Hotel construction costs continue to rise
03 APRIL 2015 7:29 AM
Hotel development costs in the U.S. continue to rise due to myriad factors. Developers are finding ways to work around the issue.
REPORT FROM THE U.S.—Hotel development costs were up in the United States during 2014, according to a recent survey.
The “U.S. hotel development cost survey 2014/15” by global hospitality consulting firm HVS noted that strong residential construction activity in 2013 put upward pressure on construction costs for all asset classes, including hotels. While housing construction slowed in 2014, commercial construction was up by as much as 11%, the survey reported.
In addition, the availability of debt and equity financing spurred new construction in many markets across the country, putting further pressure on construction costs.
According to the survey’s author, the rise in hotel development costs might be even more significant than the survey results disclose.
“There was a gap between the published surveys about construction and what developers said the real costs are,” said Elaine Sahlins, managing director of HVS San Francisco. “You really have to talk to the folks on the ground to understand how the costs are just increasing exponentially.”
With hotel development robust and new hotel rooms expected to open at a vigorous pace for the next two to four years, the stakes are high for many hotel developers across the nation, sources said.
According to STR, parent company of Hotel News Now, 128,874 U.S. hotel rooms were under construction in February 2015, a 31.9% increase over February 2014.
The HVS survey found that in many markets, hotel developers are competing for land with residential developers. Because the return on investment is often higher for apartment or condominium projects than for hotels, the residential developers can afford to drive up prices.
Sahlins named Miami as one market that is “particularly noteworthy” for rising land prices.
For example, in Miami, full-service and luxury hotel developers reported cost increases of 25% to 30% during the past two years, according to the survey.
In addition to land, the costs of development and construction have increased, HVS reported. Nationwide construction costs were 2.8% to 3% higher in 2014 than 2013, while lumber, steel and cement costs were up 5.6%, 1.4% to 2.3% and 5%, respectively.
The construction labor workforce has declined 27% from its peak of 7.5 million workers in 2007, according to HVS. As the number of skilled workers has decreased, demand is driving labor prices up.
George Heaton, CEO of Palm Beach, Florida-based Heaton Companies, faced labor costs nearly 50% higher than anticipated on his 87-key boutique hotel project in Manchester, Vermont, because he couldn’t find a subcontractor to do framing work.
“We reached all the way to Albany, New York, and the general contractor ended up putting together his own labor group to do the framing,” he said. “It increased our costs substantially in that particular category.”
Hotel design trends are influencing development costs as well.
It’s no secret that the millennial generation is impacting the hotel industry. HVS reported that millennial travelers are increasingly seeking out hotels that promote sustainability and a healthy lifestyle. But sustainable development often costs more.
“We’re trying to build green buildings, and that’s a good thing, but it adds to the cost,” said J. Edward “Buddy” Watson, CEO of Charlotte, North Carolina-based Pharos Hospitality.
Millennials’ preference for socializing in public spaces is causing developers to redesign lobby areas with all-day food-and-beverage options and seating areas, which also adds to development costs, according to sources.
Technology, too, is impacting costs as developers respond to guests’ demand for additional outlets in public areas, and guestroom and back-of-the-house efficiencies increasingly require more technology infrastructure.
Developers are responding to the increasing costs of development in many ways.
Watson said he’s trying to build hotels that are part of larger projects so that costs are shared due to the efficiencies inherent in any mixed-use project.
“That helps mitigate some of the costs such as building parking decks and infrastructure,” he said. “If you integrate a full-service hotel into urban lifestyle projects, that helps on the key costs. But that makes it more complicated from a transaction standpoint because we have more players involved.”
Heaton is taking a different approach. He sought to offset increased construction costs on his Taconic Hotel project in Vermont by attracting investment dollars from China.
“The EB-5 financing that we’ve arranged for the project has reduced our interest costs substantially over the first five years,” he said. “It’s going to reduce our costs at least $1 million a year—maybe more.”