How COVID-19 is affecting construction and renovations
REPORT FROM THE U.S.—Everything that’s familiar in hotel development—the planning, meeting with suppliers and contractors, digging up that first shovelful of dirt and the flurry of activity—has been completely changed by the coronavirus (COVID-19) pandemic.
Hotel development executives are reassessing their projects at each stage of the pipeline, and the new hurdles they’re facing emphasize the street-corner nature of the business, sources said.
Mary Beth Cutshall, EVP and chief development officer at HVMG, said many developers looking at project timelines have determined the best option is to put construction on hold.
“It’s changing by the week and by the day; we have a number of properties that are either in pre-development or new-construction, or adaptive-reuse, and by the day there’s an update about the potential impact that they’re experiencing,” Cutshall said. “A lot of municipalities have closed government offices, so if there’s any kind of need for title search or any other specifics where you need to work with a municipality, you really can’t get through.”
She added the supply chain has been disrupted and it’s been hard to get products from China “for a few months now.”
“We started seeing that impact early on, and even this weekend (28-29 March) there was a deal with a pre-development adaptive-reuse involving a couple of properties where the developer has decided to put a pause on the project until further notice just because of the challenges everybody is running into,” she said.
CHMWarnick SVP Maxine Taylor said in an email interview one project she’s overseeing is nearing a halt.
“We are wrapping up the project over the next few weeks to get to a natural breakpoint with the intention of picking the project up again at a later date. Owners are first trying to ensure they can pay debt service and then will relook at when to get back to the renovations,” she said.
“The focus now for owners and asset managers is to reduce carry cost as much as possible, manage the balance sheet and not lose sight of the future.”
Plainfield, Illinois-based Cicero’s Development Corporation has had hotel projects put on hold in its home state and in Boston, according to President and CEO Sam Cicero. He said the virus has also affected various stages of development, such as bidding, but other industries are moving ahead on construction projects.
“We have seen a downturn as far as projects we’re in currently, particularly hotels,” Cicero said. “We’ve suspended those projects, so they’ve asked us to stop and they haven’t determined when we’ll come back. Projects that are not hospitality-related, we still have a couple that are working, but we’re having to enact different types of measures to keep workers safe, and make sure clients feel comfortable and safe with people they’ve got on-site, which is limited. We’re also seeing things we’re bidding for put on pause and suspended until further notice.”
Maintaining a safe job site
With any construction or renovation projects underway, Cutshall said her company is first concerned with keeping workers healthy, adding that “their safety and the safety of others is paramount to anything else.”
“Those projects that are farther down the path that are closer to getting a certificate of occupancy* will keep going and are being managed in a different way than they were before,” she said. “We’re following the guidelines of how many people are in a certain area, on a worksite, that sort of thing.”
Cicero said his construction sites operate much differently than they did a few months ago, which includes implementing social-distancing guidelines and frequent cleaning of common areas and equipment.
“We’re trying to stagger in our trades and who’s working when,” Cicero said. “We’ve expanded job-site hours—maybe it’s just the people framing or just the painters, or if the space is big enough, they’re just on different ends of the space to respect social distancing. … Facilities are cleaned several times a day, we’re even going to the point at some of the larger sites where stairwells are designated for certain floors—like the west stairwell is designated for floors one through three and the east stairwell is for floors four through six—to try to keep people distanced as much as possible.”
Workers have also been instructed to take their breaks in shifts and bring a change of clothes for when their shifts end.
“We used to have everybody take lunch in a certain area; now they all have to take lunches in shifts and take breaks in shifts,” Cicero said. “They can’t lunch or break together; they have to do it in different areas and at different times.”
Guidance to owners
Taylor said owners are seeking guidance on whether to remain open, negotiating with brands and what to do with their slate of renovation projects.
“In a perfect world where an owner might have available capital, it would be a great time to move forward with a renovation, but that is not the case with most owners,” Taylor said. “Often, the funding for renovations comes directly from operating cash flow and these are all going negative for the most part over the next few months while we respond to city, county and federal directives in an effort to contain COVID-19, so availability of cash flow will dictate if an owner can move forward with renovations or not.
“Related to this is that most brand/operators have granted permission for owners to tap into (furniture, fixtures and equipment) reserve funds for working capital needs (pending lender approval), so those monies are being used in many cases to mitigate operating shortfalls.”
Development, recovery outlook
Regardless of the length of any coronavirus-related pause to construction timelines, those jobs will be completed eventually, Cicero said.
“With regards to hospitality sector, and a couple of owners who have been transparent … they’ve indicated that the projects that are under construction, they’re going to finish,” he said. “I’m supposed to get a phone call from a client later this week. They want to look at what we haven’t started and where the endpoints are so we can end the project sooner, knowing that they’ll have to go back at some time, maybe a year or two years down the road, so they’re going to defer whatever they can.”
Cicero added brands are being more flexible with property improvement plans and conversions in light of the pandemic.
“I’m also starting to see a lot of the brands giving deferment on PIPs or doing the minimum,” he said. “We have a couple (hotel projects) who are switching flags; we’re just getting the flag switched and deferring the rest until a year to two years later.”
Recovery could take several different forms, but Taylor said there’s lessons to be learned and strategies to re-evaluate.
“As we know, following significant downturns or shock events, we often come out with improved ways of doing business, and I suspect this one will not be any different,” Taylor said. “As an example, many owners have been losing money on F&B for years, so this may be the time to reconsider how F&B gets offered moving forward. I only say that as some of the potential ROI projects may need to be reconsidered in light of this pause and time to reconsider how we are doing business. What made sense before may now have better solutions.”
Cutshall said there’s so many factors at play—including pent-up demand for travel dependent on businesses’ and customers’ appetite or even financial stability to travel, the hotel companies most at risk in a recession, the slow return to normal performance levels—that “the tea leaves are just way too murky.”
“It might take a lot longer to get back to where we were,” she said. “We were at high watermarks for our key performance indicators in the industry, things were strong and solid, people were very positive about where we were, and things didn’t slow down because there were concerns for anything that was going on economically. It was this virus that triggered all of it. But the longer this goes on, the deeper the damage is, and it will be harder to build back.”