As the hospitality industry prepares for an active summer, flush with leisure and business bookings, the industry is also readying itself for another wave of interest rate hikes. On top of previous increases this year, the Fed in March called for an additional hike, which is in line with estimates from December.
This decision will inevitably affect business and development decision-making across the industry. However, while this may seem like cause for concern, it’s important for hoteliers to remember the industry is transitioning away from a period of exceptionally low rates back to historical norms, and there are many lessons learned over the past few years of recovery that are positioning operators to successfully execute development plans throughout 2023.
In the short term, the process of securing financing for new development projects is likely to become more difficult. Hoteliers can expect to pay more out of pocket or will need to bring funding to the table initially to get projects off the ground as a result of ongoing bank disruptions that are taking place internationally. Despite this, development is taking place across the industry.
One thing the hotel industry has learned through the recovery process is that change is taking place rapidly and without warning, and that is unlikely to abate any time soon. The return to high interest rates is the most recent trend influencing hoteliers’ development decisions, but operators have as much reason for optimism in the current climate. Group business is returning, as is business travel as a whole, and the industry is reaching a level of consistency and normalization. Still, hospitality is not finished recovering, and there are a few things hoteliers must keep in mind to ensure their development aspirations go off without a hitch.
Crawl, Then Walk, Then Run
While hotel development projects are still being completed thanks to recovering supply chains and newfound optimism in the future of hospitality, the planning process is still being disrupted today. The pre-construction phase of every hotel development project has been extended to catch up with the large and growing volume of construction and renovations taking place across the industry. Developers and hoteliers are now seeking additional time to for the planning, organizational and logistical aspects of development before breaking ground. Requests are being made from the brands and lenders for more time for development to adjust to shifts in expectations. At the same time, many brands are putting their foot down and requiring their franchisees get to work on development and renovations with the end of 2024 as a target for the completion of the many pandemic-era projects that were delayed or deferred.
Much of this decision-making is supported by the ready availability of labor and materials today, two factors that were in short supply throughout 2022. Now, with material costs normalizing — though not necessarily coming down — hotel owners are taking the opportunity to get a jump on the projects they have pushed to the back burner.
Don’t Stop Now
Now is not the time to back out of capital projects as they are essential to maintain both the asset’s physical plant as well as guest expectations. Owners should drive to push for projects to be finished, not further delays, even amid the rising cost of debt and uncertainty about a potential economic recession on the horizon. The sooner these projects are completed, the sooner these hotels start increasing their ROI and meet ever-increasing guest demands.
The trend permeating hospitality today is “cautious optimism.” Many hoteliers are comfortable expressing this sentiment having seen significant growth across hospitality over the past two years. Hospitality analysts and hoteliers on the ground agree any growth that is coming may be slowed, but the industry is not going backward.
To capitalize on these positive trends, hotels must continue through the design phase of the planning process. That way, if economic headwinds do slow progress across hospitality, at the very least the design/pre-construction phase will be completed. When macroeconomic factors improve, standing at the starting line to commence the construction phase will provide an advantage on deliverable timing, labor and material costs, putting owners in a better position to build when the time is right.
Stephen Siegel is principal of H-CPM (Hospitality CPM).
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