Independent hotel development has taken a hit of late as construction financing has been hard to come by, but independent projects still represent roughly 12% of the hotel rooms in the U.S. pipeline.
REPORT FROM THE U.S.—Development of new independent hotels has been relatively difficult to begin, as construction financing has been difficult to come by with lenders worried the industry is approaching the end of its cycle, sources said.
But experts believe the right projects with proven developers can still get traction.
Michael Sonnabend, founder and managing member of PMZ Realty Capital, said developers of independent hotels are going through the same difficulties seen across the industry when it comes to new construction.
“It’s no different (than what you see with brands), but depending on where they’re located it could actually be tougher (to get financing),” he said. “Lenders are concerned about being at the top of the market, and they take solace in the reservation systems and safety of brands.”
He said that means developers of independent properties are required to go above and beyond in articulating the demand drivers for a hotel and generally approval is limited to those that are in “irreplaceable locations.”
While some might assume that means only developments in a handful of large markets are getting approval, Sonnabend said that’s not necessarily the case.
“There’s a lot in major markets, but we’ve also seen good deals—and we’re working on a couple—getting funded in university towns that have those irreplaceable locations because of their demand generators,” he said.
The independent pipeline
According to U.S. February 2018 pipeline data from Hotel News Now’s parent company STR, unaffiliated properties, defined as those not associated with a brand, account for 29% of existing room supply but just 8.6% of recently opened rooms and 12.2% of rooms in construction.
As of February, there were 23,645 unaffiliated rooms under construction in 111 projects, although Bobby Bowers, SVP of operations for STR, noted that a significant percentage of the unaffiliated hotels in the pipeline will align with a brand before they open.
Bowers said the number of unaffiliated rooms in construction declined for the last four months of 2017 before increasing somewhat in the first two months of 2018. He pointed to issues facing hotel development as a whole as reason for the decline in late 2017.
“What people are talking about is the hurricanes that came through Texas and Florida could be siphoning off resources (needed to) build,” Bowers said.
Why independents remain appealing
Despite these roadblocks, the industry still has developers who are interested in opening new independent hotels.
Washington D.C.-based Modus Hotels, for example, just lined up financing last week for a new independent micro-hotel property in Philadelphia, said Adam Gollance, the company’s CFO.
Modus, which both develops and operates hotels, has traditionally worked with brand properties, soft brands and independents, and Gollance said the latter category remains appealing even today.
He said pursuing projects like Modus’ upcoming hotel in Philadelphia means developers need to get “more creative on the financing side.”
“It’s not as simple now for people wanting to get 75% on the first loan unless it’s full recourse in addition to a completion guarantee,” he said. “Now you’re looking at debt funds and the mezzanine players and probably more equity.”
While Gollance noted that “money is more expensive and you’re not getting as much,” there’s still room in the market for developers of independent hotels with proven track records.
“Good deals by good sponsors get done,” he said.
Gollance said looking at Modus’ hotel project in Philadelphia specifically, he doesn’t think someone with less experience in the space would be able to do what his company is doing right now.
“It would be really hard—I would imagine—for an inexperienced developer to get to the finish line, unless they’re really well-capitalized,” he said.
Lure of soft brands
Sources agreed that the roadblocks to getting independent hotel projects off the ground could push some developers to partnering with one of the various soft brand collections available today.
Both Bowers and Sonnabend noted the soft brands might represent the best of both worlds. Sonnabend said lenders seem to be more comfortable with the soft brands because they come with the safety and security of the larger brand families.
“I think a lot of times to get things financed, people are definitely looking at the soft brands,” Sonnabend said.
Bowers said there seems to be clear movement in that direction.
“With all the bigger companies moving to create these soft brands, that tells me there’s something happening there,” he said.
Gollance acknowledged his company already works in the soft-brand space, including a BW Premier Collection property in Baltimore. He said he is somewhat concerned about the proliferation of soft brands and whether that is ultimately confusing to consumers.
Although his company has worked with brands, Gollance said there is no ground-up development in that space at the moment. He added Modus is focused on the independent space because it’s more aligned with the company’s culture.
“It’s all about creating an experience,” Gollance said. “And being independent gives us the ability to create an experience. That’s why we like the space. And it also gives our employees a lot more freedom.”