Lack of labor drives up cost of construction
 
Lack of labor drives up cost of construction
01 JUNE 2015 5:58 AM
Construction activity is picking up across all sectors, creating a dearth of skilled subcontractors to focus on hotels.
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REPORT FROM PHOENIX -- When Woodbine Development Corporation began development on an AC Hotel by Marriott in Tempe, Arizona, more than a year ago, the cost per key was $165,000.
 
The group’s second effort in Fort Worth, Texas, came in at $175,000 a key, said Dupree Scovell, managing director of Woodbine Development Corporation’s investment division. The company’s third AC, in Irvine, California? $225,000 a key.
 
And so it goes.
 
The cost of construction is on the rise, and it’s showing no signs of slowing down, said panelists during a recent Hotel News Now roundtable sponsored by Best Western International.

 
Al Patel, president of Baywood Hotels, knows that fact all too well. His company has opened three hotels in a single month in early 2015 and is beginning construction on an additional two projects.
 
Between those two sets of hotels, he said he’s seeing a 25% increase on costs.
 
Materials prices also are an issue, increasing anywhere between 3% and 7% on an annual basis, he said.
 
According to the “HVS Hotel development cost survey 2014/15,” nationwide construction costs were reported to be 2.8% to 3% higher in 2014 compared to 2013. Lumber costs went up 5.6% in 2014; steel costs rose 1.4% to 2.3%; and cement prices rose 5% in 2014 compared to 2013.

More pressing than materials cost is the severe shortage of skilled labor, Patel said.
 
“What we’re seeing now more lately is just labor inflation finally coming around. A lot of the smaller subcontractors were forced out of business in the last recession, so now you have a smaller pool of subcontractors that can bid on projects,” he said.
 
Competitive bidding is now a thing of the past, Patel said.
 
And that’s not confined to the just the hotel space, where rooms under construction are up 21.4% year over year as of April, according to STR, parent company of Hotel News Now. An overall increase in construction activity across all sectors has created a squeeze for subcontractors in general.
 

In Indianapolis, for instance, a wave of new construction in the health care and residential sectors pushed hotels off the radar, said Bharat Patel, co-founder, chairman and CEO, Sun Development & Management Corporation.
 
“Where are you going to get a subcontractor in Indianapolis, with five huge hospitals built, not to mention the other huge office buildings? And condominiums—every downtown we looked at, it’s easier to take an old building, convert it into condominiums and sell them for $400,000 a unit than try to run a hotel,” he said.
 
Bashar Wali, principal and president of Provenance Hotels, is seeing the same thing on the West Coast.
 
“In Seattle, they’re more crazed than you can shake a stick at. It’s every segment: It’s office, it’s multi, it’s retail. So it’s not just exclusive to us, which is driving the cost up because every segment is (active),” he said. “San Francisco is the same. You can’t touch anything.”
 
That’s why Scovell encountered a 20% premium to build in Northern California over Southern California. Woodbine couldn’t afford to build an AC Hotel there, so the company sought a bid for a Residence Inn instead. The quote that came back? $250,000 a key.
 
“When do you walk away? That’s when you walk away, when a Residence Inn is ($250,000) a key in that market—in Northern California, not San Francisco,” he said. “That just doesn’t make sense.”
 
Wali applauded Scovell’s discipline.
 
“Because everybody’s busy doing stuff in Silicon Valley and they’re building like crazy, they couldn’t care less about these little hotels,” Wali said. “They’ll lob a number that if you’re stupid enough to take, they’ll do it. But (Scovell’s) not going to take it.”
 
A new normal?
Jeff Good, president and founder of Good Hospitality Services, said he fears the labor shortage is the new normal in many markets.
 
“We had a framer who had a lot of Mexican workers. He told me they were banging out 40 to 50 hotels a year during the cycle. When it all dried up, a lot of them just went back home,” Good said.
 
“Now you take a look at the growth in construction that’s going on in Mexico, and … their incentive to come up here to work is not there anymore, because now they don’t have to travel,” he said. “They don’t have to leave their families. (They have) the opportunity to make that money closer to their families or maybe even in their own backyards.”
 
Scott Peterson, director of development, CSM Lodging, is trying to manage costs—and lock in subcontractors—by bringing them into the process as early as possible.
 
“Your skilled labor, your electricians and plumbers, HVAC guys, what we’ve been successful in doing is bringing them in to design assist at the (ground floor) to kind of buy their way in,” he said.
 
Doing so gives CSM a bit more leverage at the negotiation table. (Peterson said he’s been able to reap savings of 2% to 4% off the initial quote.) It also locks in the labor as the project progresses.
 
“The trickle-down effect of that is they’re already in so they’ve got that time slot dedicated in their schedule,” compared to other contractors who are booked for the next several years, he said.



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