Timing new hotel projects is challenging amid pandemic
 
Timing new hotel projects is challenging amid pandemic
15 SEPTEMBER 2020 8:27 AM

Hotel owners and developers with projects in the Caribbean and Latin America region have had to adjust quickly to disruption as a result of the the coronavirus pandemic.

GLOBAL REPORT—Slowing demand and uncertainty about the duration of the coronavirus pandemic has complicated the hotel development process, forcing owners and developers to adapt.

During the “Evolving development strategies” session of the CHRIS+HOLA Connect online conference, hotel development experts shared observations and strategies for navigating hurdles to hotel projects.

State of development
Radisson Hotel Group projects have run into construction delays as banks became more restrictive on lending money to hotels, said Frances Gonzalez, VP of Latin American operations at Radisson. Several that were already in development and ready to open had to push openings back because of closures at borders and airports.

Radisson is also running into delays as everything needed to build and open a hotel arrives by boat, she said. A new Radisson Blu scheduled to open this year in Aruba had to delay its opening because the hotel couldn’t receive all the materials it needed on time. However, a new Radisson Blu set to open in Punta Cana is on schedule.

“It all depends of course on the location,” she said.

Some of Playa Hotels & Resorts’ new construction projects are late in starting while others will be canceled completely because of the uncertain conditions, said Fernando Mulet, EVP and chief development officer at Playa. Figuring out timing is tough when no one knows how long the pandemic will last and what kind of recovery it will be.

Some developers are shifting from new-build hotel projects to conversions via acquisitions at opportunistic prices, he said.

“In some cases, the expectation is that you’ll be able to buy below a cost, below replacement cost,” he said. “That’s kind of a big, big change.”

From an ownership standpoint, it all depends on where owners are in the development life cycle, said Marta Molina Seal, managing partner at CPG Hospitality & Alojica. Those in the pre-development phase might decide to extend that phase and further analyze the project to see if any changes are necessary. If already deep in construction, some owners might proceed accordingly or have projects delayed.

For a project to be completed now, it depends on the ownership group, its liquidity and where it is in the development process, said Rich Cortese, SVP of the Caribbean at Aimbridge Hospitality. One of the projects he’s working on is the Hyatt Regency Grand Reserve in Rio Grande, Puerto Rico, which has picked up the pace of its renovation with a goal of finishing by December.

“We’re putting more money into the property now than we had anticipated, but we saw this as a window of opportunity to get into the next cycle,” he said.

On another project, the ownership group was further along in a renovation but the liquidity wasn’t the same, so the project is currently frozen until after the season to see what happens, he said.

Lending and investors
Most banks this year have changed focus because of the pandemic, with many preoccupied on risk assessment with their existing clients and not taking on new projects, Mulet said. By the end of the year, lenders might start to look at new projects again, mostly in renovations or repositionings.

“With new construction projects, it’s going to take a little bit more time before you get there,” he said.

Molina said her company is in the unique position of playing defense and offense. CPG Hospitality is reinvesting in its properties and accelerating its renovations by using its lines of credit. Alojica launched an investment platform in Mexico with a plan to provide capital solutions primarily for existing projects that need liquidity.

“A lot of the deals we’re looking at are structured capital deals, essentially preferred equity, (mezzanine) debt—things that can be structured in a way without necessarily putting a value on the asset, because right now it’s just very complicated,” she said.

On the equity side, many are looking to take on distressed or opportunistic investments within the next three years, Mulet said. The cost of capital and interest rates will be higher for these investments, while leverage as well as loan-to-value and loan-to-cost ratios will be lower, he said.

Molina said there is still a lot of interest in making deals.

“Groups in the U.S., in addition to ours, have raised substantial amounts of capital to take advantage of the opportunities and to help provide solutions,” she said.

Short-term and lasting changes
Aimbridge is helping develop a soft-branded hotel that will probably open in early 2023, Cortese said. The interior design isn’t taking the pandemic into consideration because there is confidence that normalcy will return by 2023. However, other health measures are being addressed in construction, such as UV lights in the HVAC system for air conditioning in public areas and guestrooms.

Adding these elements in construction is inexpensive compared to trying to retrofit an existing building, he said. The UV lights would cost about $1,000 per air handling unit in an existing property while adding them into the initial build will run about $160 per unit.

Resorts are spoiled with kitchen size compared to city hotels, Cortese said. A resort can have a 9,000-square-foot kitchen while city hotels must maximize space.

“We also have bigger backs of the house, so the distancing thing isn’t as big of a problem in most resorts as they are in hotels stateside,” he said.

Mulet said Playa is looking to reconceptualize some of the F&B outlets at its resorts. Some changes are expected to be temporary and others will become best practices, he said.

Buffets temporarily will be replaced by a la carte ordering, while resorts will utilize outdoor and terrace spaces to allow for safe dining.

“For those hotels that are more vertical, that do not have that many public areas, I think they’re going to look for more open spaces, open air terraces,” Mulet said.

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