Lack of land, labor among developers’ dilemmas
09 APRIL 2015 6:14 AM
The demand for new development is on the rise. But so too are costs, thanks to a lack of land, resources and labor.
ATLANTA—Mitch Patel swam against the current during the downturn. At a time when new construction was virtually nonexistent, he built 16 hotels as president and CEO of Vision Hospitality.
The opportunities are in the tough times, he said of hotel development. As fundamentals improve, the landscape gets a lot more challenging.
“Developers are like a pack of wolves; they see the banker and the money and they go after it,” Patel said.
A panel comprising a general contractor, architect and another developer agreed with his assessment during the 27th annual Hunter Hotel Conference on 26 March. During a breakout session titled “New hotel development,” they painted a pessimistic picture blotched by rising costs, lack of land availability and shortage of labor at all phases of the pipeline.
Construction prices are on the rise
Jeff Jernigan, president of general contractor Pinkerton & Laws, said the overall cost of construction has gone up between 25% and 30% during the past 24 months.
- Read “Hotel construction costs continue to rise,” which includes data from the recently published “U.S. hotel development cost survey 2014/15” by global hospitality consulting firm HVS.
“We don’t see an end in sight,” he said of the hikes.
“I can tell you this is the price today. I’m not really sure what it will be six months from now when we actually get the plans done,” he said. “It’s a difficult situation.”
In general, Jernigan plans for a 1% increase in costs each month, he said.
Fueling those increases are record highs in materials such as lumber and drywall, as well as the cost of land and skilled labor, he said.
Lack of available land
Patel and his team at Vision Hospitality are looking at sites they would have ignored in the past because so many of the good plots have been picked over, he said.
To make matters worse: “You’re probably paying a greater amount for a less desirable site,” he said, attributing the increase to demand for new development.
There were 128,874 hotel rooms under construction in the U.S. as of 28 February, which is up 31.9% from the prior year, according to pipeline data from STR, parent company of Hotel News Now.
Often what’s left are footprints with odd angles or challenges with topography and grading, explained David W. Roedel, partner at developer Roedel Companies. That’s where a good civil engineer comes in; developers find the land, and the engineer determines what is buildable, he said.
That’s where PFVS Architecture makes its living, said the architecture firm’s founding principal, Greg Portman. The group specializes in designing successful projects in challenging spaces, he said.
“The (plots) that are hard are the ones that we want,” he said.
Developers now are looking at older hotels as possible teardown candidates, panelists said.
“If the site cost works, absolutely,” Patel said in response to a hypothetical situation of a 65-year-old, dated asset on a prime plot of land. “To demolish a building like that, I don’t think would be incredibly expensive.”
An extra benefit? The land already would be graded properly with the necessary infrastructure (e.g. water lines, electric) already in place, he said.
Shortages of skilled labor
The shortage of skilled construction workers is being felt far and wide. In Atlanta, the Pinkerton & Laws team is so backed up with work that it can’t touch another project for at least a year, Jernigan said.
When asked if he was looking to bulk up his team to take on more business, Jernigan said he likely couldn’t do so if he tried. Good workers are difficult to come by. Making matters worse, at least in Atlanta, are a slate of high-profile, billion-dollar projects such as SunTrust Park for the Atlanta Braves and a proposed new football stadium for the Falcons. Those, combined with billions in infrastructure projects, have only exacerbated the situation, he said.
A lack of labor stretches beyond construction, panelists said.
There used to be 30 fire marshals to approve projects in the state of Georgia, Jernigan said. Many of them have jumped into the private sector, leaving only 12 marshals to handle even more work.
“Now we’re struggling just to get guys to come inspect our projects, much less all the permit review stuff on the front end,” he said.
Patel also has felt the pinch at the municipal level. There’s not enough staff in many city offices, he said.
Brands, too, are at fault, Patel added. They’ve not added back staff to accommodate an increase in deal flow.