2015 - Hotel Development Cost Survey

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C!"#$%ad&id"'4)*otel-,nline (https://www.hotel-online.com/) 5 1ews (https://www.hotel-online.com/press&releases)5 *otel 6e7elopmentCost Sur7ey #'3/'8

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HotelDevelopmentCostSurvey2014/159ebruary ; #('8 $:'$am

by =laine Sahlins

*0S has trac/ed hotel construction costs throughout the United States since '4$>. =ach year; *0S researches de7elopment

costs )rom our database o) actual hotel construction budgets; industry reports; and uni)orm )ranchise o))ering circulars.

!hese sources pro7ide the basis )or our range o) component costs per room.

!his #'3/'8 sur7ey reports updated per-room hotel de7elopment costs through the end o #'3; and considers data or si

lodging types:

@ =conomy/Audget *otels;

@ idscale *otels without 9ood and Ae7erage (w/o 9%A);

@ =tended-Stay *otels;

@ idscale *otels with 9ood and Ae7erage (w 9%A);

@ 9ull-Ser7ice *otels; and

@ Buury *otels and Independent esorts.

In the *0S *otel 6e7elopment Cost Sur7ey; the elements o a hotel de7elopment budget are broen down into i7e general

categories: BandD Construction Costs and Site Impro7ementsD Sot CostsD 9urniture; 9itures; and =Euipment (99%=)D and

Fre opening and Goring Capital. !hese categories pro7ide general ranges or analyHing hotel de7elopment budgets on

a per room basis. !he classiications are broad enough or proessionals with dierent epertise to wor with and

understand.

1ew-proect construction cost data collected may increase the range and/or aect the mean and median o the

construction cost components. !he upper and lower ends o the ranges also consider changes in construction cost

components deri7ed rom published sources and industry indees; and inormation rom architects; contractors;

de7elopers; lenders; and other proessionals in7ol7ed with hotel de7elopment proects.

!he *otel 6e7elopment Cost Sur7eyincludes actual ranges o de7elopment costs in each category. !he sur7ey is not meant

to be a comparati7e tool to calculate changes rom year to year-rather; it represents the true costs o building hotels across

the United States at the particular time. s in pre7ious years; the data represent a wide array o geographical locations;

rom tertiary marets in the Southwest to mid- anhattan. !he de7elopment costs o the same hotel product; say a

limited-ser7ice 9airield Inn or *oliday Inn =press; can be more than triple the amount rom one locale to the other.

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WHY WE ARE !" A#RA$% !# EW S&''Y

s we all now; the hotel industry is cyclical. Ghen occupancy and a7erage rate perormance impro7es and inancing is

a7ailable; new hotels get built. Ge are in the midst o a robust operating en7ironment and de7elopment period and new

hotel rooms are epected to open at a 7igorous pace or the net two to our years. Futting this data into contet; howe7er;

shows that the new hotels opening now and in the near term are compensating or the dearth o new in7entory during the

last ten years. 1ew construction is critical to maintaining the Euality o hotel stoc nationwide. s older properties age and

are demolished or repurposed; new hotel in7entory with current design standards is reEuired to accommodate the

increasing demand o the last ew years. !he supply that has opened since the nadir o the recession in #4 has not ept

pace with the nightly demand or hotel rooms.

#$&RE * + #$,E-YEAR !'AR$S! !# H!"E $,E"!RY

Ghile supply has grown .#+ in the last i7e years; demand has grown approimately 8.+. Gith this i7e-year lag in hotel

construction relati7e to demand; occupancy or #'3 is anticipated to pea abo7e the le7els o the last two cycles. Aecause

new hotel de7elopment is hard to ustiy until a7erage rates and occupancies are peaing; the new supply is oten out osync with the demand cycle; and demand recedes as the new supply comes on line; rustrating owners and operators; and

resulting in lower-than-proected a7erage rates and occupancies. Ji7en the lac o new supply in the last ten years and the

strong demand le7els o the last i7e years; the impact o new supply on a national le7el (barring any unoreseen e7ent) may

not ha7e the strong impact that prior supply cycle increases witnessed.

hypothetical analysis o the impact o supply is presented in the ollowing chart.

