Hotel conversions have surged in recent years as high development costs have made acquiring and repositioning existing properties increasingly attractive. But the trend isn’t simply a symptom of a difficult development environment.
In fact, Bruce Ford believes the next wave of conversions could be even bigger as buyers continue to take advantage of acquiring existing hotels — especially at roughly 50% of replacement cost.
As the hotel transaction market warms and the bid-ask spread narrows, Ford expects more properties to trade with plans to renovate, reposition and operate them for the next seven to 10 years.
“The amount of conversions continues to rise, and it will go further when the transaction market truly heats up,” said Ford, senior vice president and director of global business development for Lodging Econometrics, which tracks global hotel construction and pipeline data for the industry and business development data and market forecasts for its clients. “It’s warming up, but we’re not even back to pre-pandemic levels yet.”
When transaction volume returns, Ford expects “a rush of more conversions” — a trend already influencing how hotel companies think about future growth. His example is My Place Hotels, which had never converted a hotel until it recently launched a brand specifically designed for conversions.
“They recognize that’s not a one-year play,” he said.
Hospitality Investor spoke with Ford about what’s driving the next phase of conversions, why fewer hotels in the development pipeline are getting built, how developers are finding ways to make luxury projects pencil and why secondary markets have become an increasingly important development target.
The state of the U.S. pipeline
Lodging Econometrics will release its latest pipeline data for Q3 in the coming weeks, and there’s little reason to think the overall numbers will change radically.
The U.S. pipeline stood at 5,975 projects and 703,001 rooms at the end of the second quarter. The top markets have also become familiar. Dallas has led the country for a few years now, while Atlanta, Nashville and Phoenix have consistently ranked among the largest development markets.
But the headline pipeline tells only part of the story.
Of the nearly 6,000 projects in the Q2 pipeline, only 1,081 were under construction. Another 2,147 were scheduled to begin construction within the next 12 months, while 2,747 — nearly half of the pipeline — remained in what LE calls the “early planning stage.”
That last group is particularly important in the current development environment. Historically, Ford said, roughly 40% of projects entering early planning eventually open. Today, he puts that probability closer to 30%.
That doesn’t mean thousands of stale projects are sitting in the pipeline. Ford said LE has about 40 researchers continually tracking projects, including whether franchise agreements are signed and land remains under control.
What has changed is how long those projects can take to move forward.
Before the pandemic, Ford said, select-service franchise agreements typically required construction to begin within 12 months. Today, some are being signed with no expectation of breaking ground for as long as 2½ years.
“That is absolutely a historic anomaly that is underneath the surface that no one else would see,” Ford said.
Getting a project out of early planning is only part of the challenge. Ford said development timelines have stretched across virtually every stage of the process, from planning and permitting to building the hotel.
“It takes longer to plan to develop them,” Ford said. “It takes longer to build them when you put a shovel in the ground. And only the most efficient developments are actually happening.”
So what is penciling?
Extended-stay remains the clearest answer. Ford said the segment accounted for about 41% of rooms in the new-construction pipeline at the end of last year, driven in part by its lean operating model. He pointed to a recently opened HomeTowne Studios that the developer expects to operate with just eight employees.
Dual-brand projects offer similar efficiencies because they “allow you to build two properties with a smaller room count that can have a ton of shared services that make it even more lean.”
Luxury gets efficient, too
That push for efficiency has also traveled to some surprising places, including luxury.
Luxury hotels themselves are getting smaller and increasingly being paired with residential and mixed-use components to make the economics work.
“When you and I first came into the industry, you would never see a Ritz-Carlton hotel under 200 rooms,” Ford said. “That absolutely happens now.”
Smaller, more efficient prototypes are also expanding the map of where development can pencil, especially in markets beyond the top 25, where Ford said returns have become increasingly attractive for select-service and dual-brand development.
He expects secondary markets to become an even bigger development story in 2027 as investors search for returns and smaller hotel prototypes make more locations viable.
Hampton Inn, for example, once wouldn’t build hotels with fewer than 100 rooms, Ford said. Today, a developer might pair a 60-key Hampton with a 60-room Home2 Suites, creating a 120-room dual-brand project that can work in a smaller market.
“Now you can build a 60-room Hampton Inn, and that pencils in a lot more markets.”