NEW YORK — The hotel industry flourished during its recovery and has reached the point that performance is normalizing, but despite the positive outlook, new hotel development is stymied.
Hotel brand chief executives speaking during a general session at the NYU International Hospitality Industry Investment Conference outlined the ongoing issues slowing new hotel supply from entering the market and how they're finding new solutions.
They also addressed growth potential in Asia, particularly in China and India.
Little New Development
There’s limited new supply for a host of reasons, Hilton President and CEO Chris Nassetta said. The core reason is that development came to a standstill during the pandemic, with active projects stopping mid-construction and new plans falling apart.
“If it wasn’t in production, nobody could get anything started,” he said. “There was zero dollars available.”
Unlike most cycles, when the pandemic started, it was arguable that the industry had been in a long cycle of development, Nassetta said. It was still around the 30-year average of about 2.5% supply before dropping because of COVID-19. Now the development pipeline is catching up, and developers for new projects are finding it hard to obtain financing.
The hotel industry is currently running supply numbers that are just below 1% against the 30-year average, and that 1% isn’t taking into account the obsolescence of older properties, he said.
“There’s some portion of that 1% that’s just product that’s no longer really even competitive, certainly with the products that are represented on the stage, and that’s not going to change for a number of years,” Nassetta said. “It's just there's not enough money in the system in terms of new development getting funded right now for that to turn around really quickly.”
The constriction of the debt markets for new construction is what's making all the brand companies "duke it out" for every conversion opportunity that presents itself, Marriott International President and CEO Tony Capuano said.
Having new supply coming in so low creates an environment that supports rate growth as long as the economy continues to grow and people love to travel, IHG Hotels & Resorts CEO Elie Maalouf said. There’s also more obsolete hotels and properties being repurposed that are affecting current hotel supply.
"I would say actual net supply in the U.S. is probably close to zero this year, last year — maybe a little above zero next year,” he said.
The challenging development environment is forcing hoteliers to get creative, Maalouf said. He mentioned an office building in New York City that’s under-occupied with a great location that’s being considered for conversion to a hotel.
“It's going to cost an enormous amount of money to do it — you know, office-hotels, not easy at all — but when you find the right floor plate, people are getting creative because demand is strong,” Maalouf said.
Many office buildings don’t have a future as a hotel because they don’t have the right floor plate and infrastructure, but some will, he said. Developers have to look at different ways to repurpose existing assets.
There are more and more office conversions happening in Europe, Hyatt Hotels Corp. President and CEO Mark Hoplamazian said.
“You still hold these office buildings, some of which are becoming B and C or D office buildings, but they’re in fantastic locations,” he said.
Expansions in Asia
It takes between five and six years to open a hotel in India, Accor Chairman and CEO Sébastien Bazin said. It takes probably two years in America and three in Europe.
Among all the brands represented on stage, they probably have fewer than 500 hotels in India, Bazin said. Conversely, they collectively probably have more than 25,000 hotels in China.
“So, the question is, can you make money in those two places?” Bazin asked. “Do we all make a lot of money in China? No. Do we need to be in China? Yes. Are we going to make a lot of money in India? No. Do we need to be in India? Because you’re playing the outbound market.”
Nassetta said he agreed in part, but he believes all the major hotel brand companies can all make money in both countries. Hilton makes money in China now, but it didn’t 10 years ago.
“We make a decent amount of money in China, and we’re growing at a really rapid pace, and I think it will become a very profitable business over time,” he said. “India’s harder. We’re a lot smaller there, so you have to have a lot more vision and look a little longer down the path.”
China currently has an overbuilding problem, mostly in residential and other commercial spaces, Nassetta said. There are a lot of buildings that were never completed, so there are cities full of shells of buildings.
“They’re repurposing,” he said. “I would guess close to 50% of our Hampton expansion in China is repurposing preexisting real estate.”
One big change that has happened in India is the public ownership of hotels, Hoplamazian said. Over the past several years, there have been several hotel groups go public, including a company in which Hyatt owned 50%.
“Why? Because there’s inherent growth,” Hoplamazian said. “Profitability is skyrocketing, and there’s significant inherent growth behind that.”
There’s real capital formation that’s institutional in a market that was dominated by families and small groups, he said. Now there’s significant money being raised. The market capture is small by U.S. standards, but it’s a new beginning of an asset class with publicly invested funds where capital formation will be easier and easier.
“Maybe these things are causal not just correlative because the amount of new hotel growth that needs to be stimulated in India is vast — it's so under-hoteled at this point, it's crazy,” Hoplamazian said. “Now that we've got some vehicles, we’ll have an easier time forming capital.”
Editor’s note: Chris Nassetta serves on the board of directors for Hotel News Now’s parent company, CoStar Group.