The challenges that the hospitality industry is facing are unprecedented. Vacancies are at record highs, and in many areas of the U.S. it remains uncertain when hotels can reopen – much less get back to pre-COVID booking levels.
But it’s not all bad news. Despite the uncertainty, a large portion of hospitality construction projects are still moving forward – even in states such as California, which has stricter shelter in place requirements. While the volume of travel will continue to be down, as the country reopens opportunities emerge for hotels to fit into our new normal. Travelers may opt for a local resort rather than a cross-country plane ride, but travel will eventually re-emerge.
For projects just breaking ground, many owners are optimistic that COVID-19 will be much less of a concern (if it is at all) by project completion, and are moving forward with construction with the anticipation of strong future demand. Of course, that doesn’t mean it’s business as usual.
Bill Wilhelm is president of R.D. Olson Construction, based in Irvine, California.
For hospitality projects that are able to break ground or continue construction, here’s what to keep in mind:
Safety is obviously a top priority on hospitality construction sites currently. For the safety of workers, and to ensure project sites aren’t shut down due to noncompliance, it’s critical to follow all local and state regulations as well as those outlined by the Centers for Disease Control and Prevention (CDC) and the Occupational Safety and Health Administration (OSHA). Handwashing, proper sanitization, increased social distancing and minimizing shared touchpoints are also high priorities.
Long gone are the days of workers coming in sick, as it’s extremely important to require staff and subcontractors to stay home if they are experiencing any sort of illness. Virtual inspections are becoming more common, as the current situation increases adoption of this technology. Inspections that occur very early in the morning before the project team arrives can provide inspectors full access without concerns about physical distancing.
Permits and approvals
Depending on where you’re located, public agencies may be closed or have limited hours. When seeking permits and other necessary paperwork and approvals, it’s important to give yourself extra time and allow for potential delays in the project timeline. Even when it’s back to business as usual, there may be a backlog from when offices were closed.
Securing a loan is the number one barrier to moving projects forward currently. Some lenders have halted activity completely until the economic outlook is more certain. Others are continuing to finance projects but changing terms to account for the current commercial real estate environment. Oftentimes, this means higher loan-to-value (LTV) ratios, making it more expensive for hospitality owners to secure financing. Thankfully, low interest rates are a benefit for those seeking a loan.
In addition to assessing and underwriting new loans, lenders must service existing hospitality loans – exploring forbearance and other solutions for those who need it. As an industry with 20% or less average vacancy, hospitality is even more impacted than most commercial real estate sectors. Those that service these loans will be busier than ever, which could cause substantial delays. In some markets, institutional investors and other non-bank lenders are stepping in to fill this financing gap and help hotel projects move forward. It will take some time (likely in the range of six to 12 months) for lending activity to progress in the new normal. In the meantime, securing financing may be a challenge for many owners who are hoping to move projects forward.
While more expensive financing may be a barrier for owners, there is some good news when evaluating overall project costs. A welcome relief after many years of increases, we are starting to see material, hard labor and soft development costs move towards improving on overall cost. With materials, as with many aspects on the construction process, the key is planning. The earlier you can procure materials and explore different sourcing options, the more cost savings you can uncover. This is particularly important when considering potential shipping delays due to COVID-19. Luckily, they have been largely manageable for most construction projects – particularly for firms that had expanded their material sourcing outside of China before the pandemic began.
Labor, which has been in extremely short supply in recent years, has also become more readily available. As new construction slows and some projects aren’t able to continue due to financing or other COVID-related concerns, there is a larger labor pool available. These factors are helping to drive down the price of development, which can help make up for increased financing costs. Some hotel owners see the current situation as an opportunity to make upgrades to the finishes on their projects, either due to decreased material costs or because current showdowns allow for extra time to make these enhancements.
Looking ahead, it’s likely that hospitality construction will feel the greatest impact of the pandemic in Q4 2020 and Q1 2021, as projects that would have previously been breaking ground will be impacted due to difficulties securing financing and delays in approvals and permitting. Project delays will often be inevitable, as timelines expand to account for financing and approval challenges as well as enhanced safety requirements. I don’t see that hospitality construction volume and property values will return to pre-pandemic levels until at least 2024. We also may not see as strong as development activity at this point, as the levels seen in recent years have been extremely strong. However, I am confident that activity will pick back up as the industry sees a resurgence post-COVID-19.