Construction cranes for hotels haven’t been called off to the level as some hotel industry analysts would have you believe. It can take years to build a new hotel, and those breaking ground now will open just in time for the pandemic to be in the rearview mirror.
Don’t rule out brand new hotels getting built just because of the worst downturn in the history of the industry.
IHG Hotels & Resorts CEO Keith Barr sees plenty of interest in moving ahead with new-build construction for hotels despite the tight lending market. Financing for new hotels dried up in the worst months of the pandemic, leading many hotel executives — Barr included — to promote the idea of signing new brand deals with the owners of existing hotels, also known as a conversion.
But while fellow executives see conversions as top of mind for the industry, Barr says new-build construction is a dominant force at the luxury and lifestyle end of the hotel spectrum as well as in the more “mainstream” end for IHG brands like Avid and Holiday Inn.
“It’s almost a barbell right now, which I find quite interesting,” Barr said in an interview with Skift at this week’s Americas Lodging Investment Summit. “It’s going to vary market-by-market because the U.S. is coming back, China is already back and has been for some time … Europe will take more time.”
The Middle East is also garnering strong new-build interest, Barr added. Some of IHG’s most popular brands for developers to go ground-up with include high-end brands like Regent, Six Senses, InterContinental, and Kimpton as well as more affordable offerings like Holiday Inn Express and Staybridge Suites.
There was a 25 percent increase during the second quarter of new construction projects in the early planning stages in the U.S., according to Lodging Econometrics.
That stems from increasing developer confidence around the recovery and the idea of international travel restrictions eventually getting lifted. While the UK plans to lift its border and quarantine restrictions for fully vaccinated travelers arriving from the U.S. and EU, the U.S. borders remain closed to foreign travelers for the time being in light of the Delta variant.
Barr acknowledged there is still difficulty in financing certain kinds of hotels in major cities. It would be difficult to underwrite a new project today like the Hotel Indigo in downtown Los Angeles where the interview took place, he said.
“But that will come back,” he added. “We’re seeing some of that [already] in New York and some of the other urban centers.”
Conversions Still at Play
Marriott CEO Anthony Capuano earlier this week noted conversions would be the biggest talking point of the lodging convention, and Barr isn’t discounting the idea of these kind of deals at his own company.
IHG, like most hotel companies, compensates for that slack in the market with conversion deals. Roughly a quarter of IHG’s new hotel signings in the first quarter were conversions.
“I think that varies from market to market, though,” Barr said. “Greater China is principally new builds. We are doing some conversions, but there’s a huge new-build story there and pipeline from Holiday Inn Express all the way through to InterContinental. Here in the U.S., the bulk of our signings are still new-build, kind of mainstream and intellectual lifestyle [brands], but there are more and more conversions coming into play.”
The conversion piece of the development pipeline stems from a major company like IHG making the case to existing owners of competing brands or independent hotels that they can offer better distribution, loyalty programs, and access to the sales that come with bigger brand affiliation.
Like at IHG, brand conversions at Hilton accounted for about a quarter of rooms growth in the first quarter. Marriott’s conversion rate was 31 percent of its first quarter rooms growth — the highest rate seen in six years.
The conversion competition is heating up, but IHG leaders feel prepared to make an attractive offer to potential owners. The company beefed up its brand portfolio through acquisitions and organic launches in recent years with offerings like Six Senses, Voco, and Kimpton.
“Somebody said we have more arrows in our quiver than we had in the last downturn to convert more hotels,” Barr added with a laugh.
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Photo Credit: Conversions may be the buzz word in hotel industry development, but IHG CEO Keith Barr still sees a lot of opportunity with new hotel construction. Skift