New hotels eager to open despite COVID-19 pandemic
The new White Water hotel on California’s central coast has a lot going for it: a location on a moonstonestudded beach, generously sized rooms, and Scandinavian-inspired interiors by Los Angeles designer Nina Freudenberger.
Going against it? The worldwide collapse of the hospitality industry.
White Water is one of the thousands of hotels that have either opened or will open amid the COVID-19 pandemic. According to hospitality data firm STR, occupancy rates dropped to below 30% across Europe in March; numbers from M 3, a firm that provides accounting services to hotels across the U.S., show that domestic occupancy figures declined by half, even as hotels slashed prices. It’s all part of a recession that the International Monetary Fund in June predicted would hit $12.5 trillion in global losses — almost 5% of the world’s gross domestic product.
That’s a grim picture for anyone starting a business of any kind, much less one associated with high overheads and extreme sums of underlying debt. Still Hilton opened 60 new hotels around the world in the second quarter of this year, while Marriott has debuted 163 properties — including four Ritz-Carltons — since the start of the year.
Even smaller, independent, and first-time hoteliers are undeterred. The owners of beauty brand Fresh made their first foray into hospitality this month with the opening of the 11-room Maker Hotel in New York’s Hudson Valley; Nobu Hotels grew its portfolio by a third in recent months with new properties in Chicago, London, and Warsaw; and PRG Hospitality Group, which owns eight boutique hotels in California, including the White Water, is about to cut the ribbon on its second summer debut. According to industry site Tophotelnews, an additional 775 hotels are scheduled to open in the Americas alone by the end of 2020.
Insiders say it makes sense.
For many new hotels, the decision to open is one that’s been years — and millions of dollars — in the making. Deciding to cut the ribbon is like the last leg of a too-expensive, too-long road trip: an inevitability, if you want to get home.
“A typical hotel project might take anywhere from two to five years to develop and open,” said Sean Hennessey, a hotel consultant and professor at NYU’s Jonathan M. Tisch Center of Hospitality. Including land, building costs can range from several million dollars for a budget chain hotel to billions for a lavish landmark. And maintaining a finished building comes with staffing costs that might as well be allocated toward serving paying guests.
Delaying operations is therefore, a costly proposition. “Even if it’s unsuccessful at launch, a completed project is a heck of a lot more valuable than an 80% completed one,” Hennessey adds. “You have to jump into the fire and hope for the best.”
For luxury hotels, breaking even means many things. At 50% occupancy, a property generally has enough cash flow to make payroll, assuming rates remain stable, while 70% provides a healthy return on investment. According to STR, the occupancy rate for U.S. hotels was under 43% in June.
Despite that number, opening up gives hotels a fighting shot to cover standing such expenses as taxes, insurance, some management salaries, security, maintenance, and basic energy costs—which all must be paid, whether a property is open or closed.
Location, supply and demand, debt load, morale, flexibility, and a host of additional factors also come into play when deciding whether and when to open.