Why hotels are taking longer to build
Why hotels are taking longer to build
NATIONAL REPORT — Hotels are sitting in the development pipeline longer than ever, with record numbers in the elusive “early planning stage”. Complicating matters is the hotels that are being built are taking longer to build, according to research from Jan Freitag, national director, Hospitality Analytics at CoStar.
The research found that over the last 25 years, the average construction duration has increased from around 17 months in the decade after the year 2000 to around 23.5 months now, with most of that increase happening in the last five years.
Freitag said he did research up and down the chain scales, and not surprisingly, the delays get longer the higher up you go, with luxury hotels going from an average of 22 months in 2000 to 30 months today.
He said his research found there was “nowhere to hide” from delivery timeline delays. Still, the increases have been especially pronounced in the middle, with midscale and upper midscale hotel construction timelines seeing roughly 50% added to their delivery timelines, and economy properties trending close behind. Freitag said upscale and luxury also have lengthened construction duration, though by a smaller share.
Freitag's research suggests that many limited-service hotels have absorbed the largest proportional hit, even as luxury remains the slowest to deliver.
These delays are impacting developers' costs and, in turn, making new hotels riskier, as the extended timelines can lead to unforeseen and higher costs for investors. The time from groundbreaking to opening has stretched significantly while the hotel remains in the pipeline, especially in the last five years, as COVID disrupted supply chains and labor availability.
“The underlying trend just speaks to everything taking longer,” Freitag said in an interview with Hotel Investment Today. “Everything is a little bit more expensive, and everything takes a little bit longer than we originally thought.”
For instance, the rule of thumb was that for an economy-type property in a warmer climate that could support year-round construction, it would roughly take a year to build from start to finish. That year has now averaged 19 months. For full-service, upscale hotels, it used to take 24 months to build. That’s now turned into 27 months.
So, this all leads to the question of why this is happening. Freitag said the answers aren’t easy (nor are any readily available solutions), but he has some general ideas that should sound familiar.
The first is a labor shortage, which COVID certainly exacerbated, but Freitag said started way before that.
“After the great financial crisis (2008), when there was no real need, there was no demand for housing. My sense is, talking to people in the industry, that subcontractors from Latin America went back to Latin America because their services just weren’t needed,” he said. “Now we don’t have a lot of [subcontractors], electricians and so forth.”
Freitag said labor has been a stubborn bottleneck, with contractors reporting elevated wage pressures and persistent difficulty sourcing those qualified subcontractors. In addition, he noted turnover has further eroded productivity.
The other major factor is increased costs from many directions, with higher interest rates increasing the cost of construction loans, making delays more expensive, and requiring resequencing to manage draw schedules. Those higher inflation costs also show up in higher prices for construction materials, which have shortened bid-validity windows and pushed owners to pre-purchase long-lead items, adding more complexity and risk to project management.
Freitag said the tariffs issue didn’t even have time to appear in this research and could present future complications that further increase costs and timelines.
More complicated to build
Another factor is that hotel prototypes are much more complicated than they were 25 years ago, across all segments, from economy to midscale and upper-midscale hotels, where even standardized rooms can be challenging to build. Freitag also said that, according to industry participants, municipal review timelines, utility coordination and supply constraints on prefab components can erase the speed advantages these segments traditionally enjoyed.
“We talk about activating spaces and we talk about rooftops, and we talk about having more outlets, even in limited-service hotels,” he said. “Things have evolved, and that then means it takes longer to build.”
Even the boom in extended-stay hotels has complicated and extended construction timelines.
“You could argue that some of the lower-end, extended-stay hotels, the economy and midscale type of brands are more complicated to build because the room serves a couple of functions,” he said. “It’s not just a sleeping room, but also a living room and a kitchen. The room is just more complicated… and all of that just makes it more complicated, which then elongates the timeline.”
Looking ahead, Freitag said longer schedules will likely be a reality across all classes for the remainder of the decade, with limited-service hotels continuing to bear the biggest brunt of the delays.
