HVS report shows construction costs on the rise as supply scrambles to meet demand

The 2015 HVS Hotel Development Cost Survey analyzes the development costs of the industry through the end of 2014, and concluded that the industry should not be afraid of incoming room supplies despite rising costs throughout the industry.

The survey, released by HVS, shows that while demand for hotel rooms has grown approximately 5.3 percent over the last five years, supply has only grown 3.2 percent (as of November 2014), as a result of the slower developmental pace brought on by the recession in 2009. 

The report cites data from STR (through November 2014) that show the current number of hotel rooms in construction, final planning and planning is 413,419. About 64 percent of these rooms are expected to open this year (representing 2.5 percent supply growth) and 2016 (for 2.7 percent supply growth.

Markets most affected by new supply, according to HVS, include Houston, Miami, Denver, Nashville, New York and Seattle, which are expected to report double-digit increases in new hotel rooms. Areas with high barriers to entry, such as San Francisco and Hawaii, will most likely miss out on the cycle, while markets that are still recovering are expected to take part in little hotel development.

In addition, strong residential construction activity put upward pressure on construction costs for all areas of development, particularly in urban and suburban areas where multifamily housing and condominium projects present a more lucrative return than hotel development. This has caused competition for sites to heat up, especially as development costs for hotel construction continues to rise.

The report found that markets such as Miami have seen full-service and luxury hotel developers report cost increases of 25 to 30 percent over the past two years, while nationwide construction costs were reported to be around 2.8 to 3 percent higher in 2014 over 2013. Lumber costs are reportedly up 5.6 percent for the year, while steel increased 1.4 to 2.3 percent depending on building products. The construction labor force has also declined 27 percent from the peak 7.5 million workers in 2007. 

  • The report also had a series of design considerations for future development:
  • Limited and select-service hotels continue to be the most feasible to develop due to fewer facilities and their profitable operating models.
  • Design catering to Millennials is a hot topic, with emphasis placed on sustainability, health, communal spaces and technology.
  • Public spaces as a whole are increasing in importance, with extra attention placed on social spaces.
  • Technology is adding to construction costs through additional wiring, and experienced developers advise holding off on tech decisions for a project as long as possible to take advantage of current technology and trends.
  • New brands are creating a surge in development, while energy efficient designs such as solar panels and vehicle charging stations are becoming mandatory considerations for developers.