By Bill Wilhelm
With travel at a standstill and many people across the country still staying at home, it’s indisputable that the hospitality industry is one of the hardest hit commercial real estate sectors in this pandemic. But that doesn’t mean that hotel construction has come to a halt, or that projects can’t continue.
Where are We Now?
It’s important to ensure you’re complying with the appropriate safety and health guidelines, including those issued by the Centers for Disease Control and Prevention (CDC) and the Occupational Safety and Health Administration (OSHA). Make modifications to ensure you’re adhering to social distancing regulations on all project sites, including adjusting our inspections to occur either virtually or very early in the morning when no one else is on site. Also, take preventative actions such as hand washing and requiring employees and subcontractors to stay at home if they are ill.
While travel will look quite different for the foreseeable future and may shift from getting on an airplane to driving to a local resort, in Southern California, for example, many owners see the opportunity to create an environment that can be safely enjoyed by guests as we adjust to the new normal.
Challenges and Silver Linings
Securing financing is the number-one challenge for hospitality construction currently. Lenders that are willing to participate have changed terms due to the current environment, often with larger loan-to-value (LTV) ratios. While assessing financing for new projects and renovations, lenders are simultaneously helping developers with forbearance and other solutions for existing hospitality loans. In an industry currently averaging 20% or less vacancy, it is no small feat to service existing borrowers while underwriting new loans. In some cases, institutional investors are coming in to fill this gap. Additional challenges come with securing permits from public agencies that may be closed or have reduced hours.
General contractors can help developers find solutions to reduce overall development costs, from materials and labor to soft development. Some may wonder how that’s possible given the perceived difficulty of moving materials currently, but the key is and always has been appropriate planning. It’s a good idea to procure materials as far in advance as possible, which allows for the supply/demand equation to work and provides time for alternate sourcing. These cost savings can help make up for the higher LTV ratio, giving owners much-needed relief during this challenging time.
In my view, Q4 2020 and Q1 2021 will be the most challenging for hospitality construction. Projects that normally would have been breaking ground will have had trouble securing financing and approvals, and this may delay construction substantially.
In Q2 2021 and beyond, the outlook for hospitality construction will likely improve as permits become easier to secure and financing becomes more certain. However, I don’t project that the industry will return to the strong property values and construction activity we saw as of March 1, 2020, until at least 2024, and development may take even longer to ramp up.
Bill Wilhelm is president of R.D. Olson Construction. Despite California’s largely intact shelter-in-place orders, 100% of R.D. Olson Construction’s hospitality projects are still underway, and two projects are completing construction in the next 30 days, with a third in the next 90 days.
This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.