The year 2007 is now regarded as comprising two distinct investment periods. During the first half of 2007, the robust hotel investment market of the prior two years continued to support a high volume of transactions. In the spring, underwriting standards tightened and, by the middle of the summer, the further impact of the credit market’s reaction to the subprime residential market constrained the availability of debt for new and existing hotels. Concurrently, with an abundance of new hotel projects already under construction, the pipeline of new hotels continued to surge in 2007. Smith Travel Research reported that the number of new hotel rooms opened last year was roundly 96,000, representing a 2.2% increase in supply from that of 2006.

4,454,035

Table 1 – Hotel Room Construction Statistics - 2007
	Dec-06	2007 New	% Change
	Existing Supply	Hotel Rooms	2006 to 2007
Luxury	80,062	1,401	1.7 %
Upper Upscale	539,457	6,831	1.3
Upscale	406,932	22,526	5.5
Midscale with F&B	534,063	5,565	1.0
Midscale w/out F&B	694,954	40,448	5.8
Economy	731,812	9,105	1.2
Independents	1,466,755	10,393	0.7
	96,269	2.2 %
Source: Smith Travel Research

As seen in the chart, the larger supply increases were for upscale and midscale hotels without food and beverage. The majority of the new upscale rooms are represented by five brands: Courtyard, Hilton Garden Inn, Homewood Suites, Residence Inn, and Springhill Suites. These brands continue to be built in urban and suburban locations across the country. Midscale brands without food and beverage or significant construction costs are dominated by Holiday Inn Express and Hampton Inn and Suites, followed by Hampton Inn and Comfort Suites. The lower development costs of these upscale and midscale brands are more likely to support their feasibility relative to the upper-upscale and luxury products.

Development Cost Changes

Through the first half of 2007, developers continued to actively pursue new hotel development. The rising RevPAR in many markets and the continued evolution of mixed-use development configurations supported the feasibility of many proposed projects. Beginning in August, the impact of the credit crunch and the slowdown in the residential market began to temper the financing of new hotel development, particularly those with for-sale elements. Most properties that are currently under construction were financed prior to August 2007.

For projects underway or in pre-development in 2007, construction cost increases continued to impact development budgets. During the course of the year, the cost of many building materials stabilized, but the labor shortage remained critical. This trend is not expected to be relieved by the surplus of residential construction workers who became available as the housing market softened, as construction skills do not always transfer between residential and commercial construction. Developers are reporting that with the slowdown in construction, the competition among subcontractors to secure work is increasing. For some projects, more contractors are bidding and the spread among the bids can be 20% to 30%.

With the softening of the residential market in urban cores, land that can be used for high-density projects has become more available and, in some cases, slightly more affordable. The high land appreciation seen in recent years has clearly slowed. Higher construction costs and lower loan-tovalue structures on financing have delayed numerous projects.

Of the three larger building material components—lumber, cement, and steel—lumber and cement showed modest price declines in 2007, while the price of fabricated steel increased over 5% during the course of the year. Much of the decline in lumber and cement is attributed to the contraction in housing construction, while steel remains a critical component for commercial building, which is still ongoing in many urban and suburban areas. Although trends in individual construction materials have varied, construction cost inflation is estimated by both the Turner Construction Index and RS Means at roundly 7% in 2007 over the prior year.

Green construction has become a mantra for many new projects. Building a green hotel from the ground up requires consideration of the construction, as well as the ongoing operating practices. The design may include lumber that is approved by the Forest Stewardship Council and building supplies, finishes, and FF&E composed of low volatile organic compound (VOC) or low-emitting materials that are locally produced so as to reduce transportation. Additionally, as much construction waste as possible is recycled. Even the site has to be selected to have minimal impact on the environment. Whether or not a green building costs more to build than a convention construction is a hotly debated topic. Anecdotally, market participants report that building green costs 12% to 15% more than traditional methods. Some of the costs for sustainable design may be eligible for incentives and rebates that support the feasibility.

The year 2007 will be remembered as a period of dramatic change in the hotel investment and development landscape. Developers continued to report construction cost escalations in 2007, although at lower levels than in recent years. All categories have been affected. Nonetheless, new-construction starts are expected to decline significantly due to the less favorable lending environment that appeared in the latter half of the year. As hotel market performance moderates and lending is curtailed, construction costs are anticipated to grow at a slower rate than the hearty increases of recent years.

Table 2 – 2008 Hotel Development Cost Survey per-Room Averages (Based on 2007 Amounts)

 

Budget/Economy Hotels	Land	Building and Site Improvements	Soft Costs	FF&E	Pre-Opening & Working Cap	Total
Average	$15,000	$48,800	$4,500	$8,900	$3,200	$71,000
Median	$14,400	$44,400	2,300	$8,900	$3,000	$57,400
Allocation	16%	$ 67%	5%	16%	7%
Midscale w/o F&B
Average	$30,200	$76,300	$12,400	$10,500	$4,300	$111,700
Median	15,800	$67,400	$9,000	$10,200	$2,900	$93,600
Allocation	16%	67%	10%	11%	5%
Extended-Stay
Average	$16,200	$89,400	$13,000	$14,100	$3,500	$150,000
Median	$14,400	$78,400	$11,300	$14,600	$2,600	$120,200
Allocation	13%	63%	10%	1%	2%
Midscale w/ F&B
Average	$18,500	$83,900	$14,800	$13,700	$4,000	$130,700
Median	$13,600	$69,200	$11,600	$12,900	$3,200	$112,000
Allocation	14%	64%	11%	13%	3%
Full-Service Hotels
Average	$21,700	$133,900	$25,800	$24,400	$7,300	$239,500
Median	$17,100	$121,600	$16,200	$20,000	$6,100	$179,900
Allocation	11%	64%	12%	13%	4%
Luxury
Average	$109,400	$385,100	$120,800	$59,800	$22,600	$705,500
Median	$111,800	$334,000	$103,900	$63,900	$20,300	$634,400
Allocation	18%	53%	16%	12%	5%

 

Posted on September 9, 2008 9:47 PM | Permalink
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