As costs increase, flexibility key for CapEx budgeting
 
As costs increase, flexibility key for CapEx budgeting
11 SEPTEMBER 2018 8:17 AM

As hoteliers grow to expect continued construction cost increases, representatives of hotel ownership groups said they’re building in more of a cushion in their capital-expenditure and renovation budgets.

NASHVILLE, Tennessee—As both labor and material costs push up construction costs, hoteliers are putting in more work into their capital-expenditure and renovations projections, and those projections must include additional cushion, according to experts speaking at the recent Hotel Data Conference.

Speaking during the “CapEx and renovation landscape—and what it means to data crunchers” panel, Cartarwa Jones, VP of investment and portfolio analysis for RLJ Lodging Trust, said this environment means building more variability into budgeting.

“I think the biggest thing with forecasting is you need some contingency with your plan,” she said. “Sometimes these are running a year or two before it gets to renovations, and you have to think about what’s going on in the market.”

Sarah Gulla, VP of asset management for LaSalle Hotel Properties, said when budgeting for renovations her company “tends to be at least within range” but agrees with the idea of including a cushion.

“We’re making sure budgets—particularly if they’re looking a year or two in advance—give wiggle room for inflationary costs,” she said.

Jeffrey Good, president of Good Hospitality Services, said his company plans renovations roughly a year in advance and added his company generally avoids large spikes in costs by working with the same people to build in predictability and by getting through work as quickly as possible.

“A lot of the time, the pricing is what it is, but with expediting and planning to try to hit that budget, we try to cull some of the scariness that’s out there,” he said.

How much in reserve?
Moderator Warren Feldman, CEO of Jonathan Nehmer + Associates, pointed out that the latest International Society of Hospitality Consultants’ CapEx study showed members spent roughly 6% to 8% of their budgets on CapEx, but the “rule of thumb” is to keep 4% in reserve for CapEx.

Brenna Halliday, VP of strategic insight for Host Hotels & Resorts, said everyone now realizes that 4% number doesn’t seem to cover the need anymore, but with spending increases, hoteliers must take a closer look at their return on investment.

“We all sort of realize we’re spending above that standard reserve required,” she said. “We try to break it up into different buckets, and we always like to look at ROI and redevelopment spending.”

She said Host likes to take a close look after renovations.

“We send our business intelligence team to do a (post-renovation) audit on larger projects to understand if we’re making our return hurdles, and if not, what can we learn from it?” she said.

Gulla said sometimes the increased spending on some projects means other properties might not get their “fair share every year.”

“One hotel may well be above the 4% reserve, but we don’t have unlimited resources,” she said. “So we’ve got to make strategic decision on what to spend, when and why.”

Importance of timing
Good said because he largely works in the select-service space with smaller properties, brands often don’t give as much leeway on the timing and scope of renovation projects, but there is still room to negotiate. He said companies need to think about the timing of their refresh projects in the context of what’s going on with the larger market.

“We’ve gotten pretty good at trying to time refreshes just when any new project comes in the market instead of waiting until after,” he said. “There’s a significant impact if you can beat them to it. We try to give (guests) not a lot of reasons to want to move (on to newly opened properties). So we try to beat (competitors) to the new product.”

Jones said she’s seeing a lot of work being done across the board with select-service brands, which can put a lot of pressure on owners.

“Some of the brands are doing a lot of initiatives, changing things like facades and fitness centers, which are not really cost-effective for ownership,” she said.

More variety in independent and boutique
With independent, boutique and lifestyle properties becoming more prevalent, varying hotels have different CapEx needs, panelists said, which requires hoteliers to take a closer look at why they’re doing renovations and what they hope to accomplish.

Gulla said LaSalle’s portfolio is heavily weighted toward independent properties, and her company often askes that exact question. She said they see better returns when working closely with designers on what their end goals are.

“I think a lot is incumbent on owners to help designers and give them some guidance, because left to their own devices, they will sometimes spend willy-nilly,” she said. “But if you give them a framework and boundaries, most designers are able to design within a budget.”

Halliday said even within brands, there’s more room for unique design, particularly designs that reflect local culture. But that doesn’t come for free.

“I think that shift may be affecting costs in some locations, but we’re able to leverage our scale even if we’re not buying the same thing in each location,” she said.

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