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Hotel developer optimism outpaces financing
May 2 2013

Construction costs are down and new supply is at a minimum. Financing for new construction, however, is slightly less favorable, said developers at BLIS.

Highlights
  • “It’s a pretty good time to be a developer,” said Bob Sonnenblick of Sonnenblick Development.
  • “Full-service hotels are terribly difficult to finance,” said Marriott’s Liam Brown.
  • Public funding is an important piece of any capital stack, sources agreed.

WASHINGTON, D.C.—Though the “Hotel Development Roundtable” panel during last week’s Bisnow Lodging Investment Summit lasted 45 minutes, Bob Sonnenblick was able to sum up the development landscape in less than 4.5 seconds.

“It’s a pretty good time to be a developer,” said the president of Sonnenblick Development.

Costs are down, new supply is almost nonexistent and interest rates are at historic lows, Sonnenblick continued.

Land prices have increased approximately 20%, but that’s after falling 75% during 2009 and 2010, he said. Construction costs are still down 40% compared with 2007.

“All those things lead to a pretty good time to be a developer right now,” Sonnenblick said.

Liam Brown, president of the U.S. and Canada division for select-service and extended-stay lodging and owner and franchise services, Marriott International, agreed.

“We are on a nice growth trajectory relative to new development,” he said. There’s nothing bad looming on the horizon, and “supply growth is terribly constrained.”

Brown noted that financing is not as loose as it was during 2007, but that’s not necessarily a bad thing. On the contrary, increased scrutiny ensures only the strongest projects come to market.

Mark Purcell, VP of North American development for Starwood Hotels & Resorts Worldwide, didn’t have quite as favorable a spin. Lenders might be talking actively about financing, but they have extremely difficult thresholds that developers must meet. 

“It’s very much project-specific,” he said.

Further financing troubles
“It’s twice as easy to finance a limited-service hotel today as it is a full-service hotel,” Sonnenblick said.

“Full-service hotels are terribly difficult to finance,” Brown said. What full-service growth does exist is mostly from conversions.

Lender hesitation around the sector is a matter of scale, Purcell said. They would rather spread their dollars around a variety of less-expensive, limited-service projects than one or two full-service hotels.

A typical full-service hotel costs up to $400,000 a key, Sonnenblick explained. A select-service project rarely exceeds $200,000 a key.

To help fill in the financing gaps, many developers are turning to public funds, the panelists said.

Sonnenblick said he’s a huge proponent of approaching municipalities as potential partners. That’s what he did in one location, where his development company partnered with the local government to split the cost of the city’s bed tax in exchange for job creation and commercial development in what would have stayed a vacant lot.

Smart municipalities view hotels as multi-story retail, said Dave Pollin, co-founder of The Buccini/Pollin Group and chairman of the board of BPG’s hotel management affiliate Pollin/Miller Hospitality Strategies. Each new development brings with it new sales taxes, payroll taxes and more.

The “vast majority” of projects Purcell is overseeing at Starwood Hotels have some component of public assistance, such as historic credits and business improvement district grants, he said.

Anyone building an expensive project will have to put a lot of layers in the capital stack, he added. Public funding can help.

But can the brands? It’s not likely, Sonnenblick said.

“Things have changed,” he said. “When I look to the brands now, I love them for their reservation system and whether they’re going to operate or not operate. … but looking at the brand for money today is useless.

“Maybe 3% of the project cost could come from one of the brands” in the form of sliver equity or key money, “but that’s about it.”

Marriott’s Brown did not disagree. The major chains use their money cautiously—and only for high-profile locations, strategic locations.

However, a good brand is imperative in the lending process, he added. Fly a strong flag, and “most of the projects stand on their own,” he said.

Pollin has scored some key money from the brands by drumming up a little competition.

“Key money is available in the range of $5,000 to $15,000 a key depending on where the project is and if there is another brand that could run that flag,” he said.

Asking for incentives from a brand comes at a cost, Sonnenblick warned.

“The more money you ask that brand for, the longer you’re going to get locked into them contractually on a deal. There’s a give and take on that,” he said.

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