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How to Survive a New Hotel Project Coming to Town

How to Survive a New Hotel Project Coming to Town

Like death and taxes, hotel competition is inevitable, especially when it comes to properties that are doing well. No matter how difficult a market is to enter, there always seems to be someone out there looking to jump in. And now that the lodging industry is picking up steam, it’s only a matter of time before you’ll hear word of a new project coming to threaten your business.

Even hotels with area of protection agreements aren’t safe because new projects are in the works from such a wide range of companies. And it can be tough for properties without these kinds of protections in place to keep a new hotel from entering their turf. “There are some things you can do,” says Joseph Smith, EVP of Chesapeake Hospitality. “But with localities looking to bring in all the tax revenue they can get, if the new hotel has gone through the proper zoning, trying to get it undone is going to be a tough battle.”

Smith points to the hotel scene in the ’80s, as a cautionary tale. “That was when full-service hotels started to face competition from select-service properties like Marriott Courtyard,” Smith says. “So you would have a large, established hotel and then a couple of ankle biters would open around you.” Since select-service hotels occupy a smaller footprint than full-service properties and don’t carry the large banquet facilities, restaurants, and bars, these new competitors were able to charge less when they arrived on the scene. “So almost every full-service hotel in the country at that time saw select-service hotels move in and take customers away.”

While the hotel landscape has leveled out quite a bit over the past two decades, Smith sees another competitive disadvantage currently coming to a head with all the new downtown properties being built by cities using public money. “Here you are, a private investor, you’ve been in the community for five to 10 years, paying your taxes along with everyone else, then all of a sudden the local government deems that a new convention hotel must be built for the city to survive,” Smith says. “This puts you in an immediate competitive disadvantage because your taxes are now funding this property’s development.”

Nowhere is this more visible than in Portland, Ore., where a new 600-room Hyatt Regency convention center hotel project is being funded by local hotel taxes. Several area hotels have unsuccessfully challenged the project and so far, it continues to move forward. The current plan calls for the $198 million hotel to be built using $60 million in revenue bonds backed by hotel room taxes as well as $18 million in state and local loans and grants. “Over the past decade, there are probably 20 cities that have built these publicly funded hotels,” Smith says. “We’re dealing with one in Wilmington, N.C., and after we appealed to the local government, nothing came of it.”

Despite the unfair advantage these projects hold on the funding side, Smith believes existing hotels can hold their own operationally. “The best way to handle this situation is to not give your customers a reason to choose someone else.” This means keeping your hotel in good condition and making sure your service is top-notch. “Owners with new competition coming into the market should immediately ensure that their properties are up to snuff.” This means, he adds, changing out carpet that’s on its fifth or sixth year. “When the new property opens and you haven’t made those changes, then you’re starting off from behind. Because if customers are looking to leave, they’ll find another hotel even when it isn’t next door. If they’re comfortable though, then they have no reason to leave.”

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