Construction is booming across the hospitality industry, but it's only thriving for the hoteliers who have managed to forecast well in advance.
Top-tier consultants are engaged in long-term projects across hospitality, forcing new-construction projects and renovations to plan further and further out.
Typically, toward the end of the first quarter in any given year, top-performing, hospitality-forward contractors have committed to the majority of their year while still maintaining some capacity for new projects beginning in the third or fourth quarters. This year is welcoming a long-overdue shift in proactive planning; if hoteliers waited to jump on the development bandwagon, they might find few reliable consultants and contractors with the capacity to take on new projects.
So, what should a hotelier with development on their mind do? First, they must reckon with the reality that our industry is still navigating the tail-end of COVID-19 recovery; property-improvement plans across the sector that were continually deferred and delayed have come to fruition. Additionally, debt markets have become risk-averse over the past 24 months due to the high, sustained investment costs. Increased rates year over year have led to fewer transactions, and projects underway today only occur for developers and hoteliers in complete alignment.
The Long Haul
Developers are flourishing in this exchange, but it can be challenging for hotels. Rather than planning 10 to 12 months in advance, hoteliers are advised to look longer down the line to form reliable revenue forecasts and achievable timelines; depending on the asset class, renovations should be planned a minimum of 18-24 months ahead of time.
In today’s development climate, there is no such thing as “too early” when it comes to project planning. Hoteliers are advised to engage with developers armed with a five-year capitalization plan and a willingness to engage with consultants in a way that keeps them fully informed when new projects are on the table. The more operators squeeze their development timelines, the more likely they are to stress their available funding, consultants and, ultimately, project success. In that sense, time is quite literally money in today’s development market.
As the asset class rises, so does the project complexity. An increase in customization, detail, stakeholders and capital stacks almost always accompany development efforts in the mid-four-star space and above. There are more moving parts, greater expectations and the need for uncompromising accuracy. Some of these projects require as much as three or four years of advanced planning before breaking ground. Once underway, they can’t risk errors caused by the rush.
Candor, Please and Thank You
Ultimately, when operators encounter challenges or enter periods of unexpected crunch, embracing a form of radical candor not often seen in the hotel industry may be essential. While the service mindset is invaluable for maintaining a high-quality guest experience, this can occasionally translate into overly optimistic or ambitious project goals. If projects are allowed to grow larger and more unwieldy due to well-intentioned yet inaccurate communication, costs can quickly spiral out of control.
To avoid these challenges, operators must put additional effort into understanding the development process, with particular consideration of their market and competitive set. What competition exists for food and beverage, services and amenities?
Determining objective and explicit goals for the property and clearly communicating these with the project team will help mitigate risks associated with scope creep, value engineering and material procurement. Prepare for extended lead times and assemble your team of engineers, architects, contractors and procurement agents as early as possible to reduce the chance of adding additional costs when the time comes to build.
Transparency is perhaps the most crucial aspect in terms of both financial requirements and available timelines. Hoteliers are urged to leverage their network to understand the current development climate and potential risks. How long did their recent project take? How did it fare compared to its budget? Who was on the team, and will they speak to any challenges they faced? Speaking with other hoteliers who have recently completed renovations can help form a holistic view of what it will be like working with lenders, brokers and construction teams.
Hoteliers can never eliminate all the risks associated with new development but can avoid unnecessary surprises. Collaboration, communication and education are all critical components of this process. With these tactics, operators can remain proactive throughout the development process. At the very least, they will have the best team on their side when challenges arise, and rest assured, they will.
Shannon Seay is a partner at H-CPM, a construction project management and owner representation consulting firm that specializes in managing hotel renovations, conversions, repositioning and new construction. She has overseen the renovation of hotel assets ranging from full-service luxury to select-service prototype, boutique to branded, nationwide. Some of her favorite renovations include The Rittenhouse Hotel, Voco Times Square, Renaissance Pittsburgh, Hyatt Regency Morristown, and the Hilton Santa Barbara Beachfront Resort.
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