Mr. Boyken

Development & Construction

Hotel Development: Are You Ready For the Next Boom?

By Donald R. Boyken, Chief Executive Officer , DRB Consulting, LLC

Anticipating where a market will be and then positioning your firm and its services for those future growth opportunities enables leaders to get ahead of the markets. One of the highest scoring Hockey players, Wayne Gretzky, is often quoted that his success was linked to being where “the puck” would be and not where it currently is. The same is true in business.

Over the last thirty-five years I have studied demographic and industry patterns. As a CEO, I understood that one of my key responsibilities was to look into the future, anticipate the markets and place my company clearly in the position to capitalize on the market trends. Demographic patterns have clearly been one of those tools I used to anticipate movement in the marketplace.

While individually people are unique, collectively they act and behave in patterns. This was made clear to me in 1988 when Harry Dent (www.hsdent.com) came to speak to a small group of CEOs. His views of demographic and behavior cycles at certain age groupings provide a foundation for my research. For example as a group, there are certain purchases people make as they get married and start a family. Industries affected by this pattern will be builders of starter homes and apartments, appliance and baby product manufacturers. I have followed the trends for multiple industries and other economists and found that their conclusions were also helpful guides for establishing business trends for my company and the industries were we offer services.

What has been interesting is in the industries that I have tracked, they each have their own unique patterns and just as predictable as the demographic patterns. These industry patterns will not serve a CEO in predicting the performance of an individual company however as an industry the movement will be clear and that movement can help a CEO see into the future to help place his firm in a position to capitalize on a particular industry trend.

The Hospitality industry has a repeatable pattern of recovery from economic downturns. Those CEOs who provide services to the Hospitality industry will do well to pay attention to these patterns and position their company’s production capacity and marketing focus to provide products and services to the industry.

Effects on the Travel Industry

When an economic downturn event is recognized by the public, the Travel Industry is often one of the first industry sectors affected. Businesses immediately attempt to curtail their spending and one of the first expenses to be cut is discretionary travel. Businesses will cut customer trips by postponing customer meetings or attempt to stay connected by video, phone or email, reducing the face to face connections from monthly to quarterly or from quarterly to another frequency. Reduction of Conference attendance is often also a direct result of corporate belt tightening.

Leisure travelers will do the same by choosing a closer vacation destination, traveling by car or even forgoing the trip expense all together. Since 2008, we have witnessed these factors and the effects on our businesses.

The recovery from an economic downturn is just as predictable. Over the last four downturns, we have noticed that the travel industry followed a fairly consistent pattern of recovery. While the length of time of each segment has varied by recovery, the pattern has been consistent. At Boyken International (now DRB Consulting ) we observed that initially hotel companies would first seek to cut costs to obtain a profitable operating structure. Hotel flags would allow property owners to postpone scheduled contracted renovations or upgrades thereby providing owners with some indirect financial relief. Our observation has been that after properties have been achieving some positive cash flow usually for a 12 months period, the hotel chains reinstate the requirements for upgrading and refreshing properties.

In June 2010, at the New York Hotel conference, many of the hoteliers were very pleased that they had started to see the turn of the recession and several had announced that they have been profitable since January 2010 with a steady positive increase. At that point we started advising our clients that 2011 would be the year for renovations in the hotel industry. Product manufacturers used in these renovations and service providers to the industry who have positioned themselves with their clients have had a banner year.

The future

The industry patterns also include owners quietly initiating discussions and completing small transactions, upgrading their market positions or purchasing properties that are not financially stable. This buying and selling activity ultimately drives cap rates to a decision point that maybe it would be better to build a new facility than take on a property that has built-in limitations. This pattern often has a 9 to 12 month cycle. DRB Consulting believes we are approximately 4-5 months into that cycle.

We have also followed the banking industry and they too have a typical pattern of recovery. We have found the banking industry pattern will start to participate in the transactions as they become comfortable with the industry. In this segment of the recovery, a majority of the industry has returned to profitability for a period of 12 months or more, therefore lenders are willing to take a risk and start to lend money for acquisitions and eventually new development. Often it is at this point of the recovery we start to see a trend of hotel transactions announced.

At a real estate investment conference last month, a couple of lenders were proudly sharing how they had returned to construction lending for new development programs. These announcements were in another industry segments; however the banking industry also has a pattern of recovery and what we have seen in their recovery pattern over the past four recessions is once again forming.

Predictions

The hotel industry is in their recovery cycle and following predictable patterns. Over the past 4 downturns, we have observed that the industry will maintain the renovation phase of existing properties for a period of 9–12 months. Sales of hotel properties during this period will often increase driving up financing costs and cap rates.

We also expect the hospitality industry to start building again. At some point it becomes a better business decision to build a new property than purchase an existing property as money become more expensive. Past historical patterns would indicate that we should see the start of planning for new build projects in the fall of 2011 with design in full swing in 2012. Construction starts will soon follow based on the property size, location and method for construction. The speed at which construction returns to the industry could be related to the form of contracting such as design-bid-build, design build or some other form of contracting. As a manufacturer or service provider, now would be the time to rebuild those relationships with hotel owners and developers. Also now would be a good time to find the needed talent to help deliver that service offering.

Talent is the key for providing any product or service. Finding and securing the right talent before others in your industry start could mean the difference of success. We are already seeing a shifting of talent from one company to another as forward thinking firms get ready.

Developers should be looking for that unique destination opportunity capitalizing on low property costs. Designers should now be building relationships with their clients in anticipation of studies and design commissions being awarded starting in the fall of 2011. Manufacturers should be getting their new “green” products in front of design teams and owners. Successful contractors will start to build relationships with the owners thru the offering of discounted pre-construction services with an eye toward construction starts in early to mid-2012.

Donald R. Boyken has been active in the construction industry since 1970. His experience includes development and management of Hotel, Casinos and Resort projects in the United States, the Caribbean, Latin America, and the United Kingdom. Based in Atlanta Mr. Boyken provides consulting services both nationally and internationally. Mr. Boyken’s experience also includes major healthcare programs, university and college facilities, office and commercial buildings, transportation systems and infrastructure projects. Mr. Boyken can be contacted at 678-296-3492 or dboyken@consultdrb.com Extended Bio...

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