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Where to Spend Lodging’s Plentiful Development Dollars

Where to Spend Lodging’s Plentiful Development Dollars

As of July, there were 3,597 hotel projects, totaling almost 430,917 rooms, in development in the United States, according to the STR Pipeline Report. This represents an 11 percent year-over-year increase from July 2014, and is indicative of a larger trend in the lodging industry—hotel development is at an astounding high.

While this is certainly a much more favorable environment for hotel developers than the economic downturn of 2008–2009, it does present its own set of challenges. Namely, with so many hotels in the pipeline, how can developers ensure that their properties will succeed among so much competition?

As in any business venture, certain markets are a better bet than others, and lodging developers are quickly finding the best places to invest their money in this particular economic climate. Bill DeForrest, president and CEO of Spire Hospitality, a management company based in Deerfield, Ill., says one of the keys to developing a successful property is doing your homework before starting the process. “In today’s marketplace, when you do the right things with the right brands in the right location, you know that you’re going to be rewarded,” he explains.

That homework involves learning what type of project is the best fit for a certain marketplace, and that might not necessarily be a brand new property or a full renovation. Redevelopment is a particularly high-performing endeavor at the moment. With so much capital available, many development companies are taking time to revamp existing, underperforming assets and further develop them to capture more business. DeForrest explains that this approach has been very successful for Spire. “We’ve done this in a number of properties over the past couple of years and it’s very exciting not only because of the new business the property attracts, but also because of the positive impact such a project has on the guests who had been frequenting a hotel even before we renovated. It makes a hotel feel like a whole new asset, even though it’s been around for many years.”

Douglas Dreher, president and CEO of The Hotel Group, a Washington state-based management company, adds that there’s a reason this type of development is seeing a push at this point in time—when there’s more capital available, standards become higher. “The cost of conversions and the cost of PIPs have risen significantly. Across the board, brand standards are rising as well. When there’s extra money to spend, brands and developers are going to find a way to spend it,” he says.

But the current state of development in the lodging industry isn’t just about spending more money; it’s about spending it efficiently. That is where dual-branded properties come into play. As one of the biggest development trends today, dual-branded properties are gaining a stronger foothold than ever before in the industry. “You’re seeing it in a lot of markets right now because developers have recognized that different brands attract different customers, even if those brands are from the same company,” Dreher says.

Dual-branded properties offer a lot of efficiencies because owners and developers can leverage the talent in the location to perform duties for both entities. “By combining two hotels in one building, we can drive the success of both brands,” DeForrest says. “It also gives the owners a marketing opportunity to look at the different customer bases and their unique needs in the same marketplace. It gives a property a strong competitive advantage.”

Even with the advantages inherent in renovations and dual-branded properties, smart development is not just about the type of hotel or renovation in the pipeline. New properties have to deliver something special to their marketplace, or they will be overshadowed by the wealth of supply. To make this decision wisely, DeForrest encourages developers to get to know their audience. “It’s not just about building something that’s efficient and attractive. You’ve got to program it so that the overall experience brings guests back again and again. You won’t be able to do that until you know who your customer is,” he explains. “Figure out who your customer is going to be and what he or she is going to want, then make your decision.”

While learning about potential guests and what they want from a property, both DeForrest and Dreher have seen common threads, including guests who are more invested in properties that offer a comprehensive experience in lieu of a simple place to sleep, as well as a desire to stay at properties that offer eco-friendly accommodations. “Green initiatives have been a trend in all industries,” Dreher says. “And it’s a trend that’s probably long overdue in hospitality. Now, with many properties pursuing LEED certification and embracing lean construction, there are many more properties that appeal to eco-conscious guests.”

Keeping all of these factors in mind while developing, building, and opening new properties is a major accomplishment, especially when the economy is as good as it is now. However, hoteliers should remember that development is only the first step. “It’s once the property opens that the real work begins,” Dreher says. “You’ve got a construction loan, real estate taxes, insurance costs, and your team has to switch gears from their grand-opening high to running a property. There are real guests, real associates, and it’s a dynamic process.” Lodging is an industry for people who think well on their feet, and being able to understand the development mindset is just one more advantage a hotelier can have.

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