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Hotel development costs in the U.S. continue to rise due to myriad factors. Developers are finding ways to work around the issue.
REPORT FROM THE U.S.—Hotel development costs were up in the United States during 2014, according to a recent survey.
The “U.S. hotel development cost survey 2014/15” by global hospitality consulting firm HVS noted that strong residential construction activity in 2013 put upward pressure on construction costs for all asset classes, including hotels. While housing construction slowed in 2014, commercial construction was up by as much as 11%, the survey reported.
In addition, the availability of debt and equity financing spurred new construction in many markets across the country, putting further pressure on construction costs.
According to the survey’s author, the rise in hotel development costs might be even more significant than the survey results disclose.
“There was a gap between the published surveys about construction and what developers said the real costs are,” said Elaine Sahlins, managing director of HVS San Francisco. “You really have to talk to the folks on the ground to understand how the costs are just increasing exponentially.”
With hotel development robust and new hotel rooms expected to open at a vigorous pace for the next two to four years, the stakes are high for many hotel developers across the nation, sources said.
According to STR, parent company of Hotel News Now, 128,874 U.S. hotel rooms were under construction in February 2015, a 31.9% increase over February 2014.
Land competition
The HVS survey found that in many markets, hotel developers are competing for land with residential developers. Because the return on investment is often higher for apartment or condominium projects than for hotels, the residential developers can afford to drive up prices.
Sahlins named Miami as one market that is “particularly noteworthy” for rising land prices.
For example, in Miami, full-service and luxury hotel developers reported cost increases of 25% to 30% during the past two years, according to the survey.
In addition to land, the costs of development and construction have increased, HVS reported. Nationwide construction costs were 2.8% to 3% higher in 2014 than 2013, while lumber, steel and cement costs were up 5.6%, 1.4% to 2.3% and 5%, respectively.
Skill shortage
The construction labor workforce has declined 27% from its peak of 7.5 million workers in 2007, according to HVS. As the number of skilled workers has decreased, demand is driving labor prices up.
George Heaton, CEO of Palm Beach, Florida-based Heaton Companies, faced labor costs nearly 50% higher than anticipated on his 87-key boutique hotel project in Manchester, Vermont, because he couldn’t find a subcontractor to do framing work.
“We reached all the way to Albany, New York, and the general contractor ended up putting together his own labor group to do the framing,” he said. “It increased our costs substantially in that particular category.”
Design trends
Hotel design trends are influencing development costs as well.
It’s no secret that the millennial generation is impacting the hotel industry. HVS reported that millennial travelers are increasingly seeking out hotels that promote sustainability and a healthy lifestyle. But sustainable development often costs more.
“We’re trying to build green buildings, and that’s a good thing, but it adds to the cost,” said J. Edward “Buddy” Watson, CEO of Charlotte, North Carolina-based Pharos Hospitality.
Millennials’ preference for socializing in public spaces is causing developers to redesign lobby areas with all-day food-and-beverage options and seating areas, which also adds to development costs, according to sources.
Technology, too, is impacting costs as developers respond to guests’ demand for additional outlets in public areas, and guestroom and back-of-the-house efficiencies increasingly require more technology infrastructure.
Developers respond
Developers are responding to the increasing costs of development in many ways.
Watson said he’s trying to build hotels that are part of larger projects so that costs are shared due to the efficiencies inherent in any mixed-use project.
“That helps mitigate some of the costs such as building parking decks and infrastructure,” he said. “If you integrate a full-service hotel into urban lifestyle projects, that helps on the key costs. But that makes it more complicated from a transaction standpoint because we have more players involved.”
Heaton is taking a different approach. He sought to offset increased construction costs on his Taconic Hotel project in Vermont by attracting investment dollars from China.
“The EB-5 financing that we’ve arranged for the project has reduced our interest costs substantially over the first five years,” he said. “It’s going to reduce our costs at least $1 million a year—maybe more.”
FF&E installation comprises 3 parts: furniture, fixtures, and equipment. Each is critical to completing the hotel design puzzle. An experienced furniture installation company will complement all parties involved to ensure a cooperative and successful project.
We’ve found that customers can save between 5% and 10% by choosing both furniture manufacturing and installation as a package. In those cases, the burden is taken off your shoulders and managed from the factory floor to the final on-site punch list.
On average, FF&E represents about 12-16% of total the financial investment of a standard hotel construction project. In the end, choosing a furniture manufacturer that can also tackle its part FF&E installation can be a great cost-trimming consideration, even after the initial investment.
A responsive vendor will work seamlessly alongside hotel staff and other FF&E providers. Keeping in mind that your complete design involves numerous other factors is important to the overall success of the job. A simple oversight can cause a series of implications for the entire project:
Electrical
Cable/fiber optics
Plumbing
HVAC
Safety and ADA compliance
You’re in the business of creating a comfortable and appealing atmosphere for travelers. Hotel furniture affects guests from different sensory perspectives. From seeing it to sleeping on it, guests also maneuver around the furniture to accomplish daily tasks - or even for their own safety.
Thus, placement can mean the difference between guests having a enjoyable experience or never booking again (remember: hotel guests want safe, unfettered access to electrical outlets, data ports, and other fixtures with minimal effort).
A successful project requires strong cooperation and communication to integrate each piece into an overall picture of quality. Failure to coordinate could mean lost time, lost/damaged product, and lost money.
Saving Hotel Construction Costs by Avoiding Rookie Mistakes
Moving your furniture from A to B carries inherent risks. Furniture can be heavy or awkward to move - or both.
Rookie mistakes with transportation and installation can sometimes result in your furniture suffering a range of damage possibilities:
Unsightly cosmetic nicks and scrapes
Severe structural damage, forcing a complete (and costly) factory re-do
Experience and planning, however, make easy work of moving and assembling your furniture around obstacles and cramped spaces.
A strong furniture manufacturing/installation team will also document the elements of your order and offer a standard 5-year warranty, should unavoidable errors occur.
Organizing Cost-Effective Delivery and Installation
Your finished furniture will likely reach the site as other trades are wrapping up elsewhere in the hotel. Disorganization can be costly.
An orderly hospitality casegoods manufacturer will assign a dedicated Project Manager (PM) to work with everyone involved to bolster logistics and communicate to ensure rooms are prepped for the installation of the furniture.
In addition to overseeing the fulfillment of your order in the factory, the PM can:
Coordinate delivery date(s) to optimize the site construction schedule
When it’s in the install team’s hands, they’ll unload, transport, assemble, and clean up afterward.
You need many moving pieces to come together seamlessly to punch out a successful hotel project.
Don’t let the furniture part of FF&E installation become a question mark. Choose an experienced installation team to avoid costly mistakes and cooperate with other hospitality services on-site.
Editor's Note: This blog post was originally published on October 19, 2017, but was updated on June 24, 2019 to reflect updated information.