As we emerge from the throes of the COVID pandemic and our industry is seeing a new lease on life, there are signs that the hotel development process is slowly finding its footing once again. However, as we discussed in a previous series of posts, the hotel development process is unlike that of any other asset class. And there are numerous considerations for new development in the short-term.
Of the main items that have reshaped the hotel development landscape, the main item to consider is if you can obtain construction financing. Many lenders were shying away from hospitality before the pandemic out of a concern that many markets were oversupplied. Now the concern is how quickly the industry can recover given the significant decrease in business and the fact that delinquent loans were a significant issue over the past year. Consider local lenders and personal relationships as they will take you a lot further than national institutions.
Another item that has emerged as a challenge throughout construction in general, not just with hotels, is the significant cost increases in lumber, steel, copper, and other materials. Lumber alone has increased in price by 250% over the past year and while we anticipate that prices will stabilize as production ramps back up, this is sticker shock that may not make pro formas pencil as they would in years past. It may take some time to have prices come down and then be able to move forward once again.
A third factor weighing on new construction is the lack of construction labor availability. This goes for all facets including general contractors, project managers, and subs. Construction in many industries, particularly housing and industrial, have continued at a rapid pace and there is now so much demand in those sectors that labor availability for other construction projects is scarce. Coupled with the lack of trade school graduates that has long-term ramifications for building and construction in general, scheduling development is much more challenging that it has been for several years.
Hotel operations is a fourth factor to consider early on. The owner-operator relationship has changed over the past year and incentives need to be built in to align with the realities of the changing financial needs of each party. For example, ownership needs the flexibility to make adjustments to budgets and spending to meet market conditions but operations also needs a minimum management fee to ensure that services can continue unimpeded to the fullest extent possible. Additionally, labor is becoming more expensive and it’s not just changing staffing models but also being able to find talented and qualified team members at decent wages that still make your pro forma work.
And if you are considering a branded hotel, be sure to reach out to the brand representatives early. The major hotel brands are eager to push forward with new development deals, but the dynamics of brand support and brand relations are evolving. Be sure to ask the tough questions to understand not only how the brand will support you through opening but also once the hotel is operating.
These are only a few of the items to consider as you ponder new hotel development this year and moving forward. But don’t be put off, with solid planning and realistic time horizons, your hotel development will get off the ground and you’ll be opening your doors before you know it.