Hotel developers put projects on hold as materials and labor are scarce

ATLANTA — Hotel development managers are focused on increasing their margins and brand collaboration throughout the year.

During the 2022 Hunter Hotel Investment Conference “Main Street Talks” panel, Hunter Hotel Advisors President and CEO Teague Hunter asked developers for their perspective on supply chain, construction costs and brand innovations.

Among the top causes of rising development costs, supply chain issues are the biggest reason for price increases, said Mitch Patel, president and CEO of Vision Hospitality Group.

It has become more difficult to obtain materials from international locations such as China and Canada, leading to an increase in both price and arrival time, he said. Compared to pre-pandemic levels, development costs have increased between 15% and 23%.

Data from CoStar’s hotel analytics firm, STR, shows the number of hotel rooms under construction remained broadly flat at the start of 2022, down just 0.6% in the first quarter from the fourth quarter. of 2021. But there are some early indications of a slowdown in development, with chambers in the final planning stages of the pipeline down 5% over the same period.

“There are 100 moving parts that need to move seamlessly for this – the world, the global supply chain – to be in balance. Not just one, but 20 of these things have been disrupted due to COVID around the world,” said Mitch Patel. “And now we’re trying to get it all going again, and the factories that were just completely shut down, both foreign and domestic, are starting up again. That takes time.

Baywood Hotels chairman Al Patel said supply issues caused his company to purchase supplies earlier in the process, which increased interest charges. He said products such as steel used to take 90 days to ship, but now take six months. Previously, electrical components had to be addressed two months before opening, but now they require attention four to five months before.

Mitch Patel said he expects supply chain disruptions to ease by the end of the year, but will continue to cause problems in the short term. This is the first time Vision Hospitality has had no hotels under construction since its inception in 1997, he said.

Fearing a potential recession, he said the development company decided to stop 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 did not succeed this time due to construction costs and the unexpected rise in land values, he said.

“The supply chain challenges are what we didn’t anticipate and of course the inflationary pressure we didn’t anticipate,” said Mitch Patel. “It’s a very difficult time to be a developer right now.”

Disrupted supply chains have directly affected construction timelines and costs, and some executives believe these issues are here to stay for the short term.

Peachtree Hotel Group Director and CEO Greg Friedman said rising construction costs won’t go away any time soon as they are focused on labor beyond the supply chain disruption. supply.

“Unfortunately, since the Great Recession, the construction industry is almost like a dying industry because there is less labor…and this will continue to put pressure on construction costs in general “, said Friedman.

NewcrestImage managing partner and CEO Mehul Patel said he believed labor was the biggest issue in construction. In particular, the productivity of architects, interior designers and general contractors has declined since the pandemic, forcing management companies to spend up to 30% more time on projects.

In addition, overtime leads to higher property taxes and higher utility costs, he said.

“Normally we don’t think about that,” he said. “Now you have to add another layer of debt since we have no control over the segment.”

Mitch Patel said labor is a big challenge in the construction industry and he expects it to continue. However, he attributes the high construction costs to the scarcity of resources.

“Obviously we just can’t get things done,” he said. “That’s why some of these things have created this supply/demand issue.”

Development company executives liked the brands they work with, but they also shared a considerable amount of criticism.

Al Patel said hotel brands had squeezed margins for management companies by raising the cost of things like license fees and three-way comfort letters. Brands and management companies are partners, so the former should do more to fulfill their part of the partnership, he said.

“Brands need to do more in many things. Brands have their hands in our pockets for many, many things,” said Al Patel. “….They just want a piece of our action.”

Executives also criticized the brands’ lack of technological innovation.

Mitch Patel said the industry is “so slow to move with technology” and needs to deploy tools that can help increase margins and improve customer satisfaction. For example, adding the option to tip housekeeping on the application of a brand.

“We live in a cashless society, who still carries cash? We want to tip, but often we forget or don’t have the money to do so…. Why can’t we make it easier? ” he said.

He said additions like these would be a game-changer and help solve existing labor issues by making hard work with generally low pay more attractive.

Friedman agreed with this assessment and said brands lack available technology that could be used to improve customer experience.

“Brands are so focused on franchise revenue, as they should be, but to continue to generate more revenue, they need to look at how we can really make better use of technology, as it is still underserved in our industry. and we need to be more efficient as operators, owners, etc,” Friedman said.

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