Hotel Development Cost Essay Example

small budget properties to large destination resorts. When new hotel development resumes, it is expected to start with branded limited- and select-service hotels, then progress to larger and more complex projects as the market strengthens. Hotel supply showed consistent growth between 2006 and 2010.

In 2008, the difficulty in obtaining financing for new construction led to many projects being put on hold or cancelled. This change in debt availability is evident in the decline of supply growth in 2010, as shown in the chart. We expect that the rate at which new hotel rooms open will decrease even further in 2011. It's important to note that not all new rooms in each chain scale segment come from new construction; some are from converted or rebranded properties that may have upgraded or downgraded from other chain scale categories. By Q3 2010, financing for existing hotels started returning to the market, although at much lower levels compared to pre-downturn years. Hotel development lending typically experiences a delay compared to mortgages for acquisitions and refinancing.

With the recovery of hotel fundamentals, investors are starting to assess halted development projects. When financing becomes accessible again for proposed hotels, it is anticipated that supply growth will regain momentum. However, due to the current scarcity of available loans and the time needed for new construction, substantial growth in new supply is not expected until at least 2012. Nonetheless, this decrease in new supply is encouraging for the continued occupancy, average rate, and therefore, the recovery of Revenue Per Available Room (RevPAR).

In 2010, several markets experienced substantial growth in occupancy compared to the previous year, while certain regions in the U.S. started witnessing significant

rate hikes during the second and third quarters of that year. Investors consider sustainable RevPAR as the primary indication for the viability of developing new hotels.

During the previous lending cycle, land served as a significant form of collateral for construction loans and the cost of well-positioned plots rose steeply. In difficult periods for real estate investment, land tends to be the development component that undergoes the largest decline. A study conducted by the Federal Reserve in 2010 examined land prices in 23 MSAs throughout the United States and revealed that composite residential and commercial land prices surged by nearly 130.0% from 2002 to the second half of 2007. Since reaching its peak in 2007, however, land prices have dropped by over 40.%.

The evidence for decreases in hotel land value is frequently derived from personal stories instead of market data. Lately, there have been minimal land deals because owners prefer to retain their properties and await development opportunities that can yield financial gains. HVS tracks multiple construction surveys, including the Turner Construction Index, the Engineering News Record, and the U.S. Bureau of Economic Analysis. These surveys enable observation of supply and demand patterns that impact construction materials and labor expenses.

According to multiple sources, construction costs decreased by 4.0% to 8.0% from 2008 to 2009. However, industry experts have different opinions on the changes in construction costs in 2010. Some sources predict a potential decrease of up to 4%, while others indicate an increase of around 4.0%.

During 2009 and 2010, there was fluctuation in the cost of various materials used in private commercial construction. Many categories experienced increases above the inflation rate. Notably, structural steel cost rose

by 5.3%, lumber cost increased by 15.0%, and there was a 7.0% increase in plywood cost. The rise in lumber pricing is primarily due to the sustained high demand from China.

In mid-2008, Russia, which used to be a major source of lumber for China, raised the lumber tax by 25.0%. Labor costs have been influenced by various factors over the past 18 months. Wage and benefit settlements by unions have experienced average increases of around 3.

Despite a decline in overall construction, contractors have adapted by diversifying their practices and taking on a wider range of product types. They have also focused on improving work practices and efficiencies. However, there is no consistency in bidding within the industry, as requests for proposals often receive a wide range of bids for the same project. Specialized hotel contractors have seen renovations make up the majority of their projects since 2009. In recent years, purchasing agents have successfully negotiated substantial discounts with vendors, leading to a decrease in FF&E costs.

The costs of wood furniture and fabrics have remained high and have not been as impacted as other FF&E costs. It is anticipated that by 2012, most FF&E costs will increase back to 2007 levels. Just like our previous survey, fewer construction services are expected due to fewer development projects. While categories like public agency fees have not declined, decreases in tax assessments and professional fees have slightly reduced soft costs. Green building is still an objective for new hotel construction, but only a small portion of proposed hotels are being developed to meet LEED certifications.

New hotel construction is focusing on improved energy systems rather than using green

building materials. Despite the increase in hotel activity, it is projected that construction costs will rise due to strong international demand. The availability of financing will play a key role in driving the growth of hotel construction. Lower costs in the previous survey have had the most significant impact on land and building improvements.

The other categories listed in the table are more stable compared to hotel development costs. There are multiple line items and categories that account for hotel development costs. The accounting for each specific project can be influenced by tax implications, underwriting requirements, and investment structures. For instance, in a development project, there may be overlapping tasks such as furniture, fixtures, equipment installation, and construction finish work.

Accounting for these items can vary between projects. Additionally, users of the HVS Consulting and Valuation Development Cost Survey should only consider the per-room amount as a rough estimate for each cost category. The total costs in each category do not necessarily add up to the overall high and low range of costs. None of the survey data indicated projects that fell solely within the low or high range of costs.

Properties with high land costs often have lower construction costs and higher soft costs. The total costs displayed in the previous table come from per-room budgets for hotel developments and do not represent the sum of individual components. HVS Consulting and Valuation use confidential property information believed to be reliable for their development cost survey. Data from individual sources remain undisclosed.

HVS is a leading consulting and services organization dedicated to the hotel, restaurant, shared ownership, gaming, and leisure industries. Since its establishment in

1980, HVS has completed over 2,000 assignments annually for nearly all major industry participants.

HVS is a renowned company with skilled professionals situated in various regions globally. With 30 offices and a team of 400 experienced industry experts, HVS provides customized services for the hospitality industry. For further details regarding our specialized knowledge and services, kindly visit www.hvs.com.

Elaine Sahlins, the author, earned her degree from Barnard College at Columbia University in New York City. She also holds an MPS degree in Hotel Administration from Cornell University.

Following her completion of education at Cornell, she embarked on a career at VMS Realty in Chicago as an expert in evaluating hotel investments. Subsequently, she transitioned to the role of a review appraiser at Security Pacific in San Francisco, which was later acquired by Bank of America. In 1997, she became part of HVS and operated out of their San Francisco office.