Hoteliers on the “A view from the top (Let’s talk development)” panel at The Lodging Conference discussed their outlooks for development in the next few months.
PHOENIX—There might be a few bumps ahead for the industry’s development landscape, but most hoteliers are confident development will be robust and strong in the months to come, sources said.
Here’s what panelists on the “A view from the top (Let’s talk development)” panel at The Lodging Conference had to say about the state of hotel development.
Some hoteliers are seeing a robust development pipeline while others believe development will hit a peak and then plateau.
David Pepper, chief development officer at Choice Hotels International, said the company is having a record year when it comes to franchise sales.
“We’ll probably sell 700 franchises this year at Choice, and two-thirds of our pipeline is new construction,” he said. “What you’ve seen the last couple of years, we’ve really grown that pipeline … especially in new construction. All of them are starting to dig into the ground, and so (by 2018) you’re going to see this massive amount of supply.”
Pepper said developers are trying to start on new builds before lenders begin being frugal with loans.
“Everyone is rushing now to get that shovel into the ground, and the reason why is they want to get in before the lenders start pulling back those loans … (You’re going to see) some markets are going to get overbuilt, and you’re going to see these lenders are definitely pulling back a little bit,” he said.
Joel Eisemann, chief development officer of the Americas at InterContinental Hotels Group, said he thinks development will peak and then level off.
“I think there will continue to be strong growth, and I think we’ll see the pipelines continue to grow,” he said.
Unlike other cycles, Eisemann said while deals are being signed and projects are coming to fruition, development has slowed.
“There are two things that are slowing (development) down, as we mentioned a little bit, one is financing. … We started to see the lenders starting to be more concerned as it related to new construction,” he said, “not necessarily on refinancing existing hotels or repositioning, but really on new construction, and in the panel we had earlier this morning there was also a discussion about construction cost.
“So while the pipelines are robust and we have real deals, the things that are (restraining) it to some extent in terms of moving forward is really the construction cost (and) the lenders for new construction requiring traditional equity, which has been resulting in really the more financially-structured deals.”
Eisemann said he’s optimistic there’s still a lot of opportunity in the next couple of years, it’s just market-specific.
A change in development costs
The cost of development is expected to increase in some areas but decrease in others, panelists said.
Phil Hugh, chief development officer at Red Roof Inn, said he’s seeing a decrease in the price of hotel conversions.
“We’re seeing a reduction in cost for the overall price of converting a hotel because there’s much more competition out there within the small amount of product that we need to renovate a hotel,” he said. “So we are seeing more competitive pricing than we saw two or three years ago, which I would say would be exactly opposite on a new construction hotel.”
Eric Jacobs, chief development officer of lodging development at Marriott International, said there’s been an increase in labor wages.
“Material costs have stayed about the same, but it’s really about the labor increase. ... It seems after the 2008 craziness, a lot of contractors didn’t come back, a lot of (subcontractors) didn’t come back, and so there’s a smaller number of those guys qualified to do the business or the good guys are taking advantage of that,” Jacobs said. “But we see, even our tried-and-true contractors and subs, it’s taking longer for them. We just don’t have the skill of laborers we had the last cycle, particularly on the sub base, and they’re quick to go if someone is willing to pay them a dollar and a half more down the street.”
The impact of consolidation on development
There was a lot of discussion about consolidation after Marriott International’s acquisition of Starwood Hotels & Resorts Worldwide, which was finalized last month. Panelists said consolidation in the industry could possibly affect the development landscape.
“We’re all chasing the same deals, there’s an infinite number of opportunities in any one given market at any time, right?” Jacobs said. “So you can’t just assume that a Holiday Inn and a Marriott and a Choice are all going to happen in the same market at the same time, so it could in some ways, (cause) consolidations to slow down because it depends on the franchise company, too, and how we approach development and growth.”
Eisemann said each type of M&A is different.
“Marriott’s acquisition of Starwood is the largest with the (number of) brands, but there’s been a lot of other M&A in the industry that has had a different impact,” he said. “So as an example, with IHG, we acquired Kimpton last year—which was a brand and a space where we didn’t have a particular representation—but more importantly, Kimpton was a largely U.S. domestic brand, and we bought it and put it on a global platform.
“So Kimpton wasn’t able to grow things, they just didn’t have the resources to go (global), while we already had developers placed, we didn’t have other brands that competed with Kimpton, so we were able to go very quickly and start expanding the presence of that brand.”