Construction costs typically will rise from year to year, even if just because of inflation. But a few years ago, costs began to climb faster than normal. R.D. Olson Construction President Bill Wilhelm said due to consistent 5 to 6 percent annual increases, his company has seen costs rise 30 to 40 percent overall in the past five to seven years.
These costs generally can be split into two parts, labor and materials. As the volume of development has ballooned in recent years, demand for both has pushed expenses up. Though the hotel industry has worried about rising labor costs lately, neither Wilhelm nor Concord Hospitality's SVP of development Carl Hren singled it out as the main cause of the rising price of construction.
Due to all the ongoing development projects, Hren said materials vendors are able to push up prices and builders have to accept them. “Everybody’s not stopping building yet, so why wouldn’t they keep pushing the limit,” he asked. Likewise with labor, the large number of projects has allowed for contractors to ask for additional money. “Until the works slows down and until the bubble kind of pops a little bit, or at least slows everything down a little bit and guys don’t have all these options of which job they can pick from, that’s going to continue to be the case.” Hren held back from predicting any changes in the immediate future. Maybe the rate at which costs are rising will decrease, he said, but for now they are still going up.
Wilhelm offered a more optimistic forecast for the future, saying he has seen signs costs will stabilize and return to their average upward creep, which he pegged as 2 to 3 percent per year. He explained his prediction by pointing to a small slowdown in development. Involved not just in hospitality, but multifamily as well, he said he’s seen this trend in both industries. Specifically highlighting relatively constant lumber prices over the past six months, Wilhelm said he believes material costs have started to soften as well.
Wilhelm said he’s hopeful labor costs will hit a ceiling in the next couple years. “Even though we’re still resource short because there are fewer jobs, subcontractors are being a little smarter,” he explained. “They’re not taking on more than they can handle or they’ve worked off a lot of their backlog. And so even though we still have a shortfall of labor, they have people they can put in places and so they’re not having to put premiums on their costs.”
Managing Rising Costs
Rising construction costs haven’t stopped or slowed down business by any means. With more than 40 projects in the works worth more than a total $1.5 billion, Hren said Concord currently has its largest pipeline ever. Still, this doesn’t mean companies haven’t felt the effects of rising costs and aren’t working to offset their impact.
Hren, for example, said Concord adjusted its budgets to account for anticipated rises in costs. “When we site plan a complex project that’s not going to break ground for two years, we’ve got to make sure we got the right amount of money in there for escalation that’s going to happen,” he explained.
R.D. Olson has looked to minimize its product costs. When it can, Wilhelm said the company is continuing to outsource outside the country, to places like Vietnam and Turkey, where labor is cheaper. For its wood-frame projects specifically, the company has begun building prefabricated wall panels in factories, where labor is more affordable.
One major cost-cutting avenue Concord has begun exploring is modular construction. The company recently finished its first such project, the AC Hotel Louisville (Ky.) Downtown. According to Hren, by choosing to go modular, the company shaved off four months of construction while keeping costs equal to what it would have spent anyways. “So, it was a no brainer,” he said.
Concord currently has a second AC Hotel under construction in New York City. There, Hren said the company anticipates either remaining cost neutral compared to normal construction or saving a “hairline of money” because of savings in labor costs.
Joseph Kiss serves as president of modular solutions at Horizon North Logistics, a company largely focused on modular construction. Though the Canadian company has worked in other areas of real estate historically, over the past few years it has begun building hotels. So far it has built three locations, with another two under development.
Ramada by Wyndham Revelstoke marked Horizon North's first entry into the hotel market. Located in the resort town of Revelstoke, British Columbia, the project presented many issues for a typical hotel construction project: being in the mountains, it has a shorter construction window; its secluded location means a limited availability of labor and trades; and, because it is a resort town, when a company had to bring in people from out of town, the cost of housing them can become very expensive. But by using modular construction, Kiss said the company was able to significantly shorten the period of construction and, consequently, save money.
Kiss estimated Horizon North can finish construction in seven to nine months typically, compared to the year it would take using traditional construction. In the case of the Revelstoke hotel, he guessed that project could have taken a year and a half to two years to build, depending on the severity of the winter.
Though the technique can end up cost neutral in terms of a hotel’s sticker price, he touted the importance of the time saved. “There’s a lot of ways to put a quantitative value on that time,” he said. “With hotels in particular, that’s simply lost revenue associated with room stays.”