By:
Elaine
Sahlins
Last year,
the San Francisco office of HVS International announced the redesigned
hotel development cost survey. While HVS International has tracked hotel
construction costs throughout the United States since 1976, the 2001
survey introduced data for a larger range of hotel products, setting new
2000 baseline ranges for six lodging types: Economy/Budget Hotels,
Midscale Hotels w/o F&B (without Food and Beverage), Extended-Stay
Hotels, Midscale Hotels w/ F&B (with Food and Beverage), Full-Service
Hotels, and Luxury Hotels and Independent Resorts.
With new
baseline ranges established, the 2002 hotel development cost survey
estimates changes for hotel construction costs in 2001. The year 2001
will be remembered for two events: the horrific events of September 11
and the national economic recession beginning in March. Both events had
profound impact on all aspects of the hospitality industry, affecting
property operations, management strategies, development costs and the
appetite of hotel investors for new construction.
Concurrent
with the slowdown of the hotel construction pipeline is the decrease in
all real estate development. In 2001, the construction industry’s
ten-year expansion period came to an end. With less competition for
labor and materials, hotel development costs demonstrated lower growth.
While the CPI was 2.8% last year, many material costs actually declined
or experienced less than 1.0% growth. However, insurance costs,
particularly post-September 11, soared. Although interest rates were low
in 2001 and financing costs more moderate, the availability of mortgage
capital for new hotel development was extremely limited. This
combination of factors resulted in a modest year of change for hotel
development costs.
Of the five
categories, land is the most immediately and strongly affected by shifts
in the development cycle. The lack of financing for new hotel
construction put the damper on numerous projects. Land transactions for
hotel development slowed to a trickle and prices retrenched. While land
prices were declining as the economy receded early in the year,
post-September 11 land sales were almost non-existent. There have been
relatively few transactions to substantiate a national trend, however,
HVS International is aware of a number of cases where available sites
were pulled-off the market by sellers disappointed by low or no offers.
In some instances, unimproved vacant sites with entitlements have been
resold at below the initial transaction price. Land purchases for hotel
development in 2001, particularly post-September 11, would likely have
been at a discounted price, reflecting the risk in actually getting a
hotel project financed during the year. As a result, hotel land costs
declined significantly in 2001.
The costs of
construction materials and labor were most affected by national trends
of supply and demand. Costs for some materials changed dramatically. In
particular, gypsum products and lumber dropped. Gypsum board prices
declined by over 20% in 2001, while lumber declined by more than 5.0%.
Prices for paving materials and sand increased at an above-inflationary
rate, while other costs were relatively stable. Declining costs in
materials were somewhat offset by increased labor costs. Union wage
increases have been above inflation over the past five years. Most
recently, union wages and fringe benefit packages increased by 4.6% in
2001. The Construction Labor Research Council in Washington, D.C.,
reports that the average hourly rate for construction workers is now
$32.33.
The
furniture, fixture, and equipment (FF&E) cost for new and renovated
hotel rooms declined or only modestly increased in 2001. Hotel FF&E is
subject to a greater number of influences now more than ever before. The
propagation of boutique hotels has influenced interior designers of all
hotels, from highway franchisees to traditional commercial downtown
properties. Consumers are more aware of amenities and design than ever
before. “Amenity creep” is now supplemented by “design creep.” Although
the expectations of owners and guests are evolving, the pipeline for new
hotel development is slowing and lower hotel profits in 2001 translated
into fewer projects. Furniture, fixture, and equipment manufacturers
responded to the declining hotel development pipeline by discounting or
holding prices. While the design of boutique hotels has influenced hotel
products at all price points and hotel room FF&E standards are
continuing to be elevated, fewer new hotel rooms and less renovation
meant suppliers were more willing to negotiate, particularly in the last
quarter of the year. As a result, FF&E costs in 2001 have mostly
declined from those in 2000.
Other costs
remained stable or increased slightly. In 2001, soft costs (fees,
permits, financing costs) remained at or slightly above the prior year’s
level. While mortgage rates declined, little financing was available for
new hotels. The lower costs of capital, however, helped to stabilize
soft costs. Working capital and pre-opening budgets remained at or
marginally above the 2000 range. With a larger labor pool available for
hotel operations in many markets, hotel wages stabilized over prior
years’ growth. As hotel occupancies declined in some areas beginning in
the first quarter of 2001 and plunged following the terrorist attacks,
payroll costs were decreased. In many cases, promotional costs were not
reduced and some were increased. As a whole, pre-opening and working
capital cost increases did not exceed inflation.
The following
table sets forth the results of the 2002 Hotel Development Cost Survey.
Due to the wide variety of development projects and their diverse
geographic locations, ranges of development costs per room for all of
the other property type categories overlap. Additional differences in
site characteristics, density, building and zoning codes, local labor
markets, and other construction costs account for the wide range of
per-room costs in each category. As an example, extended-stay and
limited-service hotels may be more expensive (on a per-room basis) to
develop in downtown urban areas than full-service hotels in suburban or
tertiary cities.
It is
important in this analysis to note that there is no uniform system of
allocation for hotel development budgets. Hotel development costs are
accounted for in numerous line items and categories. Individual
accounting for specific projects can be affected by tax implications,
underwriting requirements, and investment structures. For example, in a
development project, furniture, fixture, and equipment installation and
construction finish work can overlap. Accounting for these items is not
always the same from one project to another.
In addition,
users of the HVS International Development Cost Survey should consider
the per-room amount in the individual cost categories only as a general
guide for that category. The totals for low and high ranges in each
cost categories do not add up to the high and low range of the sum of
the categories. None of the data used in the survey showed a project
that was either all at the low range of costs or all at the high range
of costs. A property that has a high land cost may have lower
construction costs and higher soft costs. The totals, therefore,
represent the overall lowest and highest per-room amount for each
category indicated by the survey data.
All material
used by HVS International for the development cost survey is provided on
a confidential basis and is believed to be reliable. Data from
individual sources is not disclosed.
To view the
Hotel
Development Costs 1998 - 2001,click
here.
Elaine Sahlins
Suite 620
116 New Montgomery Street
San Francisco, CA 94105
415-896-0869
415-896-0516 FAX
This information is protected by
international copyright law and may not be reproduced without the
express permission of the publisher.
