Meeting the Challenges of New Hotel Development During a Pandemic

By Tom Baker, Managing Principal

It’s universally accepted that the global pandemic of Covid-19 has changed nearly every industry. While tourism slowed and in some areas stopped, hotel owners and potential investors have taken time to take stock and assess what can be done now and decide where to best focus. After all, this as an unheard of opportunity to revisit priorities and prepare for the future.

Overall, the hotel development sector has seen fewer deals finalized, but some sectors have not seen a large decrease in revenue. Midscale properties like extended-stay hotels or budget motels are going strong, and they have experienced little to no value reduction. This is because properties like these serve essential travelers, construction crews, and the like. Luxury properties have been impacted the most. The most popular fly-to destinations and resorts are no longer easily accessible because of travel restrictions which means turning to a drive market as vaccination rollout progresses is key.

Here some challenges of initiating new hotel development projects during a pandemic:

Low Occupancy Solutions and Opportunities

Almost 65 percent of hotels worldwide are either at or below 50 percent occupancy. This percentage is considered below the threshold at which hotels can pay for their debt or break even. Lack of tourist inflow means low occupancy in many existing hotels, causing investors to hesitate. Low occupancy also gives way to a drop in demand for new developments as existing hotels maximize efforts to keep revenue flowing.

To combat this issue, assess your indoor and outdoor space. Can it be repurposed and marketed to a different sector? Unused hotel rooms and meeting space can be a safe solution to a lack of self-contained office space, allowing employees to safely return to work without the risk of unnecessary contact with others. Consider renting long-term, especially if your property has rooms with kitchen or kitchenettes and other useful conveniences. Many need a change of scenery at this time or a place to work away from home, but not at the office.

An often overlooked benefit to lowered interest in finalizing hotel real estate deals is a coordinating drop in price. The pandemic will end and at that time, those who have already signed papers will be in the best possible place to reap the reward of a dramatic increase in property value.

Increased Safety and Hygiene is Here to Stay

By now, most hotel owners have invested in new equipment and/or technology to help keep the hotel in ultra-clean condition. Guests have always appreciated a clean hotel and they appreciate hotels have been taking the matter much more seriously. Continue to train staff to clean at a microscopic level and invest in contactless technology as these parts of the new normal are here to stay. The reward will be an increase in guest satisfaction.

A Decrease in Foreign Investments Means Incredible Opportunity

There was a strong appetite among foreign investors pre-pandemic for buying luxury hotels in very desirable locations such as major gateway cities. However, since economies have suffered worldwide, this has reduced foreign investments in hotel development projects. The bright side for US investors is that there is less competition at the moment and deals to be had. Investors are more likely to fund domestic projects during a crisis to contribute towards their economies so while foreign investors are funding projects in their own countries, you can be doing the same here at home and providing much-needed fuel for our economy.

The AHA Takeaway

Creative solutions have never been more in play in all industries, but perhaps even more so in hospitality. While occupancy is lower, there are inventive ways to raise it. For those who were considering an investment in hospitality real estate, now is a great time to invest domestically. Not only will the current situation help lower the cost, it will also help boost the country’s economy.

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– Tom Baker, Managing Principal

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