Ms. Watson

Development & Construction

Is it Better to Renovate/Convert an Existing Asset or Build a New One?

By Julia Watson, Project Director / Sr. VP of Business Development, FARROW Commercial, Inc.

One could almost say that age discrimination exists when it comes to evaluating whether or not to acquire existing hotels for the purpose of repositioning the product or operate them as they are. It seems like there is a bias in the industry to "build new," but seemingly everyone has the same "no construction financing" problem.

The partiality to new construction seems strange in a climate where there is a surplus of supply and it makes little sense to build more. However, with the downturn of the economy and construction financing becoming almost entirely obsolete, we realized an unprecedented cease of new development all together. Supply may keep up with demand for now, but soon enough won't be sufficient to compensate for the complete desolation of ground-up construction over the past several years.

Separately, when market share potential is limited due to decreased demand, it is often better to have the newest and best product available among competitors. For these reasons it does make a great deal of sense to pursue ground-up deals.

Yet, for those who are able to piece together the obvious necessary components of a real estate/construction deal, in this climate it's still difficult to tell what type of transaction to pursue. The payoff when a development deal goes well can be huge, but so is the risk. It's no secret that billions were lost when the economy crashed, and it's not at all curious why most proceed now with extreme caution before ponying up their dollars for new-builds.

Also, with the current surplus of distressed assets, isn't it better to take advantage of the low real estate costs and operate a refreshed product? I have heard it said more than once in jest, "the second person to own a hotel wins."

Clearly a case can be built in favor of and more easily, against both acquisitions and new development. So how do you know when it's a good time to build and when it's better to acquire an existing facility and renovate? All other conditions permitting (i.e. construction financing is secured, property is available, etc.) there are many variables that should factor into making a major real estate decision such as this, but understanding what those elements are can be cumbersome.

Fear not; there is help for those who persevere. Following a series of straightforward steps will serve you well to make an educated decision.

When considering construction of any sort, organizations commonly begin the flow-chart process by conducting a feasibility study. Dependent upon the proposed product type, these studies can cost several thousands of dollars to reveal whether the product is viable. Proceed to the feasibility study stage only after first conducting comprehensive internal due diligence.

Collect information from the various entities involved in the transaction. If there are multiple stake holders, gather input from them inclusive of their assumptions individually as well as the expectations of the collective. This will aid in clearly defining the objectives of the team, each party's role, and will allow you to be creative in problem-solving as you make the decision to renovate or build.

Equipped with a fundamental foundation of where the interests of all parties involved lay, the next step is to define goals. Objectives should include all ideas that pertain to the long term as well as the short term and should be quantified.

For example:

  • Are you looking to own and operate the product after completion of construction? If so, what type of ADR are you hoping to achieve?

  • Are you going to try and sell shortly after construction is completed?

  • What type of margin are you looking to achieve?

  • What are your attainable goals for assembling the capital stack?

  • Which, if any brands are you going to pursue?

Setting goals will serve as a road map for navigating the process from beginning to end and will help to create bench marks for progress toward making a decision. This information can also be used for process of elimination and define what projects are not real candidates.

For instance, if you are seeking a select service product, you probably wouldn't be looking at areas for development that could only service an economy level clientele. Conversely, if you want a full-service hotel, you likely wouldn't search for conversion opportunities of select service assets, as they typically don't meet the architectural criteria. Eliminating projects that don't fit within the parameters of the product will reduce confusion and help to streamline the decision process.

Next, assemble a team of experts. All parties involved (real estate, banks, legal, brand development, design, architecture/engineering, and construction) should have extensive background in their respective field as it pertains to hotels. Each entity brings another layer of expertise that can aid in directing your decision to build or renovate, as these are the players who have their fingers on the pulse of the industry. You can leverage these resources to provide insight as to whether a project is viable before wasting precious time and money on something with no real potential.

As an example, a hospitality-specific architect, designer, or general contractor can quickly look at an existing structure to advise how the product can be repositioned, guide you on the structural integrity of the building, and provide budget figures for making upgrades. Alternatively, for a new-build opportunity, that same team may have experience in the entitlements process within certain cities and can advise on what may be involved, how much time and money may be required, and any challenges they anticipate.

Franchise development officers can also be a great resource as they have extensive data on what markets perform best, the current and former health of properties in the area, what other projects are planned which could affect market share, etc.. You will also be able to gauge their level of interest in a project; to some extent demonstrating its true intrinsic value. The more information that can be obtained in the process the more easily an informed decision can be reached.

Once a project has to some extent been qualified, it's time to initiate the feasibility study. A feasibility study is critical to making an objective decision about whether to proceed. Do not cut corners with this process. It's essential to explore on a deeper level the nuances of a proposed project. If conducted on an existing structure, any red flags that pertain to the integrity should be noted. If executed for a new-build site, this process may reveal costly environmental or other issues that the project may ensue.

