Build or go bust?

newconstruction
New construction is on the rise, but is it smart development?

It’s building time.

The hotel industry may be seeing moderated hotel development, but I’m getting the sense that’s about to change.

From talking to people at major events this year to listening to my gut (great conversationalist, by the way), the race is on to build. It’s time to shore up locations and get those shovels in the ground fast. Or else.

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That "or else" is the nagging worry new hotel construction economics will shift, making properties more expensive to build. There’s also the legitimate fear that if your company isn’t the one building down the street, someone else surely will. And of course let’s not forget about opening hotels while the market is still flush with customers willing to pay record rates.

“My concern is we are building all these hotels, and then the bloom is going to go off the rose,” said Michael Harrell, CEO and founder of Vista Host, the largest single owner of Home2 branded hotels with about 10 percent of the entire system. “We always screw it up as an industry with too much supply in certain markets. Some of this new construction is somewhat defensive in nature; if we don’t do it, someone else will.”

Vista Host currently has six hotels under construction and opened five new properties last year. “So what is the answer if you are in the market, and another franchise brand is available and you know someone is going to do it if you don’t. So do you and then perhaps control some of the rates, or let someone else come in and build and then the rates get decimated. It’s a game of build or lose market share for many developers out there.”

Harrell nailed it. I am seeing this phenomenon in a huge way being played out more so in this cycle than any other. And I hope it works out for him.

Let’s roll the clock back to January for a moment. I was blown away by the number of applications submitted for the new Tru brand when initially announced. In 20 years in this business, I have never seen a brand launch with so many potential hotels initially announced.  

But after speaking with many of those who put in applications, I realized the rush to build was equally an offensive and defensive move. Several developers I spoke with said they put in more applications than they expect to get approved. It’s a move meant to shore up territory so they have a fair shot at potentially blocking out another developer. I also think some of the guys plan to build, then sell.

One major ownership group with more than 100 properties told me they put in 12 applications. Another, eight. Two companies, 20 properties. Wow! That is telling me something serious about this cycle.

We normally talk about how the industry always finds a way to overbuild its way into a downturn. I am worried we are seeing the start of that now. But there is no way to stop it. Developers need to develop, especially if they think a competitor may build a sexier and newer hotel across the street if they do not.

When new development starts to hit, it will decimate the supply-demand equation in a big way. The hotel industry from both the franchise sales side and ownership developer side should slow down the imminent building boom. But there is zero percent chance of that happening.

So a new strategy may be go big or go home.

Are you developing hotels as a defensive maneuver? Do you fear that if you do not build new hotels you will lose market share? Will new brands entering the market impact your older hotels? Let me know what you think at [email protected] or on Twitter or Instagram @TravelingGlenn.

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