Challenges, opportunities surrounding capital
projects examined during NYU investment conference.
Lessons
learned on CapEx deployment as a consequence of the pandemic, when reserves
were often used to supplant cash-flow purposes, have led to both strategic and
creative processes being utilized by the gamut of hotel investors, owners,
brands, designers and procurement firms.
What’s
being employed and what’s working at mid-year 2024 was the subject of a panel
discussion at the recent NYU Hospitality Industry Investment Conference.
Bringing their insights to the topic were Alan Benjamin, president, Benjamin
West; Warren Feldman, CEO, Nehmer; Justin Reid, SVP,
development, design and construction, Host Hotels and Resorts; and Chad
Sorenson, CEO, CHMWarnick. The session was moderated by Alexi Khajavi, group
president, Hospitality, Travel and Wellness, Questex.
“Traditionally,
most owners had a 4% CapEx reserve in their loan document,” said Benjamin,
citing studies that amalgamated a variety of hotel types and ownership schemes
that had overall CapEx at roughly 8% to 9% of revenue. “During COVID, the
lender said, ‘Hey, owner. Open that 4% lockbox CapEx reserve and use it for
survival, lease payments, mortgage payments, hiring the 80-year-old to drive
around the golf cart as a security guard because no one was staying in your
hotel; whatever you had to do with it. So, the biggest issue now is that both
halves of the 8% per se are missing. That capital has to come from another
source: from the same owner, an outside source, brand key money, whatever it's
going to be, to get any type of renovation done,” he said.
The biggest issue now is that both halves of the 8% per se are missing. That capital has to come from another source: from the same owner, an outside source, brand key money, whatever it's going to be, to get any type of renovation done.
Alan Benjamin
At
the same time, Benjamin observed, hotel brands are reinforcing standards,
putting a “very high demand” for capital against a very low supply of dollars.
“Owners don't have enough cash to do it” in many cases, he said.
Whether
a 4% CapEx reserve fund was even a viable cushion was generally deemed out of
alignment with the current economic environment, inflation, interest rates,
etc.
“The
4% hasn't been the right number for a long time,” said Sorenson, concurring
with Benjamin those studies back to the early 2000s consistently posited higher
numbers. “Eight, nine, 10% is just the number [sic] and sometimes more,
depending on the age of the building.” He added that owners must figure out how
to deal with both debt service and CapEx in this environment, “which is really,
really tricky.”
Feldman
said the hotel clients that have been coming to his
architectural/design/project management firm are finding they have to be “a lot
more creative and a lot more definitive in terms of what [they’re] going to do
in a capital project” because they have less money and the same, if not more,
problems, having deferred some maintenance to get through COVID, and now they
have infrastructure issues. “So, we’re seeing a lot more of what I would call à
la carte renovation versus the standard soft goods or full renovation,” he
said.
Similarly,
industry brands are apparently becoming more flexible when it comes to PIPs.
Feldman observed there’s the potential for asset owners faced with a particular
brand-required PIP they feel won’t provide a satisfactory ROI to slide along
other brand tiers in the same “family” to find a PIP that’s a better fit
cost-wise and makes sense for the asset.
“One
of the things we’re seeing is clients are coming to us with multiple PIPs to
price (for the same property) and saying: ‘I’ve got three PIPs from the same
chain at three different tiers, and I want to figure out which one’s the right
number for me to go for.’ That never used to happen. So, I think the industry
is looking at it differently than we did before,” Feldman said.
Reid
said at Host when they’re building model rooms, they’re building two scenarios.
“Maybe a casegoods installation for a given property isn’t the right choice.
[Then] when you go in and see a total soft-goods renovation and a design in the
bathroom that may be good [enough] to keep up with the market share and the
comp set in that market. Then, really lean on your consultant team.”
The
consultant team “is an area where you don’t want to try to save dollars,”
Sorenson stressed. “Low-cost providers are going to cost you way more than
hiring the [proven] groups.”
When
it comes to what types of CapEx projects deliver the greatest ROI from a rate
perspective, Reid suggested they are “very contextual” from property to
property. “If you're in a group house, maybe it's some kind of additional
meeting space component that you need to add; a large-scale ROI expansion,
right? It's breakout meeting space so that you can have the big presentations
and then break out one-on-one with the consulting team to work with your
clients,” he said. “Sometimes it’s food and beverage; that’s a strong one for
us. We’ve seen a lot of complexing in food and beverage where you’re moving the
club lounges down to the ground floors, and you’re complexing the feeding—kind
of the buffet—for that club lounge clientele, along with the restaurants. So,
there’s some strong moves in that direction across several brands that we see
throughout our portfolios.”
New,
COVID-induced demand
Guest
expectations in the wake COVID also are having an impact on how CapEx is
deployed vis-à-vis design.
We’ve seen a lot of complexing in food and beverage where you’re moving the club lounges down to the ground floors, and you’re complexing the feeding—kind of the buffet—for that club lounge clientele, along with the restaurants.
Justin Reid
For
example, Nehmer’s Feldman noted bleisure travel has upped length of stay and
added to physical room occupancy (significant others, children). “That has
ended up creating the need to work in your room or work somewhere in the hotel,
much more so. We’re seeing a bunch of hotels actually create—instead of a
business center—an area where you can go and do work, like a little
workstation… and that that is being marketed as a difference,” he said.
In
addition, the demands on technology have become “astronomically different,” Feldman
said. “The number of hotels where
internet is not provided at the right level [forces] the requirement that you
have DAS [Distributed Antenna System] now to give extra cellular coverage;
that’s all generated from the way we’re dealing with technology,” he added. And
as to dollars going to F&B, he observed “the market that used to be the
little sundry shop is now like going to Panera. It’s very much a different
experience than it was before.”
The
panelists agreed CapEx deployment becomes even more complex when it’s slated
for a resort, an asset type known to spend a higher percentage of revenues on
CapEx.
“It's
just the function of the size. You have a lot of real estate that’s spread out.
There are multiple offerings. It’s just a much more complicated operation; it’s
not efficient,” Sorenson said.
“The
pools, the spas, the tennis courts, the real estate, the acreage. As far as you
start adding in the acreage, your costs go up,” Reid said.