Panelists at the “From the ground up: Dynamics of a new build” session at The Lodging Conference said changes in labor and construction are affecting how new hotels are built.
PHOENIX—Labor and lending are concerns that have the potential to halt hotel development before it even gets started.
At the Lodging Conference in September, developers on the “From the ground up: Dynamics of a new build” panel discussed what it takes to construct a new property in the current cycle and highlighted markets they’re building in.
It’s becoming more difficult to find good labor and good lenders, the panelists said, and that has led some developers to be more cautious.
Mitch Patel, president and CEO of Vision Hospitality, said construction costs have gone up 10-15% a year. For example, a 100-room Hampton Inn property that was being built at $85 to $90 per square foot in 2009-10 is now costing $130 to $135 per square foot, he said.
“What we’ve seen, it’s somewhat stabilized,” he said. “When we say stabilized, it’s still growing at 3%, 5%, 7% … but the numbers are becoming more difficult to justify, and we all know we’re at the tail-end of this cycle, so you get yourself into a little trouble with your bases.”
The hotel development business is all about the bases, he said.
“(If you’ve got) something at $100,000 a key or $170,000 a key, it could be a great market,” he said. “That’s the difference between being mediocre and successful …. So we are being much more cautious, I guess you could say.”
Jay Patel, president of JAM Hospitality, said it’s more difficult for his company to finance new construction at this point in the cycle, primarily because there is more risk involved.
“If you get a local lender, which you’d be fortunate to get, to start financing these, we have a good opportunity …,” he said. “But if you starting leaning on other types of finance and (the) many different options out there, you’re putting a lot more of (your own) money in, (which is) way too risky. … We’d rather have less of our own equity in …. You want to build it for the cheapest you can with the least amount of money you have in it, and obviously, that’s getting more and more difficult.”
It’s also become more difficult, he said, to find good subcontractors.
“A lot of the skilled labor is gone,” he said. “Back during the downturn, a lot of those folks left because they didn’t have jobs. Now we have the demand, but you’ve got … a lot of mediocre subs … or somebody’s that’s been in the business a long time is raising rates, so it doesn’t make sense to use them.”
Where are you building?
As far as projects in the pipeline, the developers on the panel said they’re building in markets they’re familiar with.
“Most of these hotels are in markets we understand. We know them intimately. … We’ve been in those markets for 15 or 20 years,” Mitch Patel said. “We’re fortunate that a lot of those hotels that are in Nashville are in our pipeline, which has had extreme growth in the last four or five years.”
Vision Hospitality also has hotels in the pipeline in Atlanta and Denver, he said.
Jay Patel said his company takes the same approach to development.
“Primarily, we’ve been developing in North Carolina. … We’re looking at opportunities in South Carolina,” he said. “Typically, you stay close to home, at least that’s what we’ve been doing.”
Tom Lander, VP at Mortenson Development, said his company has had success building in areas where it has regional offices.
“Seattle has been strong. Portland has been very good to us,” he said. “Denver, we’ve been involved in three hotels last year, and I don’t want to say it’s soft, but there’s a lot of new products that (have) come into Denver.”
Because of higher labor costs and less available workers, Jay Patel said he’s seen a move towards modular construction in the industry.
“It’s becoming a big growth opportunity,” he said. “And modular construction’s been around a long time; it’s just sort of making a resurgence now.”
Lander said modular construction works best with wood-frame and metal-stud builds.
“To me, it’s sort of interesting how modular has come into the industry, and where it has worked and where it hasn’t worked, because even in wood-frame construction and certainly in metal-studs construction, the majority of the panel systems are put together on a site, trucked in, put together and set in place,” he said.
Modular construction is also being used in assembling plumbing and sets of wiring off-site, he said, and then trucking those pieces in.