The Chesapeake Point of View

Will Industry Overbuild Yet Again?

Will Industry Overbuild Yet Again?

June 08, 2014

When it comes to ramping up development, the lodging industry has long been accused of having something of a short memory in past cycles and effectively overbuilding as a result and creating poor fundamentals.
During the recent Hotel Business Roundtable on Development Dynamics, executives tackled the question of whether or not the industry has become smarter about development following the deep recession, which began in 2008 and weighed in on current conditions.
Edward Hoganson, EVP, CFO, Crestline Hotels & Resorts, noted, “Now is a great time to be in the industry. We’re seeing RevPAR growth continuing. We’re still seeing limited supply, and I think the industry has gotten smarter. The brands are saying they’ve done more scrutiny; the lenders are doing more scrutiny. The loan-to-value ratios are increasing. People are doing more diligence, they’re looking at the brands carefully, looking at the management company carefully to make sure it’s the right opportunity,” he said.
Paul Sacco, chief development officer, TPG Hospitality, echoed those sentiments. “There is less margin for error, people are more risk averse, especially with increases in labor and material costs. IF you’re doing a new-construction dal, you really want to make sure you have your ducks in a row, that you’re in the right site, that you know what it’s going to cost, and that you put all the rigor around it. I think that will restrict the number of deals that get done in the foreseeable future. They’ll be higher quality deals as well which makes the entire industry look smarter,” said Sacco.
Joseph Smith, EVP, Chesapeake Hospitality, noted the troughs with each cycle have gotten deeper. “I think each cycle over the last 10 years has been worse. You had the 9/11 cycle and everybody thought that was going to be the worst. Then, the next one came along and it was even worse. You have to be very careful, and I think the industry has wised up to that and learned—or at least that’s the hope,” he said.
JP Ford, SVP, director of business development, Lodging Econometrics, maintained the industry has gotten smarter and there’s plenty of reason for optimism. “We have increases in demand, occupancy, RevPAR and rates, and supply really is just kind of creeping along. Those numbers dictate to everyone around the table that we are more disciplined. We are taking the extra time and making the extra effort so that our industry can continue to grow and continue to survive. I think we’ve got a run in us for another five or six years,” he said.