NEW YORK—At IMN’s New Hotel Development conference, held Feb. 25-26 at the Marriott New York Downtown, the erosion of the hospitality industry’s cautious optimism regarding the current landscape was on display.
The event, now in its second year, began with a panel discussion titled, “The Economy, Supply and Demand: How These Factors Impact Hotel Development Plans,” the content of which was reflective of the incertitude being experienced by both developers and investors amid talk of tariffs, rising interest rates and fear of oversupply.
According to data from Lodging Econometrics released earlier this month, there were 10 U.S. markets that ended 2018 with hotel development pipelines in excess of 15 percent of their current guestroom stock. While Nashville leads with a pipeline reaching 34.4 percent of its existing guestrooms, New York City had the largest construction pipeline overall with 171 projects consisting of 29,457 guestrooms.
Shaun Kelly, managing director/senior research analyst at Bank of America Merrill Lynch, said the hotel industry may have been able to look past concerns of overbuilding in 2018 amid tax reform that stimulated development and business travel, but its passage has resulted in a muted payoff.
“There was a lot of euphoria out there this time last year,” said Kelley. “We were optimistic about tax reform, corporate demand and accelerated leisure demand. Now we’ve seen markets correct almost 20 percent.”
Brian Waldman, SVP at Peachtree Hotel Group, said his company is wary of the number of new brands being introduced to the hotel ecosystem, particularly in large cities. He said these new brands may benefit hotel companies and developers looking to break ground on new projects, but these projects also are quick to "cannibalize" customers from existing properties operating under the same umbrella of owners.
Asked if there were any markets in which he would avoid investing, Waldman’s first suggestion was New York City.
“We just got back from the ALIS conference in Los Angeles… and I was overwhelmed by the enthusiasm and optimism, which was somewhat surprising. I would not put myself in that camp,” said Waldman. “For anyone looking at investing [for the future], I highly recommend you look at this as a street corner business. You really have to understand your market and what is going on.”
Hitesh “HP” Patel, chairman of the Asian American Hotel Owners Association (AAHOA), is retaining his optimistic outlook for the industry’s prospects in 2019. However, he was quick to list rising construction, labor and material costs and uncertainty about the implementation of tariffs as immediate concerns for the near future. He said the strength of a hotel’s brand is best tested during a downturn, and was critical of the number of brands at play today.
“The best thing to think about if you are developing a hotel is to make sure it’s a great brand,” Patel said. “At the end of the day you will need a good brand if we go into a downturn. Do you see long-term longevity for some of the brands out there today? Marriott has 30 brands now, and we’re not sold on some of these new brands.”
Nearly every panelist fussed over increased construction costs. In a later panel titled, “Construction and Design Differences Between Different Hotel Segments and Brands,” Punit Shah, CEO of the Liberty Group, a Tampa-based hotel development and management company, said an identical hotel built in Florida in 2014 cost roughly 25 percent more to build in 2018.
“This was after value engineering everything we could to reduce costs,” stressed Shah.
Gary Womack, SVP/design and construction at Loews Hotels & Co., said rising development costs were only part of the story. He cited the industry’s increased investment in technology, the use of new materials and the adoption of higher standards for guest satisfaction have had just as much impact on development costs as labor demands.
“You can get a leg up with a nicer prototype, but it costs more,” Womack said. “Add in the complexity of a changing political climate and it’s basic economics that costs roll up to owners and, ultimately, the guest. Rates have risen to reflect this, and so has occupancy, and I’m not sure if this is a trend that will change in the future.”
Stephen Kallaher, VP/corporate real estate development at Hyatt Hotels Corp., agreed. He said rising expectations for guestrooms have swelled FF&E costs at Hyatt Centric developments to an estimated $40,000 per key, an investment that will be repeated seven years later during property improvement plans.
“We’ve renovated hotel rooms with items that will last 75 years, but we will still rip it all out in 10 years because design evolves,” Kallaher said. “Design drives construction as much as anything else. Right now we have 50-inch TVs in guestrooms, and I can’t imagine fitting a larger TV in some of these rooms.”
With materials and labor costs so high, Shah took a moment before the end of the day to point out the importance of planning ahead for future change of ownership PIPs.
“Even when you build a new hotel, take into consideration what the implication that PIP is going to have when you decide to exit that [property],” Shah said. “That’s possibly a different discussion, but definitely something you should take into consideration.”