Project management budgets make hotels' numbers work
https://www.hotelinvestmenttoday.com/From-Our-Partners/Project-management-budgets-make-hotels-numbers-workBy
Mary Scoviak
Top Shelf’s Darrin Phillips gives owners playbook for successful planning.
ROCKVILLE, Maryland ─ Hotel investors looking to mitigate the impact of economic, geo-political and natural events on their next wave of active projects should be focusing on the project management budget as their point of control.
Done right, this pivotal tool gives investors a detailed blueprint for how every aspect of project management rolls up into their goals and a realistic contingency program for keeping work on time and budget if/when the unexpected happens.
Integrated AI-driven data and increasingly sophisticated forecasting models identify potential opportunities and challenges in real time and over the project lifecycle to maximize upside for hotel clients.
“With all the resources we have, project management should pay for itself,” said Top Shelf Project Management CEO Darrin Phillips. “It’s the one service that should zero out for the investor.”
In this exclusive interview, Phillips checklists the factors that are essential to a comprehensive, investor-centered project management budget.
Hotel Investment Today (HIT): What is one factor that can make or break a project management budget’s effectiveness?
Darrin Phillips: A budget that lacks specific, project-driven details and relies on broad assumptions can lead to inefficiencies and missed opportunities to enhance asset value.
These five key areas signal where a generic budget often falls short:
1. Lack of a detailed existing conditions assessment: Generic budgets often overlook specific property challenges, such as hidden issues in older buildings, leading to unexpected costs and delays. A thorough assessment can reveal cost-saving opportunities.
2. Detailed site walk with the PIP: Generic budgets often miss how the existing condition of the asset affects the scope of the PIP document. Not all PIP items can be implemented at every hotel, and in some cases, the PIP requirement is already met. A detailed site walk with the PIP can reduce overall renovation costs.
3. Absence of a phased operational plan: Assuming a linear construction process, generic budgets fail to account for the complexities and additional costs of renovating an operational hotel. Strategic phasing can minimize revenue loss and enhance the guest experience.
4. Overlooking operational and guest experience costs: A budget focused solely on construction neglects crucial "soft" costs like temporary staff relocation, marketing, and staff training. These investments are vital for maximizing the renovation's return. This area is very important for brand conversions.
5. Generic FF&E and material selection: Without a detailed breakdown of FF&E, there is no assurance of quality or long-term durability. Investing in high-quality, durable materials can significantly reduce maintenance and replacement costs.
Top Shelf creates very detailed PIP estimates that take the existing conditions of an asset into consideration. Our estimate package becomes the playbook for a successful renovation or conversion.
We also provide all our clients with a Waiver Request Report that details all PIP items we feel should be discussed with the brand, and a revenue displacement forecast based on the project timeline. Our estimate package becomes the playbook for a successful renovation or conversion.
HIT: What are three things that can play the biggest roles in assuring the project is delivered on time and on budget?
Phillips: Three pivotal factors that significantly influence project success are comprehensive pre-construction planning, rigorous contract and change order management, and proactive risk management. The financial ramifications of project overruns can be substantial for an owner, affecting not only the project budget but also long-term revenue and brand reputation.
Comprehensive pre-construction planning extends beyond the mere cost estimation to create a detailed roadmap that accounts for international complexities. Accurate cost estimates, achieved through planning, mitigate the risk of inaccurate cost predictions by giving precise estimations for labor, materials, and equipment.
The selection of a qualified project team with experience in hotels, the specific brand, and the relevant region is also critical. Furthermore, a well-defined scope document developed during this phase minimizes scope creep.
A formal change management process should be established to evaluate modifications and their impact on budget and schedule. Inadequate pre-construction planning can lead to cost overruns exceeding 15% due to unforeseen mid-project changes, such as underestimating labor costs in a new international market.
Even with meticulous planning, changes are inevitable, making effective contract and change order management essential to prevent project derailment. A formal change management process ensures that all adjustments to scope, schedule, and budget are thoroughly evaluated and approved by all parties before work commences. That can prevent unplanned modifications that cause cost and schedule overruns.
