While supply growth is expected to range only between 1% and
2%, some developers are just now starting to see more shovels in the ground.
NATIONAL REPORT – If you asked Grey Raines in August or September
of last year how many hotels Raines Company would have under construction in
2025, he would have said “one.” Today, he said it looks a lot more like he will
have three or four under construction this year.
While pipelines remain somewhat stuck and construction muted
by a lack of institutional lending, developers are beginning to say they are
somewhat surprised by the number of starts they are seeing, mostly as a result
of private credit stepping in to fill the gap.
Raines, for example, is spending a lot more time in Texas,
especially Dallas and Austin, as a result of its new joint venture with Dallas-based
Atlantic Hotels Group. It is still hyper-focused on the Southeast with two
management projects coming out of the ground in Savannah, Georgia, as well as
an independent in Columbia, South Carolina. And Raines said they are looking at
a few more – a 50-50 mix of core branded select-service properties, as well as
soft-branded full-service hotel where they are having success removing the rate
ceilings.
People are lining up projects with the anticipation that selling legacy projects fund the next pipeline. And to the extent that doesn’t happen, those projects continue to just get roll forward – like legacy projects that refuse to die, for lack of a better term. Ultimately, they get to a point where they’re unable to be capitalized and don't move forward.
Dustin Fisher
But some developers still believe the pipeline will still
remain below historic levels with Noble Investment Group Senior Vice President
Dustin Fisher suggesting it could remain under 1% growth in the near term. He
said, historically, the model has been build, stabilize and sell. But with the
freezing of the transaction market, there hasn’t been a lot of capital recycling
to fund the next wave of the development.
“People are lining up projects with the anticipation that
selling legacy projects fund the next pipeline. And to the extent that doesn’t
happen, those projects continue to just get roll forward – like legacy projects
that refuse to die, for lack of a better term,” Fisher said. “Ultimately, they
get to a point where they’re unable to be capitalized and don't move forward.”
In the next breath, Fisher did say he is surprised by the number
of projects that are breaking ground.
More specifically to Noble, he said they are being very
selective on core urban ground-up right now and are more focused on midscale
and economy extended-stay ground-up opportunities across the major brand
families. They have five under construction right now with probably another 14
that will break ground in 2025, and a handful more in various stages of
planning or approval stages.
“We’re benefitting from entering into a true white space,
from just the availability of flags,” Fisher continued. “So, when you’re going
to do something scalable, you’re able to dictate with brands a set of
territories that are bespoke to who you think drives the best extended-stay
demand.”
Noble is looking for markets that our pro-business, have an
ease and speed of development from a regulatory approval standpoint, and have
the enough diversity of extended-stay demand generators, whether it be military,
hospital, major distribution and logistics hubs that support longer lengths of
stay.
“You’re seeing us mostly dot the Southeast. I don’t think
that’s surprising, but the benefit of having exclusivity and a robust pipeline
is letting us pick and choose the markets we really want to be in,” Fisher
said.
One of those extended-stay players, Extended Stay America, expects
increased project velocity as financing cost and terms become more attainable.
CEO Greg Juceam said there is no doubt that the cost of debt and inflationary
pressures has slowed the U.S. hotel development pipeline for all brands. On top
of that, he said, building a hotel today is roughly 25% more expensive than it
was just a few years ago.
The underwrite-able demand for resort continues to be very strong. So, I continue to think we’re going to see more opportunities on the resort development side.
Mark Keiser
“However, the thoughtful construction and operating model
that Extended Stay America utilizes, especially when combined with our
commercial engine, represents a strong value proposition for investors,” Juceam
said. “Our business model has been successful for 30 years, in good times and
bad, including during the uber-challenging COVID period; this relative
outperformance rightfully caught the attention of investors, lenders, and hotel
owners alike.”
Juceam added that all three Extended Stay America brands have
been rapidly growing with both new builds and acquisitions at its affiliated
REIT and through franchising activity. “In
just three years, ESA Premier Suites has opened 50 properties, with a
contracted pipeline of 50 more properties to open in the next two or so years,”
he said. “With ESA Select Suites now representing more than 200 hotels, we have
established two of the fastest growing U.S. hotel brands. Additionally, there
are many key markets that are still available for initial Extended Stay America
product, or to increase our density at different price points via multiple
brand tiers.”
Mark Keiser, president of development at Viceroy Hotels,
said that while the industry has not yet fully figured out the office-to-hotel
conversion, there are going to be opportunities in certain markets like
Nashville where corporate tenants want suite campuses as opposed to going into
a 20- to 30-year-old buildings, regardless of the great location.
They might not be as efficient, but they can make good
consumer hotels. “For those types of locations, those buildings are going to
need a new life, and hotels can be a good solution for them,” Keiser said.
Keiser added that resorts continue to have their moment as
consumers look for new locations for different experiences.
“The underwrite-able demand for resort continues to be very
strong,” Keiser said. “So, I continue to think we’re going to see more opportunities
on the resort development side.”
For Miami-based deal junky Gencom, buying good stories and a
good basis is generally what drives growth. But Chief Investment Officer
Alessandro Colantonio points to their Ritz-Carlton in Key Biscayne, Florida,
where a $150 million transformative reinvestment almost feels like a new
development.
Gencom has owned the asset for 25 years and improving on it and
others in its portfolio is a big growth strategy for 2025. “The Ritz-Carlton is
not a new acquisition, but we’re almost treating it that way,” Colantonio said.