Hotel pipeline: Finding the right development mix
Hotel pipeline: Finding the right development mix
04 SEPTEMBER 2019 7:52 AM

Though hotel supply continues to be a concern in some U.S. markets, that doesn’t mean there aren’t opportunities for developers looking outside of major markets. Current and past pipeline data can help guide those developers.

NASHVILLE, Tennessee—In the U.S., hotel supply has been a growing concern for hoteliers and developers.

During the “Development pipeline: How much is real, how much is air” session at the 2019 Hotel Data Conference, Bobby Bowers, SVP of operations at STR, and Gerry Chase, president and CEO of Chase Hospitality Advisors, explained how current and past pipeline data can help guide developers with future projects. STR is the parent company of HNN.

STR breaks down the U.S. into about 550 submarkets and then further breaks those down into groups, Bowers said. Some of the areas that have seen the greatest supply growth in those areas are: East River Queens, New York, which added 71% of its existing supply since December of 2014; Nashville, which has added about 50% of its existing supply; and Austin, Texas, has added 59.8%.

“There’s been a hell of a lot of supply already, and a whole lot more coming,” he said about Nashville. “It’s the same in Austin and East River Queens. There’s a lot of supply dumped into those areas, and a lot more yet to come.”

Since 2010, 65% of construction has been in suburban and urban markets and 21% has been in small metro markets with population under 150,000, Bowers said. He noted those small markets, like Lynchburg, Virginia, could be targets for shrewd developers.

“That could be a potential opportunity for construction in the future,” he said. “If you look at where a lot of that new supply is going in, in terms of absolute numbers, it will continue to go into the larger markets, but there’s a lot of niche opportunities in smaller markets for projects that will be extremely profitable.”

There are certainly opportunities outside of major markets, Chase said, pointing to a development project he did in Syracuse, New York.

He said that property ended up exceeding expectations, and saw a tidy profit for the developers on the exit, in part because there had been no new-build hotels in the area for roughly 50 years.

Popular construction types
While there’s always buzz around new brands, long-standing brands continue to lead in construction, Bowers said. Brands leading in the pipeline include Hampton Inn, Holiday Inn Express, Residence Inn, and Courtyard by Marriott.

Bowers said those brands are morphing to guests changing needs to stay relevant.

“The established brands are continuing to be important,” he said. “The dominance of Marriott and Hilton shows up (on the list of most built brands). All belong to those two except for Holiday Inn Express.”

Of the more than 800 hotels that have opened between July 2018 and June 2019, 47% fell in the upper-midscale chain scale segment while upscale represented 30%, which he said echoes construction trends in recent years.

Development attrition
Looking at pipeline figures from 2013 to 2016, 65% of the projects that made it into planning actually opened, Bowers said. From there, 76% that made it into final planning opened. Of those that made it to construction, 96% opened.

When developing a new property, there’s a great deal that goes into it before signing any papers and breaking ground, Chase said. It requires a careful and measured approach.

“We looked at over 50 to 100 projects for every one that we did,” he said.

Even when a project moves forward from site selection, it can hit some roadblocks, he said. To reach the final planning stage, that requires receiving city approval, having the land under control and the flag relationship set.

“It’s pretty much ready to go,” he said. “But even with that, you have things that can disrupt that. We had several projects that had everything done, but the market was hot and construction costs went up 15% to 20% higher than we anticipated.”

When that occurred, that required a rebidding process and new design work, he said. By that point, the developer could have put in $2 million worth of work. There have been projects Chase has worked on where the company paid millions of dollars to get the project through its early stages but ended up having to walk away before breaking ground, he said.

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