Despite current economic challenges, projects are still breaking ground, according to The Hospitality Show’s strategic hotel development panel. Held Oct. 29 at the Henry B. Gonzalez Convention Center in San Antonio, Texas, this panel noted that strategic development today is often executed with one thing in mind: efficiency.
Much of this efficiency was a product of the current environment, noted panel participant Ryan Bosch, principal at Arriba Capital.
“We're in a situation right now where we've got elevated interest costs, construction costs have continued to climb, but we're still seeing deals that pencil on a daily basis,” he said. “Someone early in my career told me the cheapest day to develop a hotel is today. And I've seen that continue to be true. I see a common theme where developers are out there waiting, hoping costs come down. Fast forward two years, costs are up 10 percent, right?”
These higher costs have caused many hoteliers to get creative as they determine the best ways to stretch their development dollars.
Doing More with Less
Panelist Nilesh Patel, senior attorney at MW Law, has witnessed efficiency often come in the form of smaller spaces.
“What I've seen is a lot of the brands, they're focusing on reducing footprint size on new products,” he said. “They're trying to figure out how to be more efficient with the materials that are being used.” This sometimes translates into a larger quantity of smaller rooms.
“If you look at most new products, it's a smaller footprint, a smaller room footprint,” Bosch added. “You're pushing the guests out of the room and into more of the public spaces of the hotel.”
Those spaces are also getting some attention. This is especially true on the redevelopment front, noted panelist Joe Piantedosi, executive vice president of asset management for Park Hotels & Resorts.
“When you're looking at a hotel now, it's not about the room product anymore,” he said. “Anybody can have a great guest room product, but it's about how you activate the space. That's how you energize the public areas. It's how you make it a place that people want to be and to congregate.”
Piantedosi noted he came to this conclusion as he was about to commence a resort renovation and realized Park Hotels was over indexing on the guestrooms.
“We recognized that while it was important to update the guest room product, what we really needed that resort to do was be a place that maybe it wasn't going to be the destination bar or restaurant in that market, but if it could be the place that our guests went for a drink before they went out and maybe came back and had another one after their night out, then that was accomplishing a goal,” he said. “Because, you know, in certain markets, frankly, if you're in the guestroom too much, you're doing it wrong.”
Another way to gain efficiency, Bosch said, was to create flex space.
“We're seeing more flexible spaces where maybe it's used when capacity is up at the hotel as a larger F&B dining space that could be flexible meeting space,” he noted. “We're seeing a lot of components like that to get more out of a smaller footprint.”
Creative Endeavors
Patel offered up hotel conversion as another way to stretch the dollar while shrinking the timeline. One of the keys to doing this successfully, he argued, was doing your homework.
“It's really important for our hoteliers in the room to understand there's always a level of due diligence that has to be taken,” he said. “A lot of these repositioned properties are older buildings that actually have a history of items that they may need to cover.”
Bosch added that homework is particularly important for developers hoping to cash in on a conversion.
“I see a lot of over-optimism on how much hoteliers are going to be able to push rate after that conversion, especially on the lower-end segment with brands like Spark [by Hilton Hotels],” he said. Bosch also believed dual-branded properties were a great way to maximize efficiency as they can lower costs by 10 to 15 percent, while raising NOI by 10 percent.
“It still has to make sense for both of those flags in the market, as standalone products,” he added.
Patel thought dual-branded properties were a “phenomenal idea,” but emphasized that clarity and communication with both parties (brands) was needed upfront.
“Make sure you know the roles and responsibilities from the start of construction to actually opening the doors are clearly defined,” he advised. “Being able to see those issues in an agreement beforehand will help cost overruns and delays and get those doors open for everyone to really just move their project forward.”
Still, for all these creative approaches, Bosch cautioned that not every project is making it to the finish line. This is particularly true in highly active, arguably oversupplied markets like Nashville and Miami.
“As someone on the ground every day that's financing these projects, a lot of those projects are kind of sitting in stall mode, not having much activity,” he said. “So, the real question is, how many of those projects actually happen? Actually come to life? And how the market will absorb it is [yet] to be seen.”
The panel was moderated by Daniel Lesser, co-founder, president and CEO of LW Hospitality Advisors.