Don’t look for the trend of rising construction costs to reverse anytime soon. Here are some reasons why.
We all know the hotel economy has been roaring for at least 90 months straight with positive revenue per-available-room increases. It’s helped us all in the lodging business sleep well at night. Plus, the overall U.S. economy continues to be strong, a central element keeping the hotel industry chugging along for such an extended period of financial gains.
However, there is one segment causing hoteliers headaches: the price of construction. Rarely talked about on stage at industry conferences, it’s an industry blind spot for many CEO and prognosticators. These days, it’s costing more to refresh or build hotels, and it doesn’t appear those costs will abate anytime soon. Here’s some contributing factors all inadvertently conspiring to make your next project more expensive than you might have expected:
Fully emboldened by several record years of revenue growth, major franchisors are working to ensure hotels flying their brands’ flags are in the best condition possible. That means several things.
First, hotels performing lower on quality index scores are being issued property improvement plans, many of which tend to be extensive and costly. If owners do not complete these PIPs by a specific date, they are in jeopardy of losing that brand’s representation.
More common these days: brands are rolling out all sorts of new programs and design schemes. Designed to better connect with shifting guest expectations, these programs are in place to enhance brand quality, but the burden of payment typically falls to hotel owners. At H-CPM, we see it happening with new food-and-beverage concepts, in-room décor packages, and new design directives to “activate the lobby.” Over time, these projects eat away at local labor pool availability, creating construction cost creep.
Shrinking labor pools
A roaring economy also means there’s a lot of construction happening both in and out of the hotel sector. Every city we visit lately seems to be an endless sea of construction cranes, and that’s raising construction prices. According to the Second Quarter 2017 Turner Building Cost Index, which measures costs in the non-residential building construction market in the United States, construction prices have risen 1.18% between the first and second quarters of 2017, and increased 4.96% year over year from Q2 2016.
Stuff just costs more
Another factor leading to overall higher projects costs is the continued increase in the prices of goods and services.
As the recession slips farther back in the rear-view mirror, industry vendors have been pushing prices upward as their costs have risen, too. It seems everything—from fabrics to case goods to seating and even your architect—costs more than it did a year ago.
Plus, remember what I wrote about those new design schemes? Typically, when they are introduced, the new elements cost more than the old ones did. For example, more brands are shifting to LVT floors from carpeting, which is a more expensive proposition for owners.
New hotels coming fast
According to Lodging Econometrics, new hotel openings for 2017 are up 20% compared to 2016 for a total of 1,021 projects with 114,906 rooms. Another 1,160 hotels are projected to open in 2018, and another 1,193 in 2019. Every one of those projects is competing for contractor attention. With debt easy to secure, and many new brand introductions, we expect this cost-rising trend to continue.
Of course, it is hard to pinpoint the exact cost of construction in your community. Each of the above mitigating factors play out wildly different from town to town. Plus, in general terms, it’ll cost a lot more to build a hotel in a major union driven market like New York City, compared to a suburban market in Alabama or Mississippi.
If it costs too much now, don’t expect the price of construction to drop any time soon as all indicators are pointing to rising construction costs in the foreseeable future. If you can wait to the depths of the next hotel business recession, then you’ll get better prices. If not, look to partner with someone who can take you through the process efficiently and effectively.
Stephen Siegel is principal of H-CPM (Hospitality CPM) where he is responsible for managing his team of professionals in all aspects of renovations and construction. His experience and knowledge with managing projects is comprehensive; from the early planning stage to final completion. He is a proven professional in the areas of design, engineering, contractor negotiation and project management for new construction and renovation projects. He earned both a Bachelor’s and Master’s Degree in Construction Management from the University of Florida.
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