Hotel Expansion: Renovation vs. New Construction

By Fred B. Roedel, III Partner & Managing Member, Roedel Companies, LLC | April 02, 2015

Keys to Successful Expansion

There are three options to expanding your portfolio of hotels. You can purchase an existing property and leave it as is, build a new property or purchase an existing one and renovate it. Economics is what will drive your ultimate decision. In order to determine which expansion option best meets your objectives, it is important to properly and reliably evaluate each opportunity by breaking down its time, cost and quality elements in order to ensure success.

Renovating an Existing Structure

When considering whether to invest in renovating a hotel, two key factors to look at are location and opportunity. Renovation of a property makes the most sense when it is in a proven market and holds intrinsic value that cannot be recreated - is a historical landmark, is an example of unique architecture etc. Such properties are often valued by the community, sought out by travelers and, if of historic significance, may come with marketable tax credits.

A renovation of an existing hotel can be a positive alternative to building a new one for the following reasons:

  1. You have less market risk when buying an existing hotel with a proven location and trading history.
  2. Higher construction costs and land scarcity in good markets often mean that the economics of building a new hotel will not work.
  3. Buying an existing structure may be the only option for placing a hotel in a specific location.
  4. You are acquiring an existing structure and as long as the structure is sound and adaptable to your plans, a major development component is addressed.
  5. The overall construction timeline and cost may be less since a structure is already in place.
  6. The timeline to positive operating cash flow and market stabilization can be much shorter than that of a new development.
  7. Many communities actively seek developers to redevelop properties and be a part of redevelopment efforts, in some cases monetary assistance maybe available as an incentive.
  8. Redeveloping a property within a community can have an immeasurable positive impact on the property and its potential.
  9. Renovation tax credits are available for many older structures. Depending on renovation plans, a development could garner 10 - 20% of the commercial investment value in tax credits; you can then sell the tax credits and use the cash as equity.The areas to be cautious of when it comes to renovating a property are:

Have an accurate pre-renovation timeline.

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Coming up in February 2018...

Social Media: Engagement is Key

There are currently 2.3 billion active users of social media networks and savvy hotel operators have incorporated social media into their marketing mix. There are a few Goliath channels on which one must have a presence (Facebook & Twitter) but there are also several newer upstart channels (Instagram, Snapchat &WeChat, for example) that merit consideration. With its 1.86 billion users, Facebook is a dominant platform where operators can drive brand awareness, facilitate bookings, offer incentives and collect sought-after reviews. Twitter's 284 million users generate 500 million tweets per day, and operators can use its platform for lead generation, building loyalty, and guest interaction. Instagram was originally a small photo-sharing site but it has blown up into a massive photo and video channel. The site can be used to post photos of the hotel property, as well as creating Instagram Stories - personal videos that disappear from the channel after 24 hours. In this regard, Instagram and Snapchat are now in direct competition. WeChat is a Chinese company whose aim is to be the App for Everything - instant messaging, social media, shopping and payment services - all in a single platform. In addition to these channels, blogging continues to be a popular method to establish leadership, enhance reputations, and engage with customers in a direct and personal way. The key to effective use of all social media is to find out where your customers are and then, to the fullest extent possible, engage with them on a personal level. This engagement is what creates a personal connection and sustains brand loyalty. The February Hotel Business Review will explore these issues and examine how some hotels are successfully integrating social media into their operations.