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To Develop a Hotel or Not during the Pandemic?

Let's face it. The hotel industry is among the most impacted as a result of COVID-19. 

The United States saw revenue per available room (RevPAR) drop by more than 80% in the week ending March 28 compared to the same week one year ago, according to global hospitality data company STR. Each month in 2020 has continued to present highs and lows.

Experts say all data point to a "long, slow road" to recover the U.S. hotel industry. 

Enduring and prospering during the current economic crisis will take strategic steps. But that doesn't mean developers can't do it.

While many statistics point to doom and gloom, there are some bright spots on the hotel industry's horizon.

The pandemic has hit the top 25 hotel markets the hardest. In contrast, second-tier markets have been able to survive and grow.

"Before we went into the pandemic, the top 25 ran a 15% to 20% premium in terms of occupancy. That has now inverted, and all other markets command a 10% premium," said Brad Garner, SVP of client services & relationships for North America at STR, during a Hotel Data Conference webinar series.

Garner stated that extended stay style hotels and economy chain hotels in leisure or drive-to markets are performing better throughout the pandemic during the webinar.

Developers' are second-guessing urban markets as we've seen them take a substantial financial hit. Hotels in urban locations, like the top 25 MSA's, historically are a crucial part of larger company's portfolios. Naples Hotel Group's team believes big cities will undoubtedly make a comeback, specifically in Florida. They look at it as an opportunity for markets that may have previously had a high entry barrier to become more accessible.

In the market to develop during the pandemic? You aren't alone. According to a recent report from analysts at Lodging Econometrics, despite the pandemic, specific markets saw among the highest number of new hotel property development projects during the first half of 2020.

Naples Hotel Group's development team is on the front line of openings, renovations, and new builds in 2020. The hotel group has opened two hotels, broke ground on two hotels, and acquired its first independent hotel that begins a renovation this month. Their active development year has put them in the center of multiple developers' conversations. 

What conversations are they having? Well, it depends. 

Some owners are pushing ahead on land acquisitions during the pandemic and feel it's an opportune time to develop as construction costs have started to lower. While borrowing money has been difficult for new construction projects during the pandemic, they believe that in 2021 this will become easier.

The franchises have been easier to work with during the pandemic while being aggressive to get new deals in the pipeline. Developers have also pulled previously slated projects due to the current climate opening franchise opportunities in some markets. 

Furthermore, the incoming supply of new guest rooms is declining, and presenting opportunities that were not available before. Smart hotel developers are always wary of oversupplying hotel rooms in a market. The fact that developers have pulled projects offers the chance to revisit developing in markets previously passed on. 

Construction costs remain a concern as prices were at an all-time high. Construction was one industry not affected by restrictions during the pandemic as sites remained fully open to work towards openings. 

Naples Hotel Group predicts construction prices will begin to lower as early as Q1 or Q2 of 2021. That's why most developers are pushing ahead with new projects since they won't have to price the hard construction costs until the second quarter of next year.

Are you interested in developing a hotel? We can help! Please inquire with our team today.