The U.S. economy continues to be strong and is a central element keeping the hotel industry robust. But one aspect causing hoteliers challenges is the price of construction. Today, it costs more to refresh or build hotels, and rising costs do not appear to be abating anytime soon. Here are contributing factors conspiring to make projects more expensive than expected:
1. Brand PIPs
Following record years of revenue growth, franchisors are working to ensure their brands’ flags are in the best condition. That means several things:
- Properties with lower quality index scores are being issued property improvement plans to upgrade their hotels. Owners who do not complete these renovations by a specific date are in jeopardy of losing the brand’s representation.
- Brands are rolling out new programs and design schemes. Created to better connect with guest expectations, these programs are developed to enhance brand quality. At H-CPM, we see this happening with food-and-beverage concepts, guestroom upgrades, lobby packages and exterior revitalizations.
2. Shrinking Labor Pools
Construction activity is increasing in and out of the hotel sector. Cranes can be seen everywhere. “Turner Building Cost Index United States Second Quarter 2017” results found construction costs rose 1.18 percent between the first and second quarters of 2017 in the nonresidential building market. Construction prices have also increased 4.96 percent year over year from Q2 2016.
3. Stuff Just Costs More
Manufactured product costs are increasing because their material costs have risen, too. From fabrics to casegoods to seating and even architectural services, costs are higher than a year ago.
In a previous article, I discussed new design schemes. When new concepts are introduced, the idea costs more. With brands shifting to different flooring materials and finishes, these changes can be expensive for owners.
4. New Hotels Being Developed
Lodging Econometrics noted new hotel openings for 2017 were up 20 percent. Another 1,160 hotels are projected for 2018, and 1,193 more in 2019. With new brands and cheap debt, we expect this cost-rising trend to continue.
Each of the above mitigating factors plays out differently from market to market. However, if it costs too much now, don’t expect the price of construction to ease soon. All indicators are pointing to increasing construction costs in the foreseeable future. If you can wait to the depths of the next hotel business recession, then you’ll get better prices. If not, look to partner with someone who can take you through the process efficiently and cost effectively.
Stephen Siegel is principal of H-CPM (Hospitality Construction Project Management).