Hotel owners and developers believe there’s still time left in the cycle for new builds as long as the nuances and challenges are kept in mind.
ATLANTA—Though conditions for building new hotels are more challenging than they have been in recent years, U.S. developers and owners are still seeking opportunities for new builds.
Speakers during the “New hotel development” session at the 2017 Hunter Hotel Investment Conference shared their thoughts on the current state of hotel development and provided some guidance for how to move forward on future projects.
MWT Architecture CEO Mark Tiedemann said his firm has been receiving more calls and hasn’t seen a slowdown in 2017. Looking up the development pipeline for the big brands, he said, he sees the same number of hotel projects in preplanning stages as he did in 2016.
“I could take more work if I had more people,” he said. “I try to stay steady with the people I have. I want to do less and do higher quality. I would rather have other architects share the volume and provide good service.”
Vision Hospitality Group has 18 hotels in its development pipeline, nine of which are in Vision’s own construction company, President and CEO Mitch Patel said. The company always looks for development opportunities—building even in challenging times, such as in 2001 and 2009, he said.
“We historically have been a holder,” he said. “We’ve sold a few hotels, a handful, but we like the cash flow. Last time we checked, that’s not too bad.”
The cost of building
The lack of labor is driving up the cost of construction, Pinkerton & Laws President Jeff Jernigan said, and he doesn’t see anything changing that fundamental.
“Tradesmen my age are retiring,” he said. “We’re not attracting younger people in.”
The commodity side, though not driving up costs, has had an impact, he said. Rebar was in the mid-$700s a ton, he said, but it’s jumped to $900 in the past two months. Commodities are cyclical, he said, but the labor side continues to make life difficult.
Vision Hospitality was fortunate to develop hotels from 2011 to 2014, Patel said, despite construction costs that were increasing every couple of months.
“We were waiting to the last possible moment to go to the lender to get the real construction bid,” he said. “We didn’t want to get caught in that situation—with some hotels, we were caught—where we were comfortable, we had the contingency, closed on the loan and then got the numbers from the contractor and they were higher.”
The company has had enough revenue per available room growth to cure a lot of the rising costs and risks, Patel said.
“I think today you have to be very careful,” he said. “Those experiences and developments tell you it’s a different period to navigate. Do we have the confidence we will have those RevPAR gains as costs continue to go up?”
Patel said his company has explored the possibility of using modular construction, and he has some friends who are currently pursuing it. It seems to make a lot of sense to build modularly, he said, as hotels have repetitive rooms that are mostly identical. Construction is also taking longer and getting more expensive while the quality is diminishing because of a smaller labor force, he said; but modular construction is a more controlled environment.
“The question is, why aren’t people doing it?” he asked. “Cost. … The costs are significantly greater. In today’s environment when you’re just trying to make the deal work … then add another 10%, 15% or 20% ....”
Modular construction takes about six months compared to 14, Patel said. That creates some savings, he said, but that’s minimalized somewhat by the fact that interest rates right now are still low.
Only about four to five companies are building modularly, Patel said. A Courtyard by Marriott is $45,000 to $50,000 per module, he said. Another challenge is that modular construction increases the length of buildings by several feet, he said, which ultimately adds costs for exterior care.
Modular construction might be the industry’s future, Jernigan said, but with the current labor situation, it’s just not here yet.
While modular construction saves on construction time, it doesn’t decrease development time, he said. Developers still have to accommodate factory schedules, have plans drafted and come up with the capital.
“Most developers we work with, they have every ball in the air at the same time,” he said. “I have to have all that done with the money ready to go to get the process started.”
Planning for long-term value
Jernigan said he tries to work true-value engineering into properties early on, as a way to add to the hotels’ life cycles. He said 90% of the opportunity for true-value engineering is in the design phase, but many developers miss it because the normal bid cycle means they choose to focus on saving money upfront rather than investing.
Patel said he doesn’t know of any guests writing a review about their stay on TripAdvisor based on how well-designed the corridors were. He said developers need to think ahead about what the hotel can look like in seven to 10 years, and choose colors and designs that have staying power and furnishings that will last.
“If you’re a short-term holder, it might be a different approach,” he said. “We do spend a little more upfront to hopefully save more in its 10- to 15-year period.”