Hospitality exec on why we need disruption in construction

ATLANTA — When discussing how tough new construction is in the hospitality industry, Mitch Patel said that’s the one industry he still thinks needs disruption.

“Every industry has been disrupted. The construction industry needs to be disrupted,” said Patel, president and CEO of Chattanooga, Tennessee-based Vision Hospitality Group. “We’ve been talking about modular construction for 25-30 years, and no one has quite been able to figure that out. There are so many benefits to going with modular construction.”

Patel said the labor challenges for construction are huge, with more construction work happening than 20 years ago but 50% to 60% fewer workers. He also said the disruption could help statistics such as the average age of a construction worker approaching 45 to 50.

With modular, I’ve heard you could build it within four to six months. So, we’ll put a lot of effort into figuring that out.

Mitch Patel

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“If you could reduce that timeline, that would be great. We used to build hotels in 12 months, and now that hotel takes 18 months to two years,” Patel added. “Now, compounding that with today’s interest-rate environment, it becomes very challenging. With modular, I’ve heard you could build it within four to six months. So, we’ll put a lot of effort into figuring that out.”

Patel was on the “Main Street Talks” panel at the Hunter Hotel Investment Conference in Atlanta with Greg Friedman, managing principal and CEO of Atlanta-based Peachtree Group; Jimmy Merkel, CEO and co-founder of Columbus, Ohio-based Rockbridge Holdings; and Al Patel, president of Columbia, Maryland-based Baywood Hotels. The panel was moderated by Teague Hunter, president and CEO of Hunter Hotel Advisors.

The executives discussed challenges with construction, financing and potential oversaturation in extended-stay. 

Extended-stay overbuilding?

Al Patel said Baywood Hotels is entering the extended-stay space with its first hotel. 

“We’re still a little apprehensive about how that all works out. Today, the name of the game is rate. With these, we don’t know how the rates are going to work out,” he said. “Like we’ve done with all the other brands, we’ll dip our foot into the pool a little bit and see how it goes. And then, if it goes well, we’ll accelerate that side of our business.”

Al Patel said he is concerned about oversaturation into the extended-stay space. “Now you have the proliferation of these brands — Hilton, Marriott, Hyatt — and then you bring in Wyndham with their brands and those are still going to be developed,” he said. “We're extremely concerned about the supply growth in that particular segment.” 

Challenges in banking

Merkel said you can’t underestimate the challenges of the banking industry right now.

The banks are… I hate to say it, but the model is broken right now. The regulatory pressures are not going away anytime soon.

Greg Friedman

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“There’s nowhere for the loans to go… a lot of the banks that fund our industry are these community and regional banks and superregionals. They’re getting overallocated to real estate, and they’re getting scrutinized by the regulators. It costs a lot for them to have an impaired loan on their balance sheet. This has to get solved before you’re going to start to see more construction lending,” he said.

Merkel said the companies that do last should do very well in the next phase of our economy. “You survive through a downturn, and you’re going to create value in this industry… What we’ve done is tried to be well capitalized and do smart deals in the right locations,” he said. “And when you hit a tough period, survive with your assets and continue to care for them, but then be opportunistic when the opportunities come.”

Friedman agreed with Merkel on the current state of banking. “The banks are… I hate to say it, but the model is broken right now. The regulatory pressures are not going away anytime soon,” he said. “You’re entering a new phase of credit and lending where you’re going to need other sources of capital for bridge or [someone to] take over for the portion that traditional banks are now going to avoid and leave behind through all this.”

Friedman said regional and community banks generally make up 70% to 80% of commercial real estate lending market. “That’s a lot of hotels,” he said. “You’re going to continue to see consolidation across banking and a lack of interest in lending unless you’re going to be putting a lot of huge deposits in different banks.”

Still, Friedman said he’s bullish on the hospitality industry but bearish on the overall economy. “I’m a little bit bearish on equity and what happens when rates stay higher longer,” he said. “The market recalibrates from a standpoint that you’re going to see cap rates continue to expand, but I think hotels are less impacted.”