New Hotel Development in Office Space Conversions
By Andrew Glincher Office Managing Partner, Nixon Peabody LLP | March 15, 2010
The benefits of developing, building and opening a new hotel from the ground up in an urban, downtown metropolitan area are many. Closeness to attractions, whether they are major retail centers or sporting venues, and proximity to hubs of business and tourism are just a few examples of the benefits. However, metropolitan markets present significant barriers to entry for ground up development and construction of a new hotel. These barriers can prohibit and delay a project, which in turn can present significant added cost and unbudgeted expense for new hotel development projects.
The reasons for time delays and added costs are many, and include, among others, the following:
Extensive permitting and zoning process:
When considering new hotel development, it can take anywhere from two-to-seven years (including appeals) to get the go-ahead from the City just to begin building. It can and does take years to receive the appropriate approvals from permitting, zoning and other real estate licensing agencies for the construction and development of a new site and use such as a free-standing hotel. Factoring in a two-to-seven year pipeline merely to get the approvals to begin construction on a new hotel development is standard.
Longer lead times lead to higher costs:
Longer lead times make it much more difficult to predict and anticipate costs for construction, beyond planning for a reasonable rate of inflation and other straight-forward factors. For developers who began working on permitting and zoning for a new development two-to-seven years ago, how many would have anticipated that the cost of gasoline, for example, would have risen to the level it has today? Recently, we've seen the costs of construction increase 20-50% on some development projects. It's very difficult to forecast the costs of construction when you're working with a two-to-seven year advance timeline to secure appropriate permits and zoning approvals. The longer it takes to receive permitting on a project, the higher and more expensive the costs are bound to become to build the project.
Longer lead times also make it more difficult to predict demand. It's difficult to predict demand for a new hotel development, two-to-seven years into the future. Neighborhoods may change and new developments, including other hotels, may open in the same area. While you're waiting for approvals, the area around your site may not only change considerably, but also the customer you are hoping to serve may change as well.