Hotel Development Picking Up

Diane Loupe

Mar. 27, 2013

ATLANTA–Hotel construction is on the upswing, with rising demand and low supply, but developers are worried about construction costs and labor scarcities, according to panelists at a conference on hotel development at last week’s Hunter Hotel Investment Conference in Atlanta.

“It’s a better time to be a hotel developer today than any time in my career,” said Bob Sonnenblick, chairman of Sonnenblick Development LLC of Pacific Palisades, Calif. Competition from developing apartments is gone, and he said “cities are dying for bed tax.”

Sonnenblick said he recently approached municipal officials in Palm Springs, Calif., pitching a project this way: either let this piece of property stay vacant, or do a deal with us and earn half of a bed tax for the next 30 years, and we’ll create 300 jobs. Municipalities are much more receptive to hotel developers, he said.

“Somebody turned a switch on last few months, and projects that had been stagnant are getting going,” said Jeff Jernigan, president of Pinkerton & Laws, of Marietta, Ga. His company has been a general contractor for 58 years, and just started their 250th hotel project, a 200-room Westin.

But spikes in lumber prices are driving up the cost of construction, Jernigan said. Lumber prices went from $250 for a thousand board ft. to $405 per thousand, a 43 percent increase in the last three months. Jernigan said the “wait it out” strategy, waiting for prices to fall, doesn’t look promising.

“And we’re not only dealing with commodities,” said Jernigan. “Our biggest problem is labor. There is such shrinkage on the labor side, we just don’t have capacity.”

Tougher immigration laws in Arizona, Georgia and Alabama have chased some skilled laborers away, creating net negative migration, said Jernigan. One of his good workers, with legal immigration status, begged him: “Please don’t send me to Alabama.” Other skilled laborers have been drawn away to lucrative jobs in the oil field.

The last year has been the highest year for subcontracting failures, Jernigan said. A glass contractor who had done one-third of Jernigan’s work went out of business last week. “He was just exhausted. He had nothing left in the tank capital-wise.”

“This is a tricky year,” said Jernigan. “Most of these guys are undercapitalized and don’t have people.”

“Anybody that was building without surety bonds has got to be out of his mind,” said Sonnenblick. “If some subcontractor has a problem on another job,” could mean financial disaster on a deal without surety bonds. “Everybody should be using surety bonds on every deal,” he said.

New building codes requiring more energy efficient buildings are proving troublesome, said Jernigan. He described problems getting code enforcers to accept the use of exterior insulation and finishing system (EIFS), as well as another instance in which he was required to add ductwork to each room, requiring added framing to each floor. “They are ugly surprises. We’re looking at another $300,000 whammy from this code issue,” complained Jernigan.

California and New York remain difficult markets in which to develop, said Gerry Chase, president and COO of New Castle Hotels & Resorts of Shelton, Conn., due to government regulations. “If anything, development is getting more difficult. Those that have the patience to work the deal will find they have a pretty successful project.” Chase’s company has 27 hotels on the east coast and Canada.

Financing is available from a variety of sources, but lenders will be cautious. Doug Artusio, chairman and CEO of Dellisart LLC, of Roswell, Ga. said some projects are being financed with industrial revenue bonds, enabling developers to get tax-free financing from the bank. Developers may be able to develop deals to avoid property tax for up to 20 years. Some hotels are also using USDA-backed financing, but those loans are not available in all areas, and can be complicated to get.

S. Jay Patel, president and CEO of the North Point Hospitality Group, Inc., of Atlanta, recommended taking a potential project to several lenders. “Bankers are like tires,” Patel quipped. “You’ve got to always have a spare one in the trunk.” He says his company likes projects worth between $30 million and $35 million that are in the mid-11s in financing, with 30 percent to 35 percent equity.

Getting a hotel brand to back a project is critical to financing, Sonnenblick said. “It’s virtually impossible to get financing without a brand on board.”

Chase said hotel projects can get some financing in select service-type projects, but it must be a “good project, well located, somewhere the brand wants their flag to be located.”

But Patel complained that financing support from franchisers’ has been “close to zero” in his company.

“I know there are incentives, and there is key money out there to help finance a project,” said Patel. “But the brands we do business with, we have been unsuccessful with getting any financing from them.

Sonnenblick said that “if you have a really sexy project, you could pull 3-4 percent key money,” which will help get a project financed.

“Don’t be afraid to ask, ‘how can you help me?’” advised Sonnenblick. “If we’re not doing deals, they are not getting deals.”

“The message is be creative, be patient, and have your package compete, and good projects will get done,” said Artusio.