FF&E deliveries delayed; developers hit pause
REPORT FROM THE U.S.—Hotel owners and purchasing firms in the middle of development projects are experiencing delays in receiving materials due the novel coronavirus (COVID-19), which is affecting factory operations and shipping methods, according to sources.
However, the situation remains fluid and changes daily, said Jennifer Ramsey, president of Berkley, California-based purchasing firm Ramsey & Associates.
Alan Benjamin, president of Denver-based purchasing firm Benjamin West, said not only does it affect China but also places such as Vietnam and the U.S.
Hotel owners are also faced with putting a pause on development of impending projects, sources said.
Today, factories in China are slowly reopening, Benjamin said, and the situation is better now than it was a month ago.
Though Chinese factories and retail stores are “not out of the woods” yet, they are in a “completely different spot than where (the U.S. is),” he said.
First identified by the World Health Organization in January with the origin of Wuhan, China, COVID-19’s initial spread was on the heels of Chinese New Year (25 January). Chinese New Year is a holiday that already causes a slowdown/shutdown of several factories and businesses in China. In response, China extended the holiday about a week, Benjamin said.
China’s government then imposed its mandatory lockdown at the end of January to contain spreading of the virus. According to a news report from BBC on 10 February, “a large number of China’s factories remain closed … even as millions of people return to work after the Lunar New Year holiday was extended due to the coronavirus.”
Benjamin said the immediate response from clients was them wanting to know how the outbreak and delays would affect their projects.
“One of the reasons why it goes down to a specific kind of prescription for a specific (client) is that it affects every project a little bit differently,” he said.
For the hotel industry as a whole, Benjamin estimates that about 15% to 25% of materials “by cost of a hotel room” are made in China. When factoring in component parts, such as lighting fixtures, that total percentage goes up to about 35% in some cases, he said.
Not only was production of materials delayed but so was the delivery, as about 80% of passenger flights in and out of China at the time were canceled. He said a lot of air freight will typically go on passenger flights on a space-available-basis. Transporting on air cargo flights is more expensive, he said.
As of March, Benjamin said he’s seeing about a seven- to 10-day delivery delay for an item or two.
“I don’t want to say there’s no supply chain issues anymore, but it’s far, far better than what we thought it would be a month ago,” he said.
Ramsey said most of the vendors her company works with have touchpoints in the U.S. but are Asia-based factories. Due to tariffs, she said some have pulled out of producing solely in China and now produce in Vietnam. In February, she said her company was fortunate enough to not experience many serious shipping delays.
Since the tariffs, Ramsey said many clients also began looking to vendors who manufacture in the U.S. She said Southern California has hospitality-centric factories.
Struggles arise in the US
As of 19 March, California Gov. Gavin Newsom ordered the entire population of California to shelter in place, Ramsey said. She said that’s bound to slow if not entirely shut down the output of materials.
“Key staff will remain, just not production,” she said.
Ramsey said she does not think things are better yet, and the U.S. is still in considerable flux, but China is slowly ramping back up.
Benjamin and Ramsey said a positive to the decline in hotel occupancy across the U.S. is that it offers a good time to do renovations, for owners who can afford it.
“If the owner has cash (and) is going to own the hotel for the next three to five years or longer, there is no better time to renovate—as long as labor is allowed to work,” Benjamin said. “One of the lessons of the last downturn is to renovate in the downturn. Don’t wait too long, because when the recovery happens you don’t want to be then taking rooms out of service and truly displacing revenue.”
Owner, developers with projects in the works
Mike Elliott, CEO of Denver-based full-service real estate investment and development platform ERES Capital, said as of now his company is experiencing interruption in both developments they are doing on their own accounts as well as other people’s developments that ERES Capital is project managing.
His company planned to continue construction on a hotel project this April in Belgrade, Montana, to service growing demand of Bozeman Yellowstone International Airport. Due to the current environment, they are now hitting pause on the project.
“We’re not going away. Some of our capital partners have asked us (if) we can slow this down … we may have to refresh both debt and equity on some of our projects,” he said.
Additionally, his company is planning to renovate an AC Hotels by Marriott in Fort Myers, Florida, this summer. He said ERES Capital will still move ahead on spending dollars on the soft costs and design associated with it.
“From an FF&E standpoint, we have heard from our suppliers that there will be a trickledown effect, so we need to think about that as we’re developing our properties,” he said.
For the projects they are managing construction on, they’ve experienced a slowdown on delivery of FF&E because of a lot of their supplies come from China.
“In one case, we decided to have all of our FF&E built in the United States,” he said. “What we didn’t realize was that the group that was building all of our FF&E was actually getting their supplies from China.”
He said ERES Capital has now had to get materials that are readily available in the U.S. to avoid further slowdown.
“I think what you can expect is anything that’s under construction right now or it was headed towards construction, the pause button is getting hit,” he said.
Carlos Rodriguez Jr., president and COO of Coral Gables, Florida-based Driftwood Capital, said via email his team planned to open two of its newest hotels in March, one in West Palm Beach and one in Tempe, Arizona, but have decided to delay those openings and send operations teams home until further notice.
For Driftwood Capital’s Fort Lauderdale hotel that is currently under construction, his team experienced some slowdown on the last of its shipments to arrive in February.
“Now the slowdowns are coming from availability of workforce for construction and inspections. Although jobs are still open, contractors are putting protocols in place to limit volumes, and cities are doing the same with inspections,” he said.
Rodriguez said he hopes his team can continue as much construction work as possible including install of FF&E, punch list items, etc., so they are ready when things reactivate.
“Due to the dynamic and fluid nature of the situation, we are currently unable to provide a reasonable impact assessment at this time,” he said.
Jonathan Bogatay, CEO of Wisconsin-based management and development company North Central Group, said his team has one property under construction in Arizona and has not yet seen any supply chain impact.
However, “the next 30 days will really tell the story for us,” he said.