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The tectonic plates of the financial system continue to shift daily, leaving even the most astute economists scratching their heads. As the credit markets flounder and hotel construction financing continues to evaporate, the industry’s experts have little idea when the nation will hit the economic floor—so foreseeing the road to recovery has become guesswork.
However, despite the murkiness of the economic picture, one thing on which all economists seem to agree is that the news is bad, worsening weekly, especially for developers whose lifeline is the very banks that are seizing up on lending. In fact, in mid-November, applications for building permits were down 12 percent nationwide.
Certainly the tightening purse strings among lenders and—on the other end—consumers, is going to impact hotel development and design, especially in the luxury segment. While midscale and economy-scale properties will see their fair share of woes, the pricey nature of luxury development lends itself to being the hardest hit. Lodging asked some of the industry’s most reliable experts for their best guess about where the impact will be most painful and what designers, architects and developers can do to counteract the disastrous economic environment.
Pat Ford, president of Lodging Econometrics in Portsmouth, N.H., says this financial crisis is unlike any situation he has seen. “It’s not a normal recession that we’re in. We have so much difficulty with the financial system, the lending system. This complicates everything enormously,” he says. “The economy can’t repair until the lending and banking are repaired.”
With the economy in freefall, how much do hotel developers and designers have to scale back on the scale and lavishness of upscale hotels because of little to no availability of capital and the anticipation of low occupancy, RevPAR, and average daily rates? Although a luxury property often takes years to plan and build and would likely open in a much different economic climate than today’s, Ford says developers are likely reconsidering the size and scale of the projects that they currently have on their drawing boards. Even those properties already in the ground may be subject to that kind of economic scrutiny, he says. “If I’m a developer, even though I’m in the ground, I’m thinking about the concepts, the number of rooms, and I’m rethinking,” Ford explains. “I’m either reaffirming what I’m doing and the scope of my project or I’m making adjustments. Investors are constantly reassessing during these times. There would be quite a few questions about projects that are scheduled to start construction in the next 12 months or that are in early planning.”
While new luxury hotels might feel the pinch, there are still plenty of projects that will chug along, says Jerry Zeitner, vice president of Gettys. “From a pipeline standpoint, new development is getting hit the hardest. Reflags, upgrades will still continue,” he says. “Independents will start doing more work with brands. When there’s less to go around, you lean on the big brand engine.”
At the end of the third quarter in the United States there were 63 luxury hotels in the construction pipeline with 15,197 rooms, according to Ford. Of those 63 hotels, 32 are already in the ground under construction. For those properties, completing the project without construction overruns or serious delays is the immediate goal, because renegotiating the construction financing could be nearly impossible. “If you’re in the ground, generally speaking, you’re going to open unless there’s some unusual thing that happens out of the blue,” Ford says.
The lack of available lending from banks raises the stakes for the hotel project manager—if the building process runs off schedule or additional money is required for completion, the developer may be left holding the bill, according to Ford.
“It is practically impossible to find construction financing right now. And that will probably be the case through a good part of 2009. Financing is basically unavailable for large hotel projects,” he explains. “How long that will be so—best guess—will be well into 2009.”
Upscale Scale Down
Of the 63 luxury properties in the pipeline, 23 are scheduled to start construction in the next 12 months. In those cases, it is possible that the developer will ask the design team to make changes—fewer rooms, new materials or less extravagant bells and whistles. Zeitner says there are opportunities to be creative and avoid sacrificing luxury for price, especially in the sourcing process. “Any time you can do something for a dollar and make it look like two, that’s a direction we always try to take. On the FF&E, there are a lot of untapped markets. You can go to Asia and other parts of the world. There are more opportunities in Europe to get values on goods,” he adds. “The cost of materials has stabilized, and the cost of labor is what it is. In Chicago, when you’re dealing with trade unions, the cost has already been negotiated. You have to be vigilant in looking for new sources.”
Cutting back on spending can be especially difficult for designers working on luxury hotels. That’s because the demand for extravagance is paramount among the guests. Jill Cole, founding principal and hospitality group director
of Cole Martinez, Curtis and Associates, says designers need to be imaginative in creating a great product when the pockets aren’t as deep. “Domestically, the overriding challenge is to be as creative as possible on extremely limited budgets. With money more or less unavailable for major capital improvements, lodging properties are tapping their CAPEX (capital expenditure) funds, if they’re available to be allocated to design. It’s a very significant challenge to the industry to stay current without spending much money,” Cole says. “However, because so much business is booked on the Web, good property photos are invaluable to keeping a hotel competitive. If the designer can help by making thrifty but impactful design improvements, those can be communicated online.”
Zeitner is also leery of cutting too many corners when it comes to luxury and says designers must choose carefully where they pull back on spending. First of all, killing the chandeliers and silk curtains aren’t enough to balance the budget, but the guests’ desire for luxury also has to
be weighed carefully, he says. “It’s all about expectations. People want the authentic experience. In the bathrooms, for example, you may look at the high end line of Kohler—that’s somewhere you can save a lot of money without sacrificing the look,” he says.
“Luxury has a rough time in this type of economy, and everyone will start driving their prices to drive occupancy, which is the hardest thing to get back during recovery. The way they can compete is on price.”
While the landscape for new luxury products is unpredictable and uneven, the good news for developers is that luxury hotels, which are most often one component of a grand-scale, multi-use development, take a long time to plan and build, according to Ford. And that becomes an advantage in times like these. “The investments in these luxury hotels are so large and they take so long from the point of inception to the day it opens that they really jump economic cycles,” he says. “The near term is what it is. It doesn’t stop me or get in my way because my investment is so large that by the time I open it will be in a different investment cycle.” n
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By the Numbers
At the end of the Q3 in the United States there were
63 luxury hotels in the construction pipeline.
Of those 63 hotels:
n 32 are already in the
ground under construction.
n 23 are scheduled to
start construction in the
next 12 months.
n 8 are in early planning.
n 5 of those 63 will open in Q4 of 2008.
n 11 will open in 2009.
n 13 will open in 2010.
n 34 are scheduled to open in 2011 and beyond.
n Of the 32 under construction, 29 will open by end of 2010.
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