Optimize project ROI when rate lift won’t save you

NATIONAL REPORT – Investors bringing an estimated 1,100-to-1,400 hotel projects/190,000-to-220,000 rooms online this year are fueling the third consecutive year of record-setting active U.S. pipeline growth, according to Lodging Econometrics (LE). But, without the robust rate lift of 2024-2025, record ROI is likely out of reach for all but the strongest conversions and luxury hotels.

The consensus view on this market is that moderating ADR, rising costs and, in many destinations, rate resistance removed the revenue cushion that enabled even average execution to clear return hurdles and made good projects, good enough to achieve solid returns. No more. Experts’ warning to investors adding hotel inventory in 2026’s lower growth environment is clear: There is no margin for error.

Real-world strategies for realistic returns

Outperformance can still be the goal, provided investors shift their focus from profit expansion to profit protection. In recent reports, Both HVS and CBRE emphasize that disciplined cost control and execution — not broad ADR gains — are now the primary drivers of hotel renovation and development returns.

Hotel investors got step-by-step guidance on capping reinvestment and construction costs from a panel of experts speaking on Hotel Investment Today by Northstar’s recent webinar, “Cost management: from project management to people and processes.”

The industry pacesetters delivering cogent solutions were: Chris Harlow, executive vice president of development, True North Hotel Group, Inc.; Brian Patrick Martin, president and CEO, BPM & Company, Inc.; Darrin Phillips, CEO, Top Shelf Project Management; Heather Turner, CEO and co-founder, Tamarack Capital Partners; and Danny Welch, senior vice president, Continental Contractors, Inc.

Mary Scoviak, custom and design content director, Hotel Investment Today by Northstar, moderated the March 25, 2026, live broadcast, which is now available on demand. Top Shelf Project Management was the topic sponsor. (The company collaborated on the webinar planning but had no influence over the editorial content).

What's in your control

Out of the gate, these industry veterans agreed that numerous aspects of the project management process cannot be controlled, particularly at a macro level. Yet they concurred there are effective strategies that can head off some of the cost-control issues that could develop into untenable situations if ignored or allowed to fester.

“It feels like we're being squeezed from two sides at once ─ the macro forces that we can't control and the project decisions we can,” said Harlow. He noted such tension can be offset somewhat by building a team of expert, trusted advisors and establishing communications with all involved parties to help manage expenses and ensure capital is being spent on meaningful upgrades and the guest experience.

“It can't just be money spent on stuff behind the walls that the guest doesn't see. That doesn't help me drive my rate,” Harlow added. “I'm sure they [guests] appreciate that the toilet flushes faster now. But I can't market that piece, right? I can market new design elements in the lobby, new things in the guestroom, new immersive experiences that deliver what guests want.”

Martin advised investors to keep a tight focus on the fundamentals of the asset they’re considering. “Strong demand fundamentals for a specific project can overcome a lot of the issues we’re talking about,” he said. “Let’s say you’re turning an exterior corridor beachfront asset into the latest, coolest hotel on the beach. That’s likely a heavier capital lift [than quick-turn, light-touch renovations], but it still may have a higher ROI for you because the upside potential is where it needs to be.”

Harlow added that developers' relationships with brands is evolving, giving them a new ability to drive big-picture decisions. On a recent SpringHill Suites by Marriott, he advocated for - and won - the addition of extended-stay room types to broaden the target demographic.

Talking points on PIPs

PIPs can add significant costs to renovations and brand conversion. But, there's room for negotiation. “You’re not going to get relief on fire and life safety. You’re not going to get a release on DA or code upgrades. And, it might be harder to get flexibility on prototypical brands unless you have really high QA scores and a good quality product,” said Phillips. “But, for segments above select brands like Marriott and Hilton are open to talking about what’s in the PIP and the timing of it.”

For Martin, a key challenge is the scant ability to drive a significant increased rate premium by doing what he termed “PIP recycle upgrades.” He underscored the importance of working with the project management teams to prioritize items that have the greatest impact on driving rate improvement and working with the brands to minimize those that do not, especially now when he rates 65% of PIPs as defensive plays.

“Unless you're doing a deep turnaround or development, the amount of upside at the end is highly constrained. I’d say that's probably the biggest challenge we're facing now without that pricing power on our side of the equation,” said Martin.

Turner also sees opportunities to make PIPs accretive for certain property types. "On the creative ends of the, of the spectrum renovations, I guess you could call them PIPs, but really we think of them as repositioning renovations. I would say that number is probably flipped and is more like 60%, um, offensive, 40% defensive because of the idea that you can change your target market.”

Macro-management strategies

For Phillips, the key challenge is the current tariff situation and not knowing what's going to happen on a daily basis, let alone over the course of a renovation

Top Shelf refined its contingency planning to buffer impact from worst-case eventualities. Phillips schedules percentages of the contingency to be released during design, during buyout, and when unforeseen conditions occur.

However, flexibility is key. Currently, he recommends holding contingencies back during design and buyout “in hopes that if we do get hit with a tariff that's unforeseen, we can use that additional contingency to pay for it.”

