As 2020 got underway, the hotel cycle was at the peak of expansion with relatively sound fundamentals, albeit slowing growth. Seemingly overnight, the industry enters a downward spiral the likes of which have never been seen before. Demand falls off a cliff with no definitive end in sight and new development has come to a screeching halt. As of the writing of this article, there is no proven therapeutic treatment or vaccine for COVID-19 and cases are still peaking in major markets across the U.S.
The COVID-19 crisis forced the hospitality industry to hit pause and think through next steps with limited or speculative visibility into what the future holds. At the time of writing this article we will have all seen the statistics and felt the impact of the first several weeks, leading hotels to suspend operations or close. Amid all this, developers are faced with a daunting decision about whether to proceed or scrap projects all together. No doubt the rules of engagement and risk profile of proceeding with construction projects have been altered by the crisis, but not all developments may need to be suspended. So, how do owners navigate the opportunity and risk to make an informed decision about whether to proceed with a planned project? Here are some key factors to consider at varying stages of the development cycle.
Let’s start with present-day realities:
- Limited to no construction financing for the foreseeable future (12 to 18 months)
- Equity is reserved for distressed opportunities
- Government restrictions and shutdowns pose significant risk to construction activity
- Decreased number of projects could bring down hard and soft construction costs
- Potential supply-chain risk (related to materials)
Based on the current situation, the following are key factors to consider at each phase of the development cycle when determining how best to proceed.
Phase Characteristics: Own the dirt, working through entitlements, initial stages of due diligence
Recommendation: Press pause and wait 12-24 months. Lack of visibility into recovery trajectory will make it near impossible to test feasibility.
Phase Characteristics: Feasibility study complete, management and/or brand agreements finalized, financing in-place, but not yet under construction
- Consider moving forward with planning and be among the first to open on the other side of the recession
- Explore opportunities to negotiate better terms with the city for bringing jobs and have your contractors sharpen their pencils
- Contemplate the solvency of partners in the deal (both joint venture and operational) to ensure the development decision still outweighs the risk
- Refine facility program and design considering the anticipated “new normal” re-evaluating: product type/tier (is it still consistent with future demand profile?); public/function space capacities to allow for distancing; technology and automation features; and ventilation/air purifying systems.
In the Ground
For projects three to nine months away from opening, consider the following.
- In most markets, schedule is now dictated by legislature that stopped the work of “nonessential jobs.” For most, this means nonhospital construction has halted. You should also re-evaluate the “need” for opening the whole building or mothballing some of your rooms and outlets
- Understand supply chain issues and impact on opening. Can construction materials be delivered, and furniture, fixtures and equipment and operating supplies and equipment be received in a timeline that aligns with the schedule?
- Review the preopening plan, budget and marketing plan, adjusting appropriately for time delays
- Opening a hotel and ramping to demand is challenging during strong demand periods. This is exacerbated during the low/no demand expected in the recovery. Owners need to consider when it is best to open their hotel; it might not be the first day the hotel can open, but when the market can sustain the opening. Demand should be forecasted (and stress-tested) to dictate when the market can support the hotel. Hiring and staffing should be re-examined based on current market conditions. Planning and reacting quickly is key to reducing weekly payroll burn during development.
For projects that are one to three-months from opening, consider the following:
- Staffing: Rethink staffing guides and minimize labor costs
- Training: Determine how to conduct hiring, training and orientation with social distancing requirements
- Mobilization: Openings are typically supported with task-force management teams. The question becomes how these crews get to the property and where are they coming from?
- Corporate resources: How does corporate furloughs affect the opening? Is the structure of the regional team still intact? How does this affect issuance of key money?
- Solvency: Will operating partners make it through?
The above conditions need to be balanced with all of the efforts and expense that went into the years of planning and preopening. Ownership needs skilled representation to coordinate multiple teams and evaluate decisions quickly and accurately to ensure the project does not become permanently shuttered and when opened, is optimized to perform in this new cycle.
Sean Kreiman is a vice president, asset management of CHMWarnick, a provider of hotel asset management and owner advisory services.