News - 19th Dec 2008

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A Guide to Hotel Design: Refurbishing in a Recession 2

What are the consequences of a contraction in our design and refurbishment industries?

In previous recessions affecting hotels there have been specific misjudgements by those running the economy coupled to external factors that have led to a downturn. Seldom have we seen a recession like this one where everything is going down at the same time. In the late 1980’s early 1990’s we had the invasion of Kuwait killing transatlantic tourism followed by 9/11, both on top of interest rates in the UK which were raised to 13%, making commercial mortgage rates at 5% over base rise to dizzying heights.

Now we have very low, and going lower, interest rates, but no-one with any money to lend. Troubled groups that have been marketed for some time such as the Malmaison/Hotel du Vin group are unlikely to find a buyer, and the view of Chartered Surveyors Fleurets is that the market for group transactions dried up in the summer of 2007 with the onset of the credit crunch. Without the institutional investors available to fund the large deals this market is unlikely to return very quickly. Since new owners are one source of investment in property improvements this removes one driver of our industry. Owners forced to retain assets they no longer want are unlikely to treat them generously in terms of property improvements especially if the sale itself is driven by the owner’s own financial difficulties.

The disappearance of some banks and the continuous drop in the remainders share values (created by their own irrational lending policies) has also brought some lending to a complete halt, resulting in projects being mothballed part way through construction. I know from experience that this can result in unpaid fees, having had a group fail to pay fees of over £100,000 in the last recession. For many small practices that perhaps have only one major hotel client an abrupt halt to a refurbishment programme can force them into bankruptcy.

I well remember a trip on the Orient Express organised by a supply company during which the designers on board realised that they were all, simultaneously, seeing a massive downturn in their business. Several of the practices are no longer in business, and nor is the supplier – a trip organised a celebration of good years turned into a wake...

What is the impact of such a decline in business on the refurbishment industry? When designers disappear because they have no work this ripples through the supply chain. A small practice may have a fee turnover of some £800,000 a year representing possibly FF&E orders of £8-10 million. If half a dozen such practices go out of business this is possibly £60 million of FF&E not being ordered? As FF& E may represent 20% of a new build budget this implies maybe another £600 million of construction. Not big numbers I hear you say – but this represents the practices that I know have stopped working in the last two or three weeks...it may be the total over the next few months is ten times this figure.

So what happens in this situation? Last time around about a third of the industry disappeared. I am told this is also likely to happen in the USA as well. The implications for the health of the industry go beyond the obvious fall in employment this represents. Much as they say London buses are only fully manned in recession as building workers turn to them for jobs,so skilled people leave and find employment they feel is more stable elsewhere. Designers go into teaching, one I knew in 1990 became a missionary, but this also happens with skilled craftsmen such as reupholsterers, joiners, curtain makers and the like. Some set up and compete on price reducing prices and fees – the drop in room rates in a recession took four years for hotels to recover from and there was a similar problem for design practices with fee levels never fully recovering. Conversely when the work came back prices for skilled craftsmen went through the roof and we saw in the UK a massive influx of workers from elsewhere (the famous Polish plumbers for example) as inflation in the building industry ran at double that in the normal economy.

A whole range of what would have become middle management vanished from practices and most never returned. Previously stable companies were destabilised, unstable companies vanished. Early retirement opportunities were taken so experienced practitioners left the industry too.

This does not need to happen again.Some companies such as GA international have become major international players. Those who reached out beyond the UK have become stronger, more competitive and have contributed to the respect for British design show around the world. Poznan is the same travel time from London as Carlisle. Francesca Basu has moved her office to Milan to cope with her workload there. English is the lingua franca of the hotel industry; markets are still strong in Poland, Croatia, Montenegro (target of 100,000 hotel beds to be reached) and elsewhere.

The UK may be able to prosper too as Pontin’s revealed, with bookings up 20% for 2009 showing that if you look hard enough the business is there.

First published in the DesignClub on 12th Dec 2008

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