase profitability.
Fortunately, this is a strategy investors of any size can be part of and presently it pays to be agile when it comes to these improvements. Hotel improvements at this stage can produce gains in rates and guest review scores. Smaller properties that do not require large amounts of capital are in a position to quickly address outstanding renovations and up their rates before the rush of new construction begins in earnest later this year. As a result, the current market stands to benefit from assets with limited PIP requirements.
To realize these gains, hoteliers should examine their property from head to toe in search of the updates or improvements that will have the most significant impact on their ability to drive average daily rates. With debt still more expensive than many investors have become accustomed to in recent years, hotels will be challenged to ensure the improvements they commit to will focus on growing rates. This is of greater importance for properties looking to consider a conversion to new brands. When moving up the chain scale, it is not uncommon to see the price of critical products or finishings double or even triple in cost per unit. More impactful furnishings — such as the quality of the hotel’s furniture, fixtures and equipment or its operating supplies and equipment — can increase significantly during the conversion process.
As we have been exiting out of the pandemic, there has been a more significant degree of stability in material costs and availability of goods/materials for development, which is fortunate for much of the industry. The return of consistency to the supply chain has allowed development projects to move forward, though costs remain high due to pent-up demand left over from pandemic lockdowns. This stability is expected to continue. While we may never return to pre-pandemic prices, at least a clear path for hoteliers to achieve their development goals has been created.
Today, properties with a clear plan are scoring the contracts. Operators should work on identifying their objectives/scope of their next project and setting a timeline for achieving them. If they can do that, there should be not be any challenges in finding labor to execute their plans. It’s also a good idea for hoteliers with development aspirations to keep open channels of communication between designers, developers and key planning personnel to ensure their schedules align in advance.
Right now, hospitality is host to a bustling development marketplace that is hard at work refreshing properties across every chain scale. It’s refreshing to watch developers and operators alike take a deep breath as they survey the landscape as it has emerged changed — possibly forever — but stable. Fortunately, the hotel industry is used to adapting to new things, and it’s time to get to work.
Stephen Siegel is principal of H-CPM (Hospitality CPM).
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