27 Apr History – A Peek into the Future for Hotel Development
People and patterns are unique. Predicting the future of an individual or company is not a realistic exercise, however what is interesting is that collectively industry patterns are discernable and predictable enabling us to identify how an industry will develop.
For example, at DRB Consulting, LLC we have noticed that the Hospitality industry has a pattern cycle that has repeatedly guided firms on how to connect with the industry. Often one of the first industries affected by an economic recession is the travel industry. When people seek to curtail their spending, often one of the first expenses to be cut is discretionary trips. While the typical vacation traveler may still want to take that vacation, they will choose a closer destination reachable by car or may just forgo the trip expense all together.
Businesses are made up of people who make the same decisions regarding business travel. Their choices are to postpone seeing that customer or attempt to stay connected by video, phone or email, reducing the face to face connections from monthly to quarterly or from quarterly to another frequency.
The rebuilding of the industry from a recessionary downturn is just as predictable. Our observations have been that Hotel companies will cut costs and seek a profitable operating structure. During this time investment in the properties such as renovations or upgrades is often postponed by the chains providing the property owners some indirect financial assistance. Once properties have been achieving some positive cash flow usually for a period of 12 months, then the chains start to reinstate the requirements for upgrading or refreshing the properties.
In June 2010, at the New York Hotel conference, many of the hoteliers were very pleased that they had started to see the turn of the recession and several had announced that they have been profitable since January 2010 with a steady increase. At that point we anticipated that 2011 would be the year of renovations for the hotel industry.
There is more to this industry behavioral pattern. Quietly owners initiated discussions and do small transactions, upgrading their market positions or taking advantage of properties that are not financially stable. The buying and selling continues driving cap rates to a decision point that maybe it would be better to build a new facility than take on a property that has limitations. This pattern often has a 9 to 12 month cycle. We are approximately 4-5 months into that cycle.
Usually at this point in time in the recovery, we observe that the lending community also starts to become more comfortable with the industry. As a whole the industry has returned to profitability, businesses and the public are starting to travel, and the profit structure of the industry leaders are becoming more marketable to their lenders. It is at this point in time we shall start to see a trend of hotel transactions announced.
This past week at a real estate investment conference, a couple of lenders were proudly talking about how they had returned to lending on construction programs. These announcements were in other industry segments; however the pattern we have seen in the past four recessions is once again forming.
What an individual company may do is not predicable from these patterns, but an industry is very predictable. The hospitality industry will start building again, attempting to capitalize on those unique opportunities of resort destination or business concentrations. The past patterns would indicate that we should see the start of planning for new build projects in the fall of 2011 with design in full swing in 2012. Depending on the property size, location and method for construction will follow. The speed of construction returning to the industry will be related to the form of contracting such as design-bid-build, design build or some other form of contracting.
Next posting –Inflation and how it may affect your property and project decisions.