One of the anomalies of the current demand boom in the
U.S. hotel industry has been a relatively slow growth in supply to go with
record-high levels of occupancy.
But with 128,734 rooms in construction as of June and
426,043 under contract, that looks to be changing in the near future.
A group of three active hotel developers spoke during the
Hotel Data Conference on the panel “The growing pace of development and renovations,”
saying there are both benefits and challenges to building and renovating during
the up cycle.
The panelists agreed that now is a good time to build
hotels, even if some worry the industry is past the peak of the good times.
“I think we still have some time” in this cycle, said
Mary Beth Cutshall, senior VP of acquisitions and business development at
Atlanta-based Hospitality Ventures Management Group. “We’re in a really good
place. … I think we’ll have a fairly decent run for a bit.”
Tim Osiecki, president of architecture and construction
at Concord Hospitality in Raleigh, North Carolina, has a similarly optimistic
view on new development, especially if you can identify good markets.
“You’ve got to be cautious in those gateway cities—the
Denvers and Miamis—that have seen enormous construction cost increases,”
Osiecki said. “You don’t want to be the guy who built the last hotel before it
changed. It’s not fun. But in markets like Pittsburgh, where we’ve developed 16
hotels, it’s been very steady without super highs or super lows.”
The challenge of construction demand
The recovery of the greater economy has paved way for a
comeback in construction demand, which has led to higher material costs and a
shortage of skilled labor needed to make development plans a reality, panelists
said.
“Everyone is busy, and not just in lodging but real
estate in general,” said Scott Peterson, senior director of development for the
CSM Corporation in Minneapolis. “So finding that skilled labor is the most challenging.
We’re having trouble finding masons, which is a pretty easy, bulk subcontractor
base you can find in any market.”
Osiecki said you can still turn projects around on a
relatively quick timeline if needed, but it comes at a price.
“We have a 258-room Hyatt House under construction,” he
said. “It’s an adaptive-reuse project in downtown Jersey City. It’s a
$92-million project, and we actually made the conscious decision to spend an
addition $5 million to do it completely union. And that’s just because there’s
a workforce pool there that we think is going to get us to completion at least
six to eight months sooner.”
Deno Yiankes, president and CEO of investments and
development at White Lodging in Merrillville, Indiana, said he has spoken to
contractors who are booked for the next three years. That might push some
developers into tertiary markets with less demand on contractors, but Yiankes
said there’s a payoff for dealing with that headache.
“The pricing and difficulties of labor are correlated to
the strength of some of these markets,” Yiankes said. “If you’re trying to do
something (in a high-demand market) you can’t have those great market
conditions you love without the same conditions on the construction and trade
side. It fits hand in hand. But that’s a one-time deal, and once you’re done
(with construction) you get to enjoy the strength of that market.”
Dealing with the renovation cycle
A lot of the same pressures that can weigh down a new
development also apply to renovation projects, which puts a premium on knowing
how to manage property improvement plans handed down by brands, according to
the panelists.
Yiankes said it’s important to develop good relationships
with brands and to be proactive to keep renovation costs down.
“If you have that relationship, it’s always better to
lead with telling them what you want to do rather than asking them what they
want you to do,” Yiankes said. “If you come in with a plan and it’s well
thought out … there’s a lot less heartburn then going in and saying, ‘Hey what
do you think?’ That opens up Pandora’s Box.”
Cutshall said it’s also important to carefully examine
possible renovation needs at newly acquired properties, because otherwise that
also can lead to large and unexpected costs.
“One of the biggest mistakes buyers make is
underestimating capital needs,” she said. “You have to err on the side of
conservative when you’re underwriting that.”
Source: Hotel News
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