ATLANTA — Hotel development executives are focused on increasing their margins and brand collaboration throughout the rest of the year.
During the "Main Street Talks" panel at the 2022 Hunter Hotel Investment Conference, Hunter Hotel Advisors President and CEO Teague Hunter asked the developers for their outlook on the supply chain, construction costs and brand innovations.
Supply-Chain Challenges
Among the main causes of rising development costs, supply-chain problems are the biggest reason for the increasing price, said Mitch Patel, president and CEO of Vision Hospitality Group.
It’s become harder to obtain materials from international locations such as China and Canada, causing both the price and the timeline for arrival to increase, he said. Compared to pre-pandemic levels, development costs have increased between 15% and 23%.
Data from CoStar's hospitality analytics firm STR shows the number of hotel rooms under construction has remained mostly stable in the early part of 2022, down just 0.6% in the first quarter compared to the fourth quarter of 2021. But there are some early indications of a development slowdown, with the rooms in the final planning phase of the pipeline down 5% in that same time frame.
“There are 100 moving parts that have to move seamlessly in order for this — the world, global supply chain — to be in balance. Not just one, but 20 of those things have been disrupted because of COVID worldwide,” Mitch Patel said. “And now we’re trying to reignite all of that right back, and plants that were just completely shut down, both foreign and domestically, are rebooting. That takes time.”
Baywood Hotels President Al Patel said supply issues have caused his company to buy supplies earlier on in the process, which increases interest costs. He said products such as steel used to take 90 days to ship but now take six months. Electrical components used to have to be addressed two months in advance to opening but now need attention four to five months before.
Mitch Patel said he expects supply-chain disruption will ease by the end of the year, but it will continue to cause problems in the short term. This is the first time Vision Hospitality doesn’t have any hotels in construction since its inception in 1997, he said.
Fearing a potential recession, he said the development company decided to halt adding new hotels to its pipeline in 2019. During the Great Recession, Vision Hospitality accelerated its pipeline to take advantage of low construction costs. Following the same strategy wasn’t successful this time around due to construction costs and land values rising unexpectedly, he said.
“Supply-chain challenges is what we did not anticipate and of course inflationary pressure that we did not anticipate,” Mitch Patel said. “It is a very difficult time to be a developer right now.”
Construction
The disruption of supply chains has directly affected construction timelines and costs, and some executives think these problems are here to stay in the short term.
Peachtree Hotel Group Principal and CEO Greg Friedman said increased construction costs aren’t going away anytime soon since they are labor-driven beyond the supply-chain disruption.
“Unfortunately, since the Great Recession, the construction industry is almost like a dying industry because there’s less labor force ... and it’s just going to continue to put pressure on construction costs in general,” Friedman said.
NewcrestImage Managing Partner and CEO Mehul Patel said he believes labor is the biggest issue in regard to construction. In particular, the productivity of architects, interior designers and general contractors has decreased since the pandemic, causing the management companies to spend up to 30% more time on project schemes.
In addition, extra time leads to higher property taxes and increased costs on utilities, he said.
“Normally we don’t think about that,” he said. “Now you have to add another layer of debt since we don’t have control over any of the segment.”
Mitch Patel said labor is a big challenge in the construction industry and he anticipates it to continue. However, he attributes high construction costs to the scarcity of resources.
“Clearly, we just can’t get things,” he said. “That’s why some of these things have created that supply/demand problem.”
Brands
The development company executives offered appreciation for the brands they work with, but they also shared a considerable amount of criticism.
Al Patel said hotel brands have been decreasing the management companies’ margins by increasing the cost of items, such as licensing fees and tri-party comfort letters. Brands and management companies are partners, so the former should do more to hold up their end of the partnership, he said.
“The brands have to do more in a lot of things. The brands have their hands in our pockets for many, many things,” Al Patel said. “ .... They just want a piece of our action.”
The executives also criticized the brands’ lack of innovation with technology.
Mitch Patel said the industry is “so slow to evolve with technology,” and needs to deploy tools that can help increase margins and boost guest satisfaction. For example, adding the option to tip housekeeping on a brand’s app.
“We live in a cashless society, who carries cash with them anymore? We want to tip, but many times we forget or don’t have the cash to do it …. Why can’t we make it easy?” he said.
He said additions like these would be a “game changer” and help with existing labor issues by making a hard job with generally low pay more attractive.
Friedman agreed with that assessment and said brands are missing out on available technology that could be used to improve the customer experience.
“Brands are so focused on franchise revenue, as they should be, but in order to continue to drive more revenues, they need to look at how we can really utilize technology better because it’s still underserved within our industry and we need to be more effective as operators, owners and so forth,” Friedman said.