Finally, what it all comes down to is time and money. A renovation project doesn't make sense (unless in an area where no land is available) if it will cost more than building new. Additionally, due to current code standards and ADA (Americans with Disabilities Act) compliance requirements, a renovation project may demand as much planning and approval time as a new-build. Alternatively, a ground-up project doesn't make sense if a hotel can be repurposed and render the same income potential in a shorter amount of time.

Whether developing a new or renovating an existing hotel, the process is arduous and is not for the faint of heart. Though it's highly demanding, risk can be reduced significantly by clearly defining goals for growth and gathering critical pieces of information prior to making a decision. By getting equipped with knowledge and utilizing the expertise of a carefully selected team, the ease with which making a successful decision will be optimized.

As Project Director and Senior VP of Business Development, Julia Watson combines her knowledge of construction and her experience in business and relationship development, project management and coordination, estimating, and company-wide systems implementation to hospitality experts, FARROW Commercial, Inc. FARROW is a nationwide commercial construction company specializing in quality based, price sensitive, and production driven services to satisfy the demands of discerning core clients ranging from Resorts/Timeshares/Hotels/Motels to major and/or minor Commercial Tenant Improvements. Ms. Watson can be contacted at 916-474-5375 or julia@farrowcommercial.com Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
RESOURCE CENTER - SEARCH ARCHIVES
General Search:

MAY: Eco-Friendly Practices: The Value of Sustainability

Eric Ricaurte

In 2011, we visited the 10 hotels contracted in the room block for the Greenbuild conference in Toronto. As part of their award-winning sustainable event program, the conference organizers embedded green practices into the contract language for these hotels, who either had to comply with the requirements, explain their reason why they couldn’t implement them, or pay a $1,000 fine. Part of our consulting work was to gather the data and confirm some of the practices on-site. READ MORE

Susan Tinnish

Hotels brands have actively engaged in large-scale efforts to become more environmentally friendly. Individual hotels have made great strides on property. Many significant large-scale eco-initiatives s are most easily built initially into the infrastructure and design of the building and surrounding areas. Given that the adaptation of these large-scale changes into the existing asset base is expensive and disruptive, hotels seek different ways to demonstrate their commitment to sustainability and eco-friendly practices. One way to do so is to shift the focus from large-scale change to “small wins.” Small wins can help a hotel create a culture of sustainability. READ MORE

Shannon Sentman

Utility costs are the second largest operating expense for most hotels. Successfully reducing these expenses can be a huge value-add strategy for executives. Doing this effectively requires more than just a one-time investment in efficiency upgrades. It requires ongoing visibility into a building’s performance and effectively leveraging this visibility to take action. Too often, efficiency strategies center on a one-time effort to identify opportunities with little consideration for establishing ongoing practices to better manage a building’s performance ongoing. READ MORE

Joshua Zinder, AIA

Discussions of sustainability in the hospitality industry have focused mainly on strategies at the level of energy-efficient and eco-friendly adjustments to operations and maintenance. These "tweaks" can include programs to reduce water usage, updating lighting to LEDs, campaigns to increase guest participation in recycling, and similar innovative industry initiatives. Often overlooked—not only by industry experts but even by hotel operators and designers—are possibilities for hotel design and construction that can make a property truly sustainable from the get-go. READ MORE

Coming Up In The June Online Hotel Business Review




{300x250.media}
Feature Focus
Sales & Marketing: Who Owns the Guest?
Hotels and OTAs are, by necessity, joined at the hip and locked in a symbiotic relationship that is uneasy at best. Hotels require the marketing presence that OTAs offer and of course, OTAs guest’s email when it sends guest information to a hotel, effectively allowing OTAs to maintain “ownership” of the guest. Without ready access to guest need hotel product to offer their online customers. But recently, several OTAs have decided to no longer share a data, hotels are severely constrained from marketing directly to a guest which allows them to capture repeat business – the lowest cost and highest value travelers. Hotels also require this data to effectively market to previous guests, so ownership of this data will be a significant factor as hotels and OTAs move forward. Another issue is the increasing shift to mobile travel bookings. Mobile will account for more than half of all online travel bookings next year, and 78.6% of them will use their smartphone to make those reservations. As a result, hotels must have a robust mobile marketing plan in place, which means responsive design, one-click booking, and location technology. Another important mobile marketing element is a “Click-to-Call” feature. According to a recent Google survey, 68% of hotel guests report that it is extremely/very important to be able to call a hotel during the purchase phase, and 58% are very likely to call a hotel if the capability is available in a smartphone search. The June Hotel Business Review will report on some of these issues and strategies, and examine how some sales and marketing professionals are integrating them into their operations.