PHOENIX — Getting a new-build hotel project across the finish line has been a difficult proposition in recent years, so owners and operators are turning to renovations and repositionings.
According to CoStar data, new supply growth across the United States is at 0.7% year to date, well below the long-term average of 1.6%. High financing costs and labor shortages aren't helping the short-term outlook for new development, so supply growth is expected to be muted for the next few years.
Panelists speaking during a breakout session at The Lodging Conference discussed strategies to boost the value of existing properties to continue to drive revenues.
Eric Jacobs, chief global growth officer at Aimbridge Hospitality, said the quantity of soft brands being launched by the big brands are breathing more life into assets that would typically be on the way out.
"You'll continue to see what you and I might see as obsolescent or good-to-teardown [get] extended life," he said.
For any project, the goal is to find the value in an asset to drive revenues and stay on top of costs, Jacobs said.
When it comes to activating a space within a property, he said food and beverage has stood out as an important piece for hoteliers. All the trends are pointing toward guests being willing to spend more on experiences with their travel, so providing an option for them to do it on-property is key.
"We all have great rooms, but the experience we create, that's where the value of the proposition is," he said. "Bringing new public space to life, places where you can get people to spend more money, keep them in the hotel — consumers seem to want to have that experience."
Neil Flavin, chief operating officer at HVS Asset Management & Advisory, said there are opportunities to upgrade an asset in a well-performing market. He said HVS is working on an asset right now that should see a $35 boost in average daily rate once it is complete.
"Running the numbers on converting some of these assets or upgrading some of these assets — in the right location — can definitely have a strong [return on investment] for you," he said.
Adaptive reuse of office buildings and old historical buildings, particularly in urban markets, is another creative opportunity to add something new to a portfolio, Jacobs said. Office buildings are trading at close to an all-time low, and these buildings provide long-term hotel opportunities in larger markets.
He said the adaptive reuse of historical buildings has "always been a great play ... the buildings that were built 50, 70, 100 years ago have character that is hard to replicate today in this development cycle and the cost of development."
Flavin said HVS looks for alternative-use opportunities in older hotels that are much larger than hotels built today. This can mean splitting the hotel into two separate brands or using half of it for a non-hotel use, such as student housing or retail.
"If you are in a more major metropolitan area with a facility like that, retail brings people," he said.
Rob Smith, CEO and president of Stonebridge Companies, said his company has been working on "a lot" of projects with mixed-use residential. This allows the owners to collect some cash upfront and then reinvest it into the accompanying retail and food-and-beverage spaces.
"It's a good way for either reuse or new builds to upstart the capital in front," he said.
CapEx investments
Owners and brands are at a bit of a crossroads when it comes to capital expenditure requirements. Brands are pushing to ensure the assets in their portfolios are staying in tip-top shape, while owners are keen on letting things play out instead of pouring more money into an investment that isn't likely to pay off for several years.
Jacobs said the industry is "getting very, very long in the tooth" and a lot of hotels need improvements. But on the ownership side, it's difficult to put $3 million to $5 million in CapEx into a property knowing they'd have to hold onto it for another three to five years for the return on investment.
The trickle-down effect of having an older property starts to seep into the operations of the property.
"It's a challenge to get great talent to go want to work [at an older property] when there's a brand-new [property] over there. ... Getting talent sometimes to go to those hotels when they see an owner who's not willing to invest and recapitalize the asset — there's a challenge there," he said. "People want to work and be proud of what they do ... if the owner doesn't care, why should the staff?"
Brands are starting to be more stringent when it comes to CapEx requirements, Flavin said. It's imperative to get the timing right on a renovation, because it won't be easy to regain demand once it's gone.
"What happens all too often, and is very unfortunate, is that the owner waits too long. Business begins to erode. ADR begins to erode. The product begins to erode," he said. "Once that business goes away and it's gone to your competition, it's a lot more difficult to get it back."
While brands are starting to be tougher on owners to improve their properties, Smith said he's found their stance to be fair and flexible. As long as a property is delivering results and maintaining its guest satisfaction score, the brand will be softer in its demands for property improvement plans.
"I've ran properties that were in very bad shape and had happy customers. I've seen properties that are newly renovated that don't run well at all," he said. "It really starts with us owning the operation and then planning out the PIPs smartly."