John Hardy started his eponymous property services company in 1992 to provide development, management, and design expertise to hotel owners and investors. He comes from an architecture background initially and spent seven years as group vice president of architecture and construction at Interstate Hotels before branching out on his own. Lodging Managing Editor Megan Sullivan spoke to Hardy about the challenges involved with opening a hotel property and solutions that will maximize ROI.
1. Lodging: Do you expect an upswing in new-build hotels as developers and owners become more confident of improvements in the economy, or do you foresee that conversions and adaptive reuse projects will continue to drive growth?
Hardy: Eventually there will be an upswing, but right now it is limited by a lack of high demand markets to support it, a lack of confidence in the investment community to take a risk on it, and the lending community is not offering attractive terms if they will even consider it at all. For all of these reasons acquisitions will be the investment model of choice for the foreseeable future. It will change at some point, but will be severely constrained for the time being, except in a few markets.
2. Lodging: What are some creative solutions that can be used in the development process to maximize return on investment?
Hardy: Creative conversions and deep turn arounds of existing properties where you can add significant value through an aggressive redevelopment and/or a re-branding plan or more astute design, development ideas, marketing, or management can really help make a deal work.
3. Lodging: Have you seen a lot of owners and developers get in over their head when embarking on a hotel project?
Hardy: Unfortunately yes. However, when we work with first-time hotel owners and investors we can keep it on a successful track if they are wiling to listen. Hotels are more difficult than other real estate types because it has the characteristics of real estate and multiple operating businesses combined. The complexity can be overwhelming if the investors are not prepared for it or not supported by the required resources.
4. Lodging: What are some common ways a development project can go awry?
Hardy: Poor deal or site selection, unrealistic investor ego, investor undercapitalization, owner mismanagement, incompetent consultants and contractors, weak branding, bad luck, and extreme changing market conditions. Ground-up deals are also much riskier than acquisition deals because you have a revenue track record to look back on and to base pro formas and financing on. Ground ups require a much longer period of time from inception to opening. Many basic assumptions can change dramatically over a two- to four-year period and usually not for the better. Also, the capital going in to the ground-up deal is not getting a return for the entire development period whereas in an acquisition deal there is always some sort of revenue from the beginning of the new ownership period.