As hoteliers continue to face several key challenges—including rising labor costs and interest rates, skyrocketing inflation, and lacking general contractor availability—many may wonder whether now is the best time to build a hotel. We asked an owner, operator and brand leader their thoughts. Here’s what they had to say.
Owner
Brent McDowell
VP of hotel support
So, is now the time to build? The short answer is no, according to Brent McDowell, VP of hotel support at McNeill Hotel Co., which has completed ground-up development of seven new hotels since 2016. “That’s from the standpoint of inflation, supply chain issues and commodity costs. We don’t have good clarity if these will become favorable in the future or not. For example, where will interest rates be over the next 12 to 36 months?” he said.
The other things to consider, he said, are the availability of general contractors, their subcontractors and construction labor, as well as overall construction cost, which often will be market specific. “Some of the most attractive markets in which to build a hotel are, for obvious reasons, among the hottest housing markets in the nation, which can severely strain construction availability and pricing. We are also witnessing an inflationary impact on real estate and land costs,” McDowell added.
But for those hoteliers looking to build, McDowell—who noted the company is cautious on building now but also still an opportunistic developer—said choosing a location involves a balance between opportunities like population growth, major new employers or government services, or under-representation of a given brand with post-development barriers to entry for others. And the more demand drivers the better. That means a major new or expanding employer, car plant, university, medical center or state government, combined with site availability, can drive the right timing.
McNeill’s focus right now is developing select-service and extended-stay properties from Hilton, Marriott International and Hyatt Hotels Corp. in secondary and tertiary markets. “Our sweet spot is college towns, which tend to have more stabilized, less volatile demand. Research facilities and major college football never hurt,” McDowell said. “However, in our development model or analysis, we always look closely at input costs, whether it’s land, commodities, construction or financing. We’ve found this to be a key factor in longer-term asset value and return on investment, especially in our core area of select-service and extended-stay properties.”
Operator
Jeff Burns
Chief investment officer
HP Hotels
“Generally speaking, if you are an owner or a developer, if you have a viable site in a viable market where the metrics support the development of a new hotel—surprisingly, today is as good a day as any,” Jeff Burns, chief investment officer at HP Hotels, said about whether now’s the time to build.
However, he said the industry must acknowledge the following:
- continuing supply chain issues, which challenge underwriting assumptions;
- the largest increase in construction costs on record, a 25 to 30 percent increase since 2020; and
- the uncertainty in the debt markets that is affecting projected returns on investment.
“With respect to construction, unquestionably, there are abnormal costs impacting general pricing in areas like diesel fuel, building materials and availability of labor,” Burns said. However, he added that construction costs as a whole aren’t likely to recede back to previous levels: “They never do, in my experience.”
Instead, he expects specific trades to normalize as supply and demand establish a new equilibrium. But, overall, he said this could be the new plateau for construction costs.
“The key to all this is in having as great a degree of certainty as possible on availability and pricing, whether it’s for contractors and other professional services, labor or materials. Fortunately, I think we now have more confidence about these factors than we have seen over the past two years,” Burns said.
“What owners and operators must look for right now is certainty in budget numbers as we go through the development phase. We need a pro forma that we can stand by. It’s not a perfect situation, but I think we can rely on the budget process more now than we could eight to nine months ago,” he added. “Greater confidence in the development process should eventually lead to forward progress and movement in the development of hotels.”
Franchisor
Mark Purcell
SVP of development
Accor North & Central America
“Over time there are always markets that are ripe for new-build projects and markets where new-build does not make sense. The present time is not really any different,” said Mark Purcell, SVP of development for Accor North & Central America. “However, there are some extenuating circumstances right now that make new projects particularly challenging including the cost of materials and the increasing interest rates for borrowing money.”
He said that these conditions can put a lot of pressure on making deals financially viable. And while there aren’t many existing hotels on the market today, Purcell said there are some opportunities to find properties to buy and renovate at a cost below building new.
“A gating issue is what is occupancy and rate growth in the local market and what does the supply pipeline look like? When average occupancies move into the 70-percent-plus range and rates are increasing in a particular segment it is time to begin evaluating options to build if the supply pipeline is not too active,” he said. “Then you can take the next step of evaluating the cost to build against the expected profitability to determine if the project meets your return criteria.”
As for where the biggest opportunities to build right now, Purcell said Sunbelt destinations in the United States still seem to be the strongest for new projects. “We are not seeing a lot of new projects in northern urban markets yet,” he said.
One of the biggest challenges, he added, is securing debt financing. “We’ve seen lenders narrow their willingness to lend to only those developers with a strong track record of building success that have a really good site in a good market as well as a strong balance sheet.”