Image: ALIS 2018’s opening day panel Dealing with the New Normal contemplates if new fundamentals are at play in the hospitality investment industry. From left to right, moderator Rob Kline, Chartres Lodging Group, Carter Wilson, STR, Cindy Estis Green, Kalibri Labs, Mark Wynne Smith, JLL Hotels, and Mark Woodworth, CBRE Hotels. Photo credit: Stephanie Ricca, Hotel News Now.
Earlier this month I had the pleasure of attending the 2018 installment of the Americas Lodging Investment Summit, or ALIS, as it’s more commonly known in the industry. The 2018 summit was especially notable given this year’s event was the first summit our recently merged AXIS/GFA Architecture + Design team attended together. Joining me this year was Gene Fong, AXIS/GFA Principal Architect, head of our Los Angeles studio, and founder of Gene Fong Associates, the firm AXIS Architecture + Design merged with nearly a year ago. In previous years when I attended the summit, I tended to focus on the formal seminar sessions; this year, with Gene attending, the two of us spent a majority of our time in the hallways between sessions introducing former AXIS clients to Gene, and former GFA clients to me. Not surprisingly, given both GFA’s and AXIS’ noted pre-merger reputations for hotel and hospitality design, our mutual introductions were more than familiar.
Apart from providing more opportunities to catch-up with our clients and project partners, spending more time in the break-out areas between sessions seemed to provide a more candid and organic touch on the pulse of the industry directly from the attending stakeholders themselves. With that feedback in mind, three notable themes seemed to elevate themselves as the key issues for stakeholders at this year’s summit.
Dealing with the “new normal”
This year, ALIS attendees approached the event with a modicum of trepidation, and rightly so given January 2018 saw the 94th straight month of growth in the hospitality industry, leaving many in attendance questioning when the current growth cycle will end. But as STR’s Hotel News Now captured on day one of the summit, stakeholders seem less occupied with predicting an impending calamity as opposed to considering if a “new normal” might have set in, wherein the industry is less cyclical, and whereby the traditional market indicators are no longer prescient. With guest-side market fundamentals still indicating room for the industry to grow (although perhaps with less vigor than in previous record-breaking quarters), developers appear to be focusing less on the macro/national-level indicators, and more on the micro/local-level indicators closer to any given project. Said another way, if the national indicators continue to be unhelpful given their inability to shed light on the direction of the market, then focus instead on the local indicators to validate or reject a project.
Look to “value” projects, especially hotel renovation projects
Two of the most common concerns voiced by developers in the hallways between sessions at ALIS 2018 were increasing land costs, and the equally concerning increase in the cost of construction labor. To mitigate upfront land costs, and instead of initiating new-builds on raw land, developers are getting wise and focusing on finding existing hotels ripe for renovation and reflagging. The challenge being, given the limited number of existing properties ideal for renovation, even these “value” properties are being bid up in price by thirsty developers keen to capitalize on their potential. Combine that situation with the aforementioned increasing cost of labor – made worse by skilled labor shortages in the building trades – and very quickly “value” projects start to rival new-build projects in terms of costs and risks to project profitability. For now at least, anticipate renovations to existing hotels to continue to gain favor among developers.
Are we over-supplying yet?
Coinciding with ALIS 2018 was STR’s Hotel News Now article indicating California had significantly exceeded 2017 supply expectations with a record number of rooms opening last year. 10,793 rooms were activated in 66 hotels in California in 2017, with over 4,309 of those rooms opening in downtown LA alone. All totaled, 2017 represented a 292% increase over 2016’s new room numbers, with those new rooms being the most brought online in California since 2008. With California’s 2018 pipeline already flush with roughly 18,000 rooms in 123 hotels – most of which will hit the market in the next 24 months – one has to wonder how much more inventory California can absorb before hotel performance starts taking a hit. Add a trend of declining tourism numbers as a result of a stronger dollar and increased visa restrictions, and the risk of over-supply becomes even more concerning.