INTERNATIONAL REPORT—Adding hotels to the existing construction pipeline isn’t likely to for another year, and when such building activity revives, it’ll more often happen in the limited-service and economy segments, said North American developers, construction specialists and consultants.
At the same time, opportunities for new-builds in the US$3-million-to-US$10-million range are available, particularly if you follow the interstate highway system, as Holiday Inn founder Kemmons Wilson did in the 1950s and Wilson disciple John Q. Hammons of Hammons Hotels does now.
For now, however, lenders and bankers making money available only under onerous terms are frustrating developers.
“Financing is the problem,” said John Russell, CEO of Atlanta, Georgia-based NYLO, a limited-service, boutique-style brand. “The terms are outrageous, maybe 40 percent equity and 60 percent debt at best. There’s very little development going on. … It’s not new-builds; it’s conversions or repositioning, where the bank got something back, and they’re trying to figure out what to do with it.”
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While construction costs are low and many people are seeking work, banks are hoarding money so they can show they have reserves, and many people are waiting for distressed properties, Russell said. “You got sellers looking for 90 cents on the dollar and buyers wanting 40 cents on the dollar,” he said.
The tight economy also affects peripheral businesses such as construction management and hotel consulting. A year ago, Kansas City, Missouri-based Key Construction was working on 15 to 20 projects. Now that’s down to 10, said Roger Summers, the company’s business development director.
“Local banks are still funding projects, but anything over (US)$8 million to (US)$10 million on a construction loan is difficult if not impossible,” he said.
Nevertheless, Key is involved in a NYLO, Sleep Inn and aloft.
“Each of those, whether it’s a Value Place, Hampton or aloft, all are within that under-(US)$10-million construction loan range,” Summers said, adding most activity is in the Midwest and the Gulf states, not the coasts or Florida.
“It’s going to be a long, cold winter for some people, but lots of people are planning for spring starts, with the hope of opening in early 2011,” he added. “The general consensus is there will be a slow recovery starting in the middle of 2010 with fits and starts.”
Business also is down for Edward L. Xanders, president of Tallahassee, Florida-based Interim Hospitality Consultants. In 2007 and 2008, he was doing about 55 projects per year. That volume is down about 15 percent, and his consulting fee lowered from US$7,500 to US$5,500.
About half the projects Xanders has consulted on this year are updates from the past two years, he said. An example is a little community called Mansfield, Pennsylvania, where Interim conducted a study for a developer for a Country Inn & Suites in late 2007 or early 2008.
“We went in a year later and changed his study to a Microtel,” Xanders said. “The Microtel is now under construction. All this town has is one hotel, a Comfort Inn. But it has a college, and that college is what makes the thing work. In addition, it’s on new Interstate 99.”
Chain offerings
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Many hotels are going through the conversion process. Choice Hotels International is fortunate many of its new-build projects for the Comfort and Sleep brands can be financed locally, said David Pepper, senior vice president of development and emerging brands for Choice. “If developers can obtain financing, land can be significantly cheaper to acquire, which is coupled with decreasing labor and commodity prices,” Pepper said.
Pepper also cited the franchisor’s new Ascend Collection, a network of historic, boutique and unique hotels, as a prime candidate for conversion.
In Canada, two new-build Days Inns recently opened in Alberta, three more hotels are to start construction soon, and two like-new conversion projects will open as Days Inns at the beginning of next year, said Irwin Prince, president and COO of Realstar Hospitality and master franchisor of Days Inn, Motel 6 and Studio 6.
“Financing of new projects has become more of a hurdle for Canadian developers. We’ll be playing catch-up on demand for quite some time, which probably means continued downward compression on rate,” Prince said.
Advice for builders
Summers suggested developers work with their bank or find a local one that knows the market in which the hotel will be built.
“There are a number of commercial mortgage brokers who specialize in hospitality and work to bring developers and bankers together to find ways to finance projects,” he said. “Verify the financial stability of the subcontractors, and find out if they’re paying their suppliers.”
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Xanders suggested builders follow the interstates, or better yet, anticipate them. Interstate 69 is located on the south side of Memphis, Tennessee, and eventually will extend to suburban Greenville, Mississippi, where a six-lane bridge is scheduled to open next spring.
“The approaches go through a little town called Leland, so I did a feasibility study for a developer out of Atlanta for a Microtel Inn,” Xanders said. “What’s Leland famous for? Kermit and Miss Piggy met in Leland, Mississippi. When you go to the chamber of commerce, what you got is a shrine to Kermit the Frog and Miss Piggy. My point is new development is on track to happen on new interstate highway systems.”
Summers advised developers to seize the moment.
“If lending is available, and everybody starts trying to build next spring, construction and labor costs are going to shoot right back up,” he said. “It’s a great time to build if you can get the money.”