As more hotel developers turn to modular construction for their projects, brand companies and financiers are taking notice.
Editor’s note: This is the second of a three-part series on modular construction in the hotel industry. Read part one: "Benefits of modular construction stack up for owners"
REPORT FROM THE U.S.—Brands and lenders are wading deeper into the modular-hotel construction pool as the process gains favor in development and ownership circles.
Modular construction requires individual hotel room units be built at a manufacturing facility, shipped to the construction site, then stacked to create a single hotel facility.
Hyatt Hotels Corporation is among the branded companies open to utilizing the process throughout its system, said Julienne Smith, SVP of development and owner relations for Hyatt Hotels Corporation, during the “Current pace of new construction” breakout session at September’s Lodging Conference.
For example, the company’s latest Hyatt Place prototype utilizes a 12-foot-wide room—in part to make it more conducive for modular construction.
“We’re going to see (modular construction) a lot in the coastal communities where labor is higher than in some of the other regions,” Smith said. “We’re even hearing of projects (that are) urban modular, which is interesting to think about.”
Consumers haven’t pushed back on the narrower rooms, according to the Hyatt executive.
“Efficiency is key when we’re looking at these prototypes,” she said. “When we first launched Hyatt Place 12 years ago, we had almost a 14-foot-wide room. I don’t think there’s a consumer expectation to be in such a large room any longer.”
Hyatt Place’s “cozy corner” seating configuration is what scores points with consumers, Smith said, and that hasn’t changed with the narrower room or modular construction.
Educating the brands
Modular construction is in its infancy in the branding world, said Stuart Turner, VP of acquisitions and development for Barings, a Charlotte, North Carolina-based part of MassMutual, during a breakout session at October’s New Hotel Construction & Development (West) Conference.
“The educational process is pretty huge,” he said. “The big brands are moving forward. The design groups within the big brands know, especially in a select-serve space and kind of the premier level of that, they know that in order to grow, time is important.”
The select-service product is a good fit for modular construction because of the setup of having a corridor with rooms on both sides, he added.
“They’re working around the issues on flat beds and how wide they need to be, how tall they need to be,” Turner said. “Those are some of the key trip points, if you will, in creating modular construction. Your project is wider than a traditional unit because you’re stacking them together. And also it’s getting higher and higher because of the stacking. You might gain four or five feet. And if you’re in height-restriction zones or your lot is limited by width—all key concerns you have to take in.”
Marriott International introduced modular construction during the owner’s conference in January 2015, said Mogul Capital owner and managing partner Brad Wagstaff, during the NHC&D conference session. Hilton stepped in shortly thereafter.
“In the select-service and even in the extended-stay space, brands are being flexible,” said Wagstaff, whose company recently opened a dual-branded Courtyard by Marriott/TownePlace Suites Los Angeles LAX in Hawthorne, California, near the Los Angeles International Airport that was built via modular construction.
“We actually just got approved to do a Residence Inn, which will be our first extended-stay product of Marriott that’s built modular. If you’re familiar with that Residence Inn room prototype, it’s a very square box. It’s a 22-by-20 (foot) box. We’ve had to get them comfortable to get them down to 15 feet wide in an extended format.”
Prototypes are important in the modular world because they represent well-defined parameters to follow, according to Wagstaff.
Part of the reason for that is organizational, related to furniture, fixture and equipment suppliers—many of which ship their products from Asia to the modular manufacturers in the U.S., he said. Finished modular units include couches, beds, packaged terminal air conditioner units, windows, carpet—even the TV is strapped to the bed during shipping.
“What you don’t realize is your back-ending this project,” Wagstaff said. “You have got to think backwards on it and get ahead of the game when you think about how you’re doing your project. But the brands, if you’re working with them and you’re staying prototypical, that becomes much easier to do.”
Wood-frame modular hotel properties tend to fall in the five-story range, but steel-frame modular units allow for far greater height possibilities—even up to 40 stories, sources said.
“Sitting down with your architect and making sure they understand the variables around transportation is important,” said Andy Berube, VP of sales and marketing for Stack Modular Structures, during the NHC&D event. “We don’t get to hire police escorts. If you’re 16 (feet wide), that’s an extremely wide unit. Ideally, road systems are very convenient. (Fourteen feet, six inches) is a very easy width.”
Following code is essential, even when it comes to seismic codes in California, Berube said.
“You still have a structural engineer reviewing your drawings and having the requirements around your build and moving it back to site,” he said.
How lenders think about modular
Lenders are beginning to take notice of modular construction, but they don’t appear to be completely sold on the concept, according to sources.
“I think it’s just a fear (for lenders) that if something goes wrong with that modular contract at that factory, then they cannot deliver,” said Mark Laport, president and CEO of North Carolina-based Concord Hospitality Enterprises Company, during a session at The Lodging Conference. “(With standard construction) you can rescue a broken general contractor—in fact, we’ve done that a few times in our history—and get the project done. If the (modular) factory goes lights out, it could be a real problem with the lender security.”
David Bader, managing principal for Cumming Construction Management, and Nate Gundrum, VP of real estate development for Mortenson Development, agreed.
“If you have a fabricator go belly up in the middle of things, getting the work in place is really a challenge as opposed to the as-built environment,” Bader said during the Lodging Conference discussion.
Gundrum added during the same session that the payment plan for a project “looks a lot different in modular builds as opposed to traditional builds.”
“You’re pushing a lot more work upstream to the point where it’s uncomfortable to put deposits down at a point earlier in the process. So it’s just how comfortable you are at the feasibility of your project,” he said.
Despite the growing popularity of modular construction, lending for the concept remains a niche industry, said Barings’ Turner.
“It’s a lot of up-front cost with deposits, and the fact that your lender’s collateral is sitting in a warehouse in wherever it’s being built,” he said. “You need a lender that’s open-minded and that’s going to be able to work with you. … The lender needs to get comfortable not just with you, the capital, not just with the modular group who’s building for you, but the entire team.”
Developers can expect to pay a little more for borrowed capital with modular construction, according to Wagstaff.
“There’s no question we paid a premium to finance our (Hawthorne) project,” he said. “When you make the decision to go modular, you’ve got to get the whole team on board, including your lender. You can’t take a traditional-build project and just at the last minute go, ‘hey I’m going to flip the switch and build on a modular construction.’”
Discussions with lenders often focus on the idea that modular construction mitigates risk for a hotel project because it eliminates or limits weather delays, poor quality, poor craftsmanship and liens on the building—all of which are part of traditional construction, Wagstaff said.
“We had to take on a lot of that up-front risk ourselves,” he said. “By the time our lender closed the construction loan, we had effectively almost our entire hotel built and sitting in a staging yard a mile away from our project. So we had funded all of our equity up front, funding deposits, funding dollars up front, which is really our equity portion of the loan. … By the time the lender got on board, they had a lot of collateral sitting there.”
A typical modular hotel manufacturer requires 30% to 35% down payment and pre-determined dates for the remainder of the draws, Berube said.
“We buy the entire building right down to the paint, furniture and fixtures, flooring, etc., so that’s why there’s the challenge around financing projects—because the manufacturer themselves need that,” Berube said.