Timely resolution of change orders is crucial to minimizing project impact, as disputes between owners and contractors can often arise. Clear, complete, and binding change orders protect the owner by preventing disputes over cost and scope. Poor change-order management can lead to significant cost and schedule impacts, especially when disputes arise, potentially causing lost revenue from delays if issues, such as those related to new hotel bathroom fixtures, are not processed correctly.
The true cost of budget and timeline overruns often surpasses direct costs alone. Delays frequently necessitate additional financing, leading to increased interest expenses over an extended period. The most significant financial impact is often the lost revenue from a delayed hotel opening, which can amount to millions for a multi-million-dollar hotel. Moreover, a project experiencing multiple delays and cost overruns can harm the brand's reputation and generate negative press, potentially leading to a long-term loss of market share.
HIT: How do you build adequate cushion for a project that is unbranded when you create the budget but will be branded at some point?
Phillips: The core principle for a project that is unbranded at the outset but will be branded later involves incorporating future brand standards as early as possible through a three-pronged approach: a tiered contingency, a brand standards assessment, and a value-engineering feedback loop.
First, a tiered contingency based on brand tiers is essential. Instead of a single contingency percentage, I propose a tiered system that reflects the potential standards of different hotel brands. That allows for more precise fund allocation based on the project's brand strategy and market position. This approach includes:
• Tier 1 (base): Allocating a standard contingency (e.g., 5–10% of total costs) based on a conservative projection for a high-quality independent hotel
• Tier 2 (mid-level brand): Adding an additional layer of contingency (e.g., 5–10%) for a mid-level brand, covering specific technology, furnishings, or lobby designs.
• Tier 3 (upscale brand): Setting aside a higher percentage (e.g., 10–20%) for an upscale brand, encompassing more expensive finishes, customized furniture, higher-end technology, and extensive public area upgrades.
Second, a comprehensive brand standards assessment is vital. Engaging with potential brands early in the planning phase to understand their requirements, even without a final decision, allows for the integration of their specific needs into the budget from the outset. This involves:
• Conducting mock assessments: Utilizing brand checklists and standards from potential flags to perform a "mock assessment" of the initial design, identifying areas where the current design may fall short.
• Involving brand representatives: Engaging brand representatives to review preliminary plans, thereby incorporating their feedback early to avoid costly later changes.
• Capturing all standards: Itemizing costs for brand standards that differ from the initial independent plan, including specific fire and safety systems, technology infrastructure, and specific furniture and fixture packages.
Finally, establishing a value-engineering feedback loop is crucial. This approach starts the project with a high-end, brand-agnostic design and uses value engineering to scale it back as needed, maintaining flexibility without exceeding the budget. This entails:
• Over-designing initially: Designing the hotel to a standard that meets or exceeds potential brand requirements, for instance, a more robust technology infrastructure than a typical independent hotel might need.
• Using value engineering to reduce costs: Once final brand requirements are clearer, scaling back the design and costs for items exceeding those standards, which is more efficient than the opposite approach that could lead to expensive retrofitting.
• Documenting all changes: Maintaining a log of all value engineering decisions and their budget impact, justifying changes to stakeholders and providing clear documentation of how the final budget was reached.
“My first seven years of experience was split between lending and development. I learned early on the importance of an accurate budget and personally experienced the negative impacts of an inaccurate one,” said Phillips.
He added, “Our budgets reflect experience gained in managing hundreds of hotel construction projects and through our lender services, reviewing, underwriting, and inspecting over 1,000 hotel projects since our inception. Our aim is to be the project expert by thoroughly understanding the asset, brand standards, and associated costs.”
Mary Scoviak is custom & design content director for Hotel Investment Today by Northstar.
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DUHC&S | Strategic Hospitality Consulting & Advisory
We transform hospitality and tourism businesses through strategic solutions, operational efficiency, and comprehensive renovation . With over 40 years of experience working with brands like Hilton, Hyatt, Sheraton, and Sonesta , we enhance asset value and profitability through:
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Hotel openings and repositioning
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