LIIC: Now may be the time to start new development
 
LIIC: Now may be the time to start new development
20 OCTOBER 2020 7:32 AM

At the recent online meeting of the Lodging Industry Investment Council, members said new hotel projects that start development now could open in a better environment in a few years.

REPORT FROM THE U.S.—With demand at historic lows thanks to the coronavirus pandemic, some hotel owners and developers have had to pause or even walk away from new projects. But not everyone has, and many even see the current environment as a good time to start.

During a recent online meeting of the Lodging Industry Investment Council, industry experts shared their perspectives on the headwinds new projects face and what opportunities might still be available.

A change in supply
It used to be that hotel reports came out every day telling of one hotel opening after another, said Mike Cahill, founder and CEO of Hospitality Real Estate Counselors. That will all work itself out through the next year to 18 months followed by an absence of new supply.

Looking ahead, 2023 and 2024 are going to be great years to be a hotel owner, Cahill said. New supply will slow down as the industry moves through the existing pipeline without many new projects being added on. Once the pandemic ends, the economy will take off, creating a great environment with little new supply and an aggressive growth in demand.

“For those people, especially who bought now or going to buy over the next couple of years, for those who have held on to their assets, I think they’re going to look back and say, ‘Thank God we got through it,’ but ’23 and ’24 are pretty darn good years,” he said.

Julienne Smith, SVP of development, transactions and asset management at InterContinental Hotels Group, said she doesn’t anticipate any capital for new developments for a while, which is why IHG is focusing more heavily on conversions, including soft brands and some adaptive-reuse projects.

“Development in the traditional sense is really not there,” she said. “It’s really more conversion activity today.”

New developments
Through its development fund, Driftwood Capital is pursuing four deals it plans to move ahead with and break ground on, President and CEO Carlos Rodriguez Sr. said. It takes a year to get entitlements, permits and drawings and then another couple of years to build, so a new project now will open—hopefully—in a better economy and rise along with the tide.

“You’re going to be with a brand-new project, hopefully designed in a better way to take advantage of new concepts and new ideas that are being developed today,” he said.

Rodriguez added that the vast majority of deals are being put on hold or are changing as they move forward.

Markets that have had high barriers to entry are a little easier to work in now, Rodriguez said. The local politicians want to create jobs and improve their tax base, so they’re willing to give tax credits or other incentives. One project his company is working on is a $300-million development deal.

“The politicians—I mean, red carpet all the way, trying to help us out because they want to keep it alive,” he said. “They know that there’s headwinds, they know there’s issues for us, and they are giving us the red carpet, understanding and trying to bend over backwards to help us out.”

Owners and developers can also negotiate better terms with general contractors and, by extension, their subcontractors, because they need to keep the lights on and cover payroll.

Picking the right projects
New projects will be easier to undertake in stronger markets that still had leisure demand and didn’t suffer as much during the pandemic, Rodriguez said. The traditional deals, however, are the ones that will likely end up on the shelf for a while.

“The vast majority of deals I think are going to be put on the shelf, but there is going to be some deals here and there,” he said. “They're going to proceed just because they still have merit in spite of the pandemic.”

Specific projects that have merit can still go forward, said Aik Hong Tan, principal at Greenwood Hospitality Group. If the project has its construction loan in place already and the lender is still involved, the deal can move forward. The lender buying into the project is a must.

“You can swear up and down that this is a great deal, but if he doesn’t believe it, then it doesn’t matter unless you have 100% equity,” he said. “That is not going to move forward.”

There is a weeding-out process with debt being so scarce, especially in construction. It’s going to be impossible for someone who wants to build a Hampton Inn in the middle of nowhere like everyone else.

Timing it right
A project’s success will depend on its timeline, said Mary Beth Cutshall, EVP and chief business development officer at Hospitality Ventures Management Group. Any proposed deals coming in receive a critical look at how realistic the chances are the project will make it through the next couple of years, she said.

“I want to focus strategically my time on the right things,” she said. “There will be some that are just not going to be moving forward because of the nature of the project. Maybe it’s a bit ambitious for where we are today.”

Owners looking to open in struggling markets need to look at whether those markets can absorb new supply when the property opens, Cutshall said. Those markets will have properties that were already in the pipeline and have since opened.

“People have to rethink, use good judgment and really make sure that where we’re going to be in the next few years is going to be able to absorb new supply should you open up in 2022 or even 2023,” she said.

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