Another major unknown at press time in early April is what may happen to the U.S. hotel development/construction outlook if there’s an extended closure of the Strait of Hormuz beyond the end of April 2026. Possibilities include seriously inflated construction costs, stalled projects due to escalated oil prices and reduced availability of supplies and core materials, e.g., plastics and resins, needed for construction. Higher fuel costs may impact shipping expenses for building and renovation materials, which may be in short supply as the competition for goods heats up.

Additionally, the mix of rising capital costs combined with higher material prices may see investors taking their finger off the trigger of a project, returning if and when greater economic stability returns. As a hotel owner, Tamarack Capital Partners invests alongside institutional capital partners and family offices in value-add properties, said Turner, noting macroeconomic headwinds and limited RevPAR growth are among her major challenges.

“Our ability to use renovations as we typically would to come in, make change and really drive exceptional revenue growth in order to earn the returns has been hampered because of what's going on macroeconomically,” said Turner. “They [these challenges] oftentimes led us to pull back on the scope of what we want to renovate, because we don't feel the returns are there. On the acquisition side, the cost of construction and renovation has meant a lot of deals do not get done. It's making things more difficult to pencil these days.”

One way she's counteracting that is bringing teams on board before she even goes nonrefundable on a deal. However, Tamarack sees growing options for reining in costs, starting with reducing the risks of long-haul supply movement.

“The cost and the risk of bringing things in from overseas has gotten so much more expensive and uncertain that we have had to procure things closer to the actual property. That's probably the biggest change I've seen in terms of how we can try to respond to some of the uncertainty,” said Turner.

Toward that end, Tamarack tries “to stay on underwritten timelines as best we can rather than postponing them by a couple of years, because that in itself is a pretty drastic decision,” said Turner. “If you're buying an underperforming asset and trying to turn it around by delaying the project, you're sort of admitting you're going to stay underperforming for that much longer and that has a pretty material impact on our cash flow.”

As to construction, Welch said, “We’re always racing as hard as we can because we have a limited amount of time to get the projects bought out, get the material procured and to make sure we're ready for the start.” He added that pre-planning is crucial to ensure that due diligence is done thoroughly and properly to enable teams to prepare as much as possible.

As ground-up developers, most of True North’s current projects have been in the pipeline for one or two years. “We’re seeing sort of a three-layer shock hitting right now with the tariffs and energy, rising costs, the capital stack of interest rates and lending behaviors,” said Harlow. However, he added a strong belief in a project, alignment with a well-known brand, solid underwriting and good partners on the lending side who trust in the company’s decision-making process can help advance a project.

Making it (almost) real

In Welch's view, having a model room can be a crucial investment in keeping project management on time, on budget and on track to drive rate and guest satisfaction. It is a cost-effective "must" for getting the team aligned from the outset, reducing the likelihood of change orders when they can result on delays and overruns.

“The greatest benefits we see in the process is bringing us on early, doing that model room, being able to review that model room with the decision makers, and really being able to dial in the costs associated with the project….We really encourage our clients to permit the model room because that enables us to bring in the local inspectors, and we can make sure everything behind the wall is up to code. Then we can start to bake that into the rollout for the project…and provide a solid budget that everybody can rely on,” said Welch.

Buying existing assets is what you can't see behind the wall, especially depending on the age of the construction being bought, noted Martin. ”That’s always your biggest wild card,” he said. ”There’s no telling when a pinhole pipe's going to pop up. You just have to have proper reserves to make sure that if it does, that you take quick action, the communication is fluid, that you haven't ground yourself down to the last dollar, and that you've left some excess in there to address that kind of crazy.

Turner observed spending time up front is critical, particularly in historic buildings, whether a historic conversion to hotel or historic restoration.

“You find all the pitfalls, but sometimes you also find these hidden gems (that could be cost-savers). We have gone into buildings and found beautiful original art from the late-1800s/early-1900s hidden behind walls. We found beautiful terrazzo floors, stairwells that we otherwise would have been ordering marble or carpet to cover.”

Phillips stressed the importance of walking the hotel and flagging things for the company that’s coming in to do the PCA (Property Condition Assessment). Additionally, he suggested connecting with contracted services, e.g., elevators, water, to make sure all the building systems are in working order. “If you have a project that has a water softener, and it's not working, and no one can tell you when the last time it worked, you're going to have some infrastructure problems on that project,” said Phillips.

Making decisions early in the process to assess costs needs input from the brand, the designer, the architect and other key team members, with the owner’s voice also heard loud and clear vis-à-vis requirements, said Phillips. “So, I think slow is fast. You methodically go through all these checks and balances, and you'll have the fastest construction schedule you ever had. But if you don't check all these boxes, it's going to be way longer than you ever thought,” he said.

Stefani C. O’Connor is a journalist based in New York City.

The views and opinions expressed in this content do not necessarily reflect the opinions of Hotel Investment Today by Northstar or Northstar Travel Group and its affiliated companies.