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. | May 06, 2012
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.