4 things to know about rising construction costs

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Hotels in the United States have enjoyed strong and steady performance growth over the past few years. As performance grew, so too did hotel construction.

In 2017, STR reported that supply increased 1.8 percent, adding about 90,000 new hotel rooms across the nation last year. That pace was only expected to continue into 2018, and by the end of 2017 the American Hotel & Lodging Association noted that 189,000 hotel rooms were under construction in the U.S., a 3.7 percent pending supply increase.

HVS reported in its "Hotel Development Cost Survey 2017/18" that in October of this year, nearly 100,000 hotel rooms opened over the previous 12 months (+2 percent year over year), and the number of rooms under construction remained almost unchanged at 190,000. And coupled with steady supply surges and a booming economy, hotel developers have found that labor and construction costs have continued to grow.

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Here are four things from the HVS report that hoteliers need to know about the issues affecting development costs in the industry:

1. Costs are Gradually Increasing

The Turner Building Cost Index has tracked costs in the nonresidential building construction market in the U.S. since 1967. The index is determined on a nationwide basis by labor rates and productivity, material prices and the competitive condition of the marketplace.

Year over year, the index has increased since 2011, and it has outpaced inflation since 2012. In 2017, the index increased 5 percent. In the trailing 12 months ending in June 2018, the index increased 5.5 percent.

2. Construction Inflation Grows at Faster Clip

HVS noted that construction inflation during growth years tends to develop faster. Although the 5.5-percent growth is nowhere near prerecession levels (10.6 percent in 2006, 7.7 percent in 2007 and 6.3 percent in 2008), researchers said that growth trending above 5 percent is notable and something to keep an eye on.

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3. Labor Shortages Have an Effect

In 2017, U.S. unemployment was at 4.1 percent. Since then, that figure has been trending downward. In October 2018, unemployment was down to 3.7 percent, according to the Bureau of Labor Statistics. But shortages in skilled labor for the construction industry took their toll on costs, according to HVS.

Reasons for the shortage are due to the rebuilding efforts after hurricanes in Texas and the Caribbean, wildfires throughout the country and mudslides in California, according to HVS. Employment in the construction industry grew by 210,000 jobs through the end of 2017, compared to 2016’s 155,000 add. Despite that growth, HVS reported that nearly 149,000 construction jobs still needed to be filled by the end of 2018.

However, wages for this job expansion only increased 1.3 percent last year, which was still below the pace of inflation, according to HVS.

4. Material Costs Hold the Key

The real story might lie within the cost of materials, which increased 4 to 6 percent in 2017, according to HVS’ research. Lumber, steel, aluminum and cement were the largest culprits for cost gains.

HVS noted that cost growth for those materials did not include tariffs by the Trump administration that hit this year. The 25 percent steel and 10 percent aluminum tariffs, as well as a shaky trade relationship with China, are certain to have an effect on material costs moving forward.

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