By Roland Murphy for AZBEX
The ongoing pace of population and business growth in Arizona, combined with targeted economic development planning and an ongoing swell of visitors, has helped the state and the metro Phoenix area maintain a leadership position in the hotel segment of the hospitality development sector.
Sept. 16th’s BEX Leading Market Series event on Hospitality Developments in Greater Phoenix featured three industry experts sharing their insights, experiences and current trend observations with the audience. The panel was comprised of:
- Moderator Stephanie Handley—business development manager at event sponsor PCL Construction;
- Zabada Abouelhana—senior director, leader for the Phoenix and Salt Lake City offices of HVS, and
- Matthew J. Kosednar—partner & senior project architect for Allen + Philp Architects/Interiors.
After introducing herself and the panelists, Handley started the session with some quick market statistics, compiled for her by the BEX research staff. In 2024, hospitality made up 4% of Arizona’s project volume and totaled slightly more than $1B. In 2025, the number is expected to reach $1.25B.
She added Phoenix is fifth in the U.S. in terms of hotel rooms under construction and pointed out the market is diverse, split largely between new select-service hotels and renovations at larger luxury and resort spaces.
When the panelists were asked what they are working on at the moment, both Kosednar and Abouelhana said they are both heavily involved with renovations, improvements and expansions at legacy luxury developments but are seeing movement in bringing new projects forward again.
How is the Market Shifting?
Handley then pivoted to ask what market forces they are seeing that are leading to revived interest in new developments.
Abouelhana responded there has been a shift in investor requirements. Over the last few years, high interest rates and construction costs made investors cautious, she said. “It was really hard to get anything done, but now that we’re starting to see things stabilize on that front—interest rates start to come down and lender activity start to pick up a little bit—we’re starting to see some of these projects start to come back to life and start moving forward with maybe making some changes to make it more feasible to actually move forward right now.”
Kosednar agreed, saying the market took a cautious approach post-COVID, and initial activity focused more on small improvements, making the facilities better without overextending in the face of uncertain markets. “Money is still expensive. Construction is still expensive, but they’ve got to take their properties up to a different level. We’ve been watching that occur over the past few years, but also great clients, the right clients, have pulled triggers slower.”
Drivers of Growth
Pointing out that Arizona’s hospitality market continues developing in a leadership position, Handley asked the panelists for their insights into what is driving the growth. Abouelhana credited population and employment growth over the last several years, as well as the volume of investment generated by such major corporate developments as TSMC, LG Energy Solution, Intel and the Mayo Clinic expansion.
Kosednar said cities and other jurisdictions have done a great job generating investment and opportunity and creating the right conditions for that investment to ripple outward. First come the jobs, then core services and then quality of life opportunities like more and better hotels, he explained, pointing out how the West Valley, Gilbert and Queen Creek are all seeing expanded hospitality development after significant core investment.
Hospitality + Residential = Opportunity/Challenges
Permanent residential spaces have long been part of ultra high-end developments, such as in ski markets. They are now becoming much more common in standard luxury and higher-end projects as well. The panelists took the opportunity to discuss both the benefits and challenges associated with blending the two, both in overall mixed-use multicomponent projects and within a single facility.
Abouelhana noted the residential component helps to fund the projects. However, finding the right mix of residential and hotel space is an ongoing balancing act. She said the Fairmont tower in downtown Phoenix has more than 100 residences planned, but the developers are still working over plans as they prepare to move forward. “It’s really hard to get things to pencil at that luxury level. It’s a million bucks a key to build those properties.”
“On the brand side, and a lot of these (types of developments) are going to be brand residences,” she continued, “the brand really wants wholly owned units, so you can’t develop these entire projects with just residences. It’s really finding that right mix of owned inventory versus what you’re going to sell off and make participatory inventory. It ranges between 50% and 75% participation levels for these owners that are buying these residences and paying into the rental pool that you can’t really rely on that as income for your project. It’s really balancing the two.”
Kosednar said most of the projects he has worked on in the Phoenix market have had a residential component. He said the design aspect presents unique challenges. Hotel units versus villas and condos have different requirements for accessibility and other features, and working with municipalities to ensure design and construction follow the correct building codes is essential.
Construction Costs and Capital Markets
As with every aspect of construction, costs and capital availability have troubled hospitality development for the last several years.
Kosednar said the market is currently experiencing a mix of relief and apprehension. While aspects of development, such as a decrease in construction costs, are encouraging, it is still essential to budget carefully throughout the process, work closely with clients to see where savings and adjustments can be made, and take careful accounting of schedules and timelines. For example, while infrastructure costs can be rigid, there is often flexibility in fixtures and furnishings.
Abouelhana said it is not possible to wait as long as it once was. Property improvement plans have become more vital, given the focus on renovation and upgrades. She added costs have stabilized a bit, rather than falling, and some components are still hard to pencil.
Regarding PIPs, Kosednar said there can sometimes be conflicts between the hotel brands and the property owner. Brands will issue sweeping change requirements to keep their properties fresh and current. Owners, meanwhile, may be forced by market conditions to pick and choose components to focus on and timing execution to keep projects manageable, which can create a push-pull situation with the design and construction team in the middle.
He added some of the best projects in the space right now are coming from independent owners.
Fortunately for hotel and hospitality development, capital markets are beginning to take renewed notice. Abouelhana said she has seen more activity from lenders, and it is easier to get them excited for “the right projects,” which generally consist of properties that are stabilized and doing well.
Kosednar said he has seen particular interest in hotel developments that are part of a larger master plan and mixed-use activities.
The panelists agreed project type and composition are vital in the current market and, while all the stars have to properly align, everyone is looking for the right opportunity to move their goals forward.
