Hotel Construction Soaring, Making Up for Lost Time

As featured in GlobeSt.com January 24, 2023

Projects scheduled to start construction in the next 12 months are up 14%.

By Paul Bergeron | January 24, 2023

All stages of hotel construction in the US experienced positive YOY growth through Q4, according to the most recent Construction Pipeline Trend Report from Lodging Econometrics.

Rooms under construction are up 4% by projects and 3% by rooms YOY. Projects scheduled to start construction in the next 12 months are up 14% by projects and 12% by rooms YOY. Projects and rooms in the early planning stage increased 18% and 17% YOY, respectively, reaching all-time high counts of 2,348 projects/279,912 rooms.

LE said the 2023 outlook remains strong, “as it continues to recover from the lows experienced throughout the past two years.”

The US and the hotel industry continue to face economic challenges, but travel and hotel bookings increased substantially during 2022 and the new construction pipeline continues to grow at a moderate pace with new project announcements and construction starts increasing 35% YOY and 36% YOY, respectively, according to the report.

Dallas, Atlanta, Los Angeles, Phoenix, and Nashville are the leading areas for hotel construction.

Residential and Business Migration Boosting Hotels

Mark Knott, vice president and national hospitality sector lead for Project Management Advisors, tells GlobeSt.com that the “strong” pipeline in hotel development is happening on two tracks.

“Major hotel brands paused or postponed their mandated CapEx property improvement programs during the pandemic, and we’re still working our way through the backlog of five-year renovations, which typically includes rooms, beds, and other soft improvements,” Knott said.

The space is also seeing new development in locations that are benefitting from residential and business migration, he said.

“Markets like Dallas and Atlanta are pulling from major markets like New York and Chicago for both business and leisure travel, and we don’t see that trend reversing,” according to Knott.

“Many of the developments we’re involved in now are mixed-use with a strong hospitality component, like condos over hotel rooms. We’re also bullish on leisure travel overall, with markets like Florida benefitting from pent-up travel demand. The real test will be in the latter half of the year when these projects go out for contract and we’ll see if the financial models still work for the current reality.”

Most Brands Requiring FF&E Upgrades

Gregory Karns, Partner, Cox, Castle & Nicholson, tells GlobeSt.com that he is seeing renewed activity in all areas of hospitality, partly due to two+ years of COVID, during which most brands allowed owners to use furniture, fixtures, and equipment (FF&E) reserves for operational/survival capital.

“But today, most brands are now requiring those FF&E upgrades, even though those reserves have been largely exhausted,” Karns said.

“Another factor contributing to the renewed interest in the hotel sector is the reopening of China from its COVID policy, as we believe the middle class in China is ready to start traveling again. Some of the Chinese hospitality and restaurant companies that trade on US exchanges have gotten quite a pop from that.

“Additionally, it appears that the spending power of hotel guests in the luxury hotel sector is unaffected by potential fear of a recession, and that is also fueling continued growth in that segment.”

A Need to Meet Guests’ ‘Modern’ Demands

Alex Kuby, senior studio director for hospitality at architecture firm RDC, tells GlobeSt.com that hospitality is driving the most business for his firm.

“Owners are more motivated than ever to elevate and maximize their existing assets to not only make their properties more attractive to guests but to create solutions that allow for new revenue streams to balance their investment,” Kuby said.

Specifically, there appears to be increasing “excitement” about opportunities for creating new, branded relationships with travelers and local communities.

“We are witnessing the level of investment rise across boutique, select-service, and full-services offerings, spanning destination and urban property types,” Kuby said.

“With so much capital flooding into the hospitality space, there seems to be considerable upward pressure on all properties to meet the demands of modern guests or struggle to find relevance in the new landscape, and with that, we anticipate construction fees will continue to follow suit.”

Better Of Buying Existing Core Hotel Assets

Investment specialist at Cadre, David Vincent, tells GlobeSt.com, “Not all hotel assets are equal — especially for investors navigating the high-interest environment. The numbers for hospitality, on one hand, look very promising.”

Both average daily rates (ADR) and revenue per available room (RevPAR) hit record highs in 2022 and are up 13.6% and 8.1% compared to 2019, respectively, Vincent shared.

“It makes sense that when ADR and RevPAR hit new highs that it would attract new development, but while hotels have managed to push daily rates for their rooms, they have still struggled to fill their rooms,” he said.

Last year, occupancy averaged 62.7% which is still down roughly 5% from the pre-COVID average in 2019.

“What this means for investors is that supply is still high, and you may be better off buying existing core hotel assets or focusing on value-add projects instead of adding new rooms in markets where occupancy has not yet fully recovered,” Vincent said.

Hotel Owners Seeking Bridge Loans

T.R. Hazelrigg IV, president of Avatar Financial Group LLC, a private commercial real estate mortgage lender, tells GlobeSt.com that the company has received inquiries from hotel owners seeking bridge loans to provide temporary financing until they can meet the requirements for a conduit loan.

These loans, known as CMBS loans, are evaluated based on the Debt Service Coverage Ratio (DSCR), Loan-to- Value (LTV) ratio, and debt yield.

“Many of these borrowers have loans coming due on their properties that do not currently generate enough income to meet the required net operating income (NOI) threshold, which can be as high as 15%,” Hazelrigg said.