Why New Hotels Are Still Opening During the Pandemic - Bloomberg

Why New Hotels Are Still Opening During the Pandemic - Bloomberg

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Luxury Travel

Nearly 1,000 New Hotels Are Still Opening During the
Pandemic. Why?

The travel industry may be in survival mode, but some brave
brands are making the numbers work.

By Sara Clemence

The new White Water hotel on California’s central coast has
a lot going for it: a location on a moonstone-studded beach, generously sized
rooms, and Scandinavian-inspired interiors by Los Angeles designer Nina
Freudenberger.

Going against it? Oh, just the worldwide collapse of the
hospitality industry.

White Water is one of the thousands of hotels that have
either opened or will open in the midst of the Covid-19 pandemic. According to
hospitality data firm STR, occupancy rates dropped to below 30% across Europe
in March; numbers from M3, a firm that provides accounting services to hotels
across the U.S., show that domestic occupancy figures declined by half, even as
hotels slashed prices. It’s all part of a recession that the International
Monetary Fund in June predicted would hit $12.5 trillion in global
losses—almost 5% of the world’s gross domestic product.

That’s a grim picture for anyone starting a business of any
kind, much less one associated with high overheads and extreme sums of
underlying debt. Still Hilton opened 60
new hotels around the world in the second quarter of this year, while Marriott
has debuted 163 properties—including four Ritz-Carltons—since the start of
the year.

Even smaller, independent, and first-time hoteliers are
undeterred. The owners of beauty brand Fresh made their first foray into
hospitality this month with the opening of the 11-room Maker Hotel in New
York’s Hudson Valley; Nobu Hotels grew its portfolio by a third in recent
months with new properties in Chicago, London, and Warsaw; and PRG Hospitality
Group, which owns eight boutique hotels in California, including the White
Water, is about to cut the ribbon on its second summer debut. According to
industry site Tophotelnews, an additional 775 
hotels are scheduled to open in the Americas alone by the end of 2020.

This might sound counterintuitive, with travel at a
near-standstill. But insiders say it makes sense.

For many new hotels, the decision to open is one that’s been
years—and millions of dollars—in the making. Deciding to cut the ribbon is like
the last leg of a too-expensive, too-long road trip: an inevitability, if you
want to get home.

“A typical hotel project might take anywhere from two to five years to develop and open,”
says Sean Hennessey, a hotel consultant and professor at NYU’s Jonathan M.
Tisch Center of Hospitality. Including land, building costs can range from
several million dollars for a budget chain hotel to billions for a lavish
landmark. And maintaining a finished building comes with staffing costs that
might as well be allocated toward serving paying guests.

Delaying operations is therefore, a costly proposition. “Even
if it’s unsuccessful at launch, a completed project is a heck of a lot more
valuable than an 80% completed one,” Hennessey adds. “You have to jump into
the fire and hope for the best.”

For luxury hotels, breaking even means many things. At 50% occupancy, a property generally
has enough cash flow to make payroll, assuming rates remain stable, while 70% provides a healthy return on
investment. According to STR, the occupancy rate for U.S. hotels was under
43% in June.

In spite of that number, opening up gives hotels a fighting
shot to cover standing such expenses
as taxes, insurance, some management salaries, security, maintenance, and
basic energy costs—which all must be paid, whether a property is open or closed.

It also gives them a chance to capture local business.
That’s the logic driving Rocco Forte Hotels, which by September will have reopened
its entire portfolio of 13 existing five-star properties around the world
while forging ahead on three additional forthcoming openings.

“My business will have an outflow of $55 million, whereas
normally I have an inflow of $35 million,” says Rocco Forte, the company’s
chairman. He adds that operating outdoor dining venues while the weather is
still nice—such as the garden restaurant at the Hotel de Russie in
Rome—compensates somewhat for poor overnight business, and can be done with
dramatically reduced staffing levels. “For a lot of people in the industry,
it's about survival,” he says.

Geography Matters

Location, supply and demand, debt load, morale, flexibility,
and a host of additional factors also come into play when deciding whether and
when to open.

“It’s a tale of two areas—urban vs. non-urban,” says PRG co-founder Britten Shuford. His
company has seen occupancy rates hit highs of 80% at the surfer-friendly
Cambria Beach Lodge and lows of 20% throughout Los Angeles, where it
operates the still-closed Prospect hotel in Hollywood. Its design-forward Sands
Hotel & Spa in California’s Coachella Valley, meanwhile, has been up 50%
year-over-year since reopening in June. That picture gave Shuford faith that
White Water and the San Luis Creek Lodge, which opened in August in the Pacific
coast town of San Luis Obispo, would find their footing.

Target audience also
makes a difference. Phil Cordell oversees Hilton’s Canopy brand of
friendly, stylish urban hotels. Nine Canopies have opened so far this
year—increasing the size of the portfolio by 75%—including locations in
Philadelphia and Washington, D.C. Even though they’re in cities, he thinks
Canopies can attract the kinds of travelers whose business has been a relative
bright spot this summer: road trippers, individual business travelers, and staycationers.

“We’re going ahead with all the openings that were scheduled
this year,” Cordell says.

Calculating Risk

Deciding to open a hotel doesn’t have to be an
all-or-nothing proposition. Take the Maker Hotel in the popular weekend town of
Hudson, N.Y., from Lev Glazman and Alina Roytberg, founders of the beauty brand
Fresh, and hospitality expert Damien Janowicz.

It took the team 3 1/2 years to update, restore, and connect
three historic buildings into one. They opened
the property in stages—first a lounge, then a restaurant in a glass
conservatory, and finally a cafe with a European coffeehouse feel. The moody,
elegant hotel was scheduled to debut in April and instead launched in early
August, with reservations available only from Thursday to Monday, creating a
buffer for thorough cleanings
between guests. With a few weekends already sold out, Glazman says he’s
hoping to break even in just a few months.

For Rocco Forte, pursuing three new properties—two in Italy and one in Shanghai—means
maximizing economies of scale. “The future of my group is dependent to some
degree on being able to continue to grow,” Forte explains.

Luckily for him and his counterparts, new hotels aren’t
expected to be profitable in their first year, anyway.

“Unlike an office building, where tenants come on board when
you’re developing it, hotels are always built on spec—you don’t have any
installed customer base until you open the doors,” explains NYU’s Hennessey.

Opening now allows operators to work out kinks and be
prepared for a recovery, he adds. But they can’t operate at a loss for too
long. “Many hotel companies have enough cash to pay overhead costs for 12 to 24
months,” he said. “Private owners likely have fewer resources to last that
long.”