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| Construction is underway at the 95-room Courtyard by Marriott in Oneonta, New York. |
REPORT FROM THE U.S.—During the economic recession, new construction was out of the question for most hoteliers, especially with an over-abundance of new hotel supply and lagging demand in the U.S. hotel industry.
The industry is finally getting back on its feet—albeit slowly—though hoteliers still struggle to obtain financing for new construction. With the total active U.S. hotel development pipeline comprising 2,741 projects totaling 296,333 rooms as of June, according to STR, several players in the industry have found the recipe for success during an uncertain market and are diving into development. STR is the parent company of HotelNewsNow.com.
Eastern Hospitality Advisors is overseeing the construction of nine new properties in Pennsylvania and New York.
John Cleary, VP of business development for Eastern Hospitality, said the owners of each of the new builds conducted feasibility studies before starting construction to ensure the properties would be compatible with their respective markets.
“Each property looks toward what’s surrounding them,” Cleary said.
Those demand drivers include military bases, universities and natural-gas drilling sites. For example, in Watertown, New York, the Fort Drum military base serves as a major source of demand, which made sense for the owners of the new 103-room Fairfield Inn & Suites.
Meantime, the decision to construct the 65-room Best Western Plus in Cortland, New York, which opened earlier this year, was supported by the demand that stems from nearby universities, such as Cornell University and the State University of New York College at Cortland.
Gas drilling in Pennsylvania and southern New York is driving “an awful lot of hotel activity because the workers need a place to say,” Cleary said. And the owners of the Best Western in Towanda, New York, which opened in May; the Holiday Inn Express in Bradford, Pennsylvania, which is under construction; and the Best Western in Horseheads, New York, which is expected to undergo construction in late 2012 or early 2013, are hoping to get their fair share of business as a result.
“It is the belief of many hoteliers that this industry will be in existence for many years to come in these locations,” Cleary said.
Creative financing
In an environment that is difficult to secure financing, owner and operator of 22 hotels Jayesh Patel, who also serves as the northeast regional director for the Asian American Hotel Owners Association, is finding success with local lenders.
“It’s the smaller, regional banks. They are the only ones who have been the players out there,” Patel said.
Even so, without having a previous relationship with a lender, it’s nearly impossible to get financing, and the banks still are not lending much, he said. “It is very, very difficult to get the financing in today’s environment, so we have to (put up) a minimum of 30% to 35% equity.”
Patel has two developments underway: a 77-unit Hampton Inn in Niagara Falls, New York, and an 88-room Holiday Inn Express in Buffalo, New York. The two properties are undergoing the approval process from their respective municipalities while he continues to secure the necessary financing.
Owners are learning to be very creative when it comes to financing, Eastern Hospitality’s Cleary said.
In addition to working with the smaller banks to get smaller loans, such as SBA 504 loans, owners have been scaling down their projects to fit the needs of the community, he said.
“Rather than doing 120-room properties, they’ve been doing 84 (rooms),” Cleary said, which is helping reduce development costs.
The use of a project manager rather than a general contractor also is proving to be cost effective, Patel said. By using a project manager, “the savings go directly to you so you can keep the project more compressed,” he said.
A general contractor handles all aspects of construction, including bringing on their own subcontractors, which can prove to be more costly. By hiring a project manager, the owner has the freedom to hire his or her own contractors, which the project manager will oversee on a day-to-day basis.
Patel has used project managers in the last five hotels he has developed. “In today’s insecure financial environment, banks like that even more … If a general contractor goes belly-up, everything is a risk,” he said.
Complementing the market
The Hilton Columbus Downtown, publicly funded by the city of Columbus and Franklin County in Ohio, is being built with the hope it will serve as an economic engine for the city, GM Christian Coffin said.
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| A rendering of the Hilton Columbus Downtown, which is scheduled to open later this year. |
“I think we have an opportunity in a strong market like this to elevate the market as opposed to steal from it,” Coffin said of the property, which is the only Hilton Worldwide-branded convention hotel opening in North America in 2012.
The team at the Hilton Columbus Downtown is working closely with the other hotels in the city to attract convention business, Coffin said. “This is very much a partnership … of bringing new business to town.”
As the property enters its final stages of construction and prepares to open in the fall, Coffin expects occupancy will be relatively quiet for the remainder of the year. Guests have already begun booking stays. “We plan to be in the mid- to low-70s.”
As far as rates are concerned, “they’ve been surpassing our expectations,” he said.
And group business is taking off as well. The property already is 15% ahead of its goal for group business for the coming year and has meetings booked into 2017.
The Cambria Suites that opened on 17 May in Rapid City, South Dakota, also is complementing its market well, according to GM Sam Cannon.
It is the second new hotel to open in Rapid City within in 12-month period, which indicates there has been some growth in the market, Cannon said.
“My feeling from being in this market for several years is that it feels strong, like it was in 2010,” he said.
Occupancy at the Cambria Suites has been strong since the property opened, Cannon said.
“The market is bouncing back enough that we’re able to meet the expectations we want to meet as well,” he added.
