Marriott International pulled back on development of new hotels in the U.S. in the second quarter of this year, according to comments from CEO Arne Sorenson during a conference call with Wall Street analysts. The global hotel chain also canceled a regularly scheduled meeting with developers in April.
The firm had 510,000 total rooms in its pipeline, including 28,000 approved in the quarter, down from 516,000 rooms a quarter earlier. Sorenson said various deals have been put on hold due to developers' uncertainty over COVID-19.
"Even if the financing is done, if construction hasn't already started, it well might be that you're sitting there saying, 'Well, let's watch it here now over the next number of months and see what happens,'" Sorenson said.
Sorenson told analysts that despite signing 30% more new development deals in the Asia Pacific region in 2020 than a year earlier, elsewhere, overall deal interest had declined, including in the U.S.
“The pace of signings is not as robust in other regions around the world largely due to the lackluster lending environment and owner uncertainty,” he said. “The pipeline is 1% lower than at the end of the first quarter with the slowed signings and a few more projects than usual put on hold.”
That environment led to the canceled meeting with developers. “It seemed ... an odd time, I suppose, to be bringing in deals that we couldn’t really underwrite," Sorenson said.
However, the CEO rang a more optimistic note on two fronts: That the second quarter was likely the worst business environment the company would ever see, and that lower construction prices could spur some developers to break ground sooner rather than later, even amid continued uncertainty.
“We are having productive conversations with owners and franchisees who want to move forward,” Sorenson said. “Some are hoping to see lower construction costs in the weaker economic environment for new builds.”
Other hotel developers are taking advantage of that trend, with Hilton Worldwide Holdings growing its pipeline to 414,100 rooms in the second quarter from 405,000 a quarter earlier, and from 387,000 at the end of 2019, according to the Baltimore Business Journal.
Meanwhile, Dutch hotel developer citizenM has broken ground on new hotels in Washington, D.C., and Boston to take advantage of those lower prices.
“The bids we’re getting are coming in under our pre-COVID budget expectations,” said Ernest Lee, citizenM’s managing director of development for North America, who put the percentage discount on those bids in the high single digits. “Over the next couple years, we anticipate the most competitive construction environment that we are likely to see for some time.”
That silver lining for developers, however, may not be as positive for contractors, who have been submitting lowball bids at slim profit margins just to keep crews busy.
“There are more firms chasing fewer deals," said Anirban Basu, chief economist at the Associated Builders and Contractors trade group.
Marriott's shrinking U.S. hotel development pipeline adds quantifiable data to reports from contractors about construction activity in the hospitality sector decreasing significantly since the onset of COVID-19. That, in turn, has resulted in contractors taking on fewer projects for less money.
Shane Napper, president of construction at Grand Rapids, Michigan-based Rockford Construction, told Construction Dive that his firm does not have one hotel project underway now that wasn’t already started when the coronavirus hit.
“We’ve seen overall fees starting to go down, maybe by a quarter of a point on a construction management project," said Napper. "It’s not dramatic, but it is starting to trend down.”