In the U.S., businesses are certainly building. Construction spending in the U.S. topped $1.23 trillion in 2017, with commercial construction up $85 billion in 2017, an 11-percent increase over 2016. The hospitality industry has certainly benefitted from these trends, but with so many projects being executed at once and only a limited pool of resources and labor to tap into, costs continue to climb.
Hoteliers are a thrifty bunch, but they need real estate to do business. Such challenges may have driven some developers to turn to alternative means of construction in order to save on costs, but what hoteliers are really after is a faster path to market.
Enter modular construction, whereby hotel rooms are built en masse off property in a warehouse and shipped on site to be finished. Nate Gundrum, VP of real estate development at Mortenson Development, said his company is building its first modular property—a Citizen M hotel in downtown Seattle—for the reasons cited above. But this type of construction only works for the deals that are able to find enough lift to get off the ground.
“It's getting more and more difficult for projects to pencil out,” Gundrum said. “I was on a panel at the Lodging Conference where two thirds of folks there said they are shutting down some projects because they aren't able to get anything underwritten.”
For those difficult projects, even a modular build would be hard-pressed to serve as an answer. Michel Gibeault, VP of business development at High Construction, said modular builds are excellent for saving time but they often cost more than originally thought.
“Typically underwriters will approve invoices for a contractor after their work is installed in the field,” Gibeault said. “A modular developer wants to be paid by the number of boxes they produce because they can't afford to make all of your hotel's 120 rooms all at once. Then if you have a two-week break to figure out funding you lose the benefit of time, so banks and operators have to be on the same page.”
One thing developers are sure of is that while deals are growing more difficult to sign, they are still taking place, and investments to improve the development process remain ongoing. Derek Hutchison, EVP at construction company Cumming Construction Management, said some companies have developed drones powered by artificial intelligence to monitor productivity and construction progress.
“It's an interesting way to automate some of the day-to-day construction oversight that takes place, and it helps with safety,” Hutchison said. “It's easier to have a drone inspect the side of a high rise rather than have someone hang off a rig.”
Stumbling blocks and building blocks
Challenge: Material costs are on the rise, and now the threat of possible tariffs looms in 2019. How are hoteliers expected to budget for a development when the cost to build continues to fluctuate? Furthermore, how can projects be underwritten when tariffs may change the entire landscape of the industry at an undetermined date?
Solution: Michael Doyle, managing director and EVP at CHMWarnick, said hotel brands are sympathetic with the plight of both owners and developers, and in many cases they are willing to provide support or pursue alternatives. Doyle said the one factor that changes everything is timing. “You have to build in the necessary time to allow that type of planning to occur,” he said. “If you don’t plan appropriately you may miss a window, and that’s more costly than trying to rush things. We’re building in more time to go through the appropriate process.”
Challenge: Modular construction can save on costs, but it doesn’t work in every situation. How are hotels adapting to combat cost escalation?
Solution: While some hotel companies are loosening up on brand requirements with regard to materials in order to remain flexible on costs, Gundrum said dual-build hotels are becoming more common as a way to retain value while providing two distinct products. “Sharing certain back-of-house spaces such as laundry, offices and even public spaces can help with the economics of development,” Gundrum said. “Hyatt developed a dual-build prototype for its Hyatt Place and Hyatt House brands, as well as a method to build that in an efficient way.”
Challenge: The labor pool remains a challenge for hospitality even outside of the service sector. Doyle pointed to a $50-million development in Washington state that is encountering challenges. CHMWarnick is having difficulty locating skilled construction workers to the large number of adjacent development projects taking place simultaneously.
Solution: Stephen Daley, VP of construction and design, East at OTO Development, said an ongoing shortage of drywallers, electricians and plumbers is partly why hotel developers have turned to modular construction and dual-branded development to get the job done. However, Daley also said that while labor challenges are expected to continue, they may be leveling off. “We are not seeing a decrease in the cost of labor, but we are seeing a deceleration in the increases that are taking place,” he said. “This is the first year I’ve seen that. Normally the rate of change has been increasing rather than decreasing, so there is room for positivity.”