Fewer new developments are being built in the hotel industry as the soaring cost of borrowing is pushing existing hotels towards conversion and franchising options rather than new builds, Reuters is reporting.
Nearly 30% fewer hotels were opened in 2023 than in 2019, according to figures from Lodging Econometrics which show that 1,980 hotels launched in 2023, compared to 2,730 in 2019.
Enhanced refinancing options for known entities
Different factors are coming into play. The pandemic caused financial difficulties for many hoteliers who struggled to pay debts during the crisis and were forced to negotiate new terms which mean they now cannot easily access refinancing for development.
Those seeking new financing or coming to the end of existing loan terms (and approximately $217 billion’s worth of hotel loans is about to mature by 2025, according to industry researchers JLL) are finding themselves faced with today’s less favourable terms. Real estate lender Avana Capital has said the cost of borrowing (6.75% to 8.25%) is now between 0.75 and 2.25% higher than before the pandemic – and that’s for branded hotels. Independent hotels face even higher rates of between 7 and 9%.
Why? Brand-name hotels are less likely to present a cash-flow risk than independents, a 20-year Cornell University study based on 4,000 hotels has found, giving them a better credit score.
Good brands, their loyalty program, their reservation system, typically will help a property perform better and so a lender will often have that as a requirement.
Robin Farley, UBS equity analyst.
The loyalty effect
The effect in the longer term may be to restrict consumer choice, as more and more existing independent hotels convert into a member of a standardised branded family, but the incentive to switch to a franchise model is clear. Not only can they then benefit from the borrowing power of a larger name hotel, but moreover, converting allows them to tap into more bookings through an entity known to consumers, many of whom have loyalty cards that drive them to book with branded hotels.
The effect on bookings can be an eye-opener. Lou Carrier, chief executive of Distinctive Hospitality Group, responsible for opening the first Hilton sub-brand “Spark” Hotel in Connecticut, told Reuters: “Within the first two months over 45% of that hotel’s guests were Hilton Honors members. That was remarkable to me.”
Conversions rocketing
It’s in this context then that the percentage of rooms entering the hospitality sector through conversions has doubled, or even quadrupled. “Historically, global conversions have been 10% to 20% of the rooms entering the system, today it is probably closer to 40%,” said Patrick Scholes, Truist equity analyst.
What’s more, revenues from franchise and licensing fees have rocketed: Hilton’s by 14.6% year-over-year in 2023 and 38.5% in 2022. Marriott’s too were up 13% in 2023 and 40% in 2022.
For Marriott, which has just had its seventh consecutive year of record-breaking volume in room signings, 40% of those in 2023 were conversions. Increasing capacity keeps investors happy after all, little matter how it’s done. “In a climate where the debt markets for new construction are somewhat constricted, the importance of conversions is elevated,” Marriott’s CEO Anthony Capuano said in an early 2024 earnings call.
