HM on Location: Hotel innovation gold rush begins in California

Although Dallas, Atlanta and Nashville are ranked in the world’s top cities with the largest hotel construction pipeline totals, Lodging Econometrics' Bruce Ford kicked off the 2024 California Lodging Investment Conference [CLIC], the only conference focused exclusively on the California hotel market, with his “Annual Hotel State of the Market,” a point-by-point overview of how major markets in California can represent a projection of where new hotel projects, hotel conversions, PIPs and other hotel industry growth patterns elsewhere in North America may head.

Renovations and Conversions

“California is leading the way,” affirmed the senior vice president and director of global business development of Lodging Econometrics to Hotel Management following his program. “California is unique because they have all types of hospitality markets for major urban centers like Los Angeles and San Francisco, resort destination cities like San Diego, Monterey, Napa and Sonoma, and convention center markets in Sacramento and Orange County. For example, some 60 renovations and conversions are happening in the San Diego market right now, and I predict that trend is going to continue across the U.S.”

Ford noted that many top hotel brands, including Marriott, Hyatt, IHG and others, are in the midst of converting existing properties to other brands in their respective portfolios in addition to having numerous new constructions in the works. Conversions—existing hotels changing to a different brand and undergoing complete renovations to generate excitement—constituted a big emphasis of his presentations.

“Conversion activity is at a record-based rate,” he continues. “The term is widely associated with a ‘dual brand’ concept, where the hotelier or investor gets a select service brand and puts it together with an extended-stay product, which ultimately delivers two hotels for the price of one. Three times out of 10, an operating hotel poised for conversion in line for a name change is going go upmarket or become a better hotel than it was. Half the time, it may move laterally within its chain scale so it is either a comparable brand or a better brand than what they have. And then two times out of 10, the property goes down market down the chain scale if management feels its life cycle is coming to close.”

During his program, Ford preceded Lodging Econometrics’ findings for key California markets by explaining how his team maintains a database to track market intelligence and development trends.

“All the numbers that you see here today are generated from our database, which is refreshed every seven days throughout the industry,” he said. “[In terms of] what's happening out there in the industry, I think 2023 felt pretty good for everybody, especially among industry-leading hotel franchise companies, lodging industry vendors, ownership and management groups, Wall Street analysts, industry consultants and many other companies. We either are mostly recovered or still recovering from [COVID and related setbacks] from the past few years.”

Hotel Ownership and Operations Costs

Buyers and investors who are surveying Central Business Districts who are talking to the downtown hotels and Convention Center authorities have been informed conferences and meetings are up. This points to the strong possibility 2024 will be a great time to invest and own properties. However, there is uncertainty about whether 2025 will keep up with 2024. Ford chalks it up as the “little bit of the unevenness that you typically see during a hospitality real estate cycle recovery.”  

Ford did underscore caveats involving economic hang-ups that may impact overall industry growth and change. While debt-related operations costs changed dramatically in 2023, inflation caused some troubles at the operating performance as it can be up to 25 percent more expensive to operate a hotel today than just two years ago. 

“That is obviously connected with the addition of a lot of expenses, whether it's insurance, the cost of retaining employees, cost of rehiring employees, or energy being more expensive,” he said.  “Much of what we're also seeing as an external economic impact is the amount of money that's chasing the hospitality industry. We all know everybody likes a good deal [when investing in a hotel or hotels], so we're all waiting for when those deals are coming.”

Challenges Ahead

Ford outlined a variety of issues existing and future hotel owners would have to ponder, from the tremendous amount of debt maturing in the hospitality industry this and next year to beginning the refinancing of the hotel industry to the dramatic differences between markets within California. He also discussed his observations about investors and prospective owners wanting to purchase certain hotels they may have their eyes on should they go on the market even in spite of the risks involved.

“We all know that the most expensive way to own a hotel is to take it back as a bank,” he explained. “We want to see more processes of a hotel selling naturally and organically versus having to take a hotel back, put it back on the market or hire a third-party management company. That's very expensive. We've learned over time that that is the most expensive way to get a hotel to market, so we’re looking to see how these things will play out. There have been a lot of announcements about transactions this year.”

Ford added that there have been several company merger announcements this year as well as some interesting changes in top executives. This news is proving to be consequential in terms of industry recovery with new or continuing construction projects.

“There's a lot of fluctuation going on in the industry right now as we get reset for the recovery,” he affirms. “And when I say reset for the recovery, I mean there are several other elements that we should be thinking about. Additionally, we have now reached a record high of the number of projects in the new construction pipeline across the United States. Therefore, I see that there is going to be a transition to construction again. A lot of these projects were in the pipeline at the beginning of the pandemic and just failed to start but remain active.”

Although California is a patchwork quilt in terms of what areas are recovering more rapidly for hotel owners, operators and investors, the future looks promising when one examines all of the variables at play.