#$&RE + HY'!"HE"$A AAYS$S !# S&''Y A% %EA%

In the past ten years; the number o hotel rooms in the US increased approimately ''+. 6uring this same period; the

number o occupied rooms grew by approimately '$+; relected in the almost '- occupancy-point increase since the

worst year o the recession.

ccording to the S! pipeline (1o7ember #'3); the current number o hotel rooms in construction; inal planning; and

planning is 3';3'4. bout >3+ o these rooms are epected to open in #'8 (#.8+ supply growth) and #'> (#.$+).

Calculated in the blue-shaded portion o the chart; supply growth is proected to continue at #.8+ annually or the net two

years as demand growth moderates rom #.+ to '.+ during this same period. !he resulting national occupancy le7els

would still eceed the occupancy o

>'.+ recorded ten years ago and at the pre-recession pea in #$. In this hypothetical scenario; the national hotel

industry is epected to maintain its current healthy condition and be unaected by any particular e7ent or trend.

!his is not to say that certain marets or regions wonKt be more or less aected by new supply. Some marets; including

*ouston; iami; 6en7er; 1ash7ille; 1ew Lor; and Seattle; are epected to record double-digit increases in new hotel

rooms. ,ther marets are anticipating much less new supply. reas with high barriers to entry such as San 9rancisco and

*awaii; which could readily absorb new rooms; are missing out in the cycle. ,ther marets with hotel perormance that is

still reco7ering are anticipated to witness 7ery little new hotel de7elopment.

Inluencing the potential o new hotel de7elopment is the a7ailability and cost o hotel construction inancing. Ghile

de7elopers are currently beneiting rom low interest rates and a more enthusiastic lending en7ironment; hotel debt is still

constrained relati7e to the pea o the last cycle. 6ata rom the ortgage Aaners ssociationKs Muarterly ,rigination

0olume Inde illustrates the historical trends o the 7olume o hotel inancing.

#$&RE 0 + H!"E !A !R$$A"$! ,!&E $%E1




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Comparing this data to the 7olume o hotel construction put in place as traced by the US Census Aureau shows the

epected lag between loan origination and construction and the consistency o the two data sources.

#$&RE 2 + H!"E !A !R$$A"$!S A% H!"E !S"R&"$! ,!&E

s seen in 9igure ; on a Euarterly basis; loan originations appear to be relati7ely stable or the last our Euarters; but as

shown in 9igure 3; on an annual basis the trend seems to be moderating. It is possible that the pipeline o proposed new

hotel supply will also be tempered in the net ew years; particularly i interest rates increase.

!S"R&"$! !S" "RE%S

Strong residential construction acti7ity in #' put upward pressure on construction costs or all asset classes in #'; but

#'3 has been characteriHed as an NanemicN year or residential de7elopments. In contrast; commercial construction in

#'3 was up o7er #' le7els (by as much as ''+; depending on the source). !he relati7ely low le7el o housing

construction has helped to moderate national cost le7els. 6ebt and eEuity are more a7ailable now than any time since #>

and #$; urther spurring new construction in many marets across the country.

!he competition or sites continues to intensiy. In dense urban and suburban areas; multiamily housing and

condominium proects can pro7ide a more lucrati7e return than hotel de7elopment; particularly or well-located sites.

any o the proects currently in the pipeline are being de7eloped on land that was planned or hotel use in the last cycle

and was already secured or hotel de7elopmentD absent these pre- eisting plans; some o these sites might well be

selected or residential proects.

9urther aecting the easibility o new hotel construction are the increases in de7elopment costs. In some marets such as

1ew Lor; San 9rancisco; and iami; hotel construction costs ha7e steadily escalated in the past three years. In iami; or

eample; ull-ser7ice and luury hotel de7elopers report cost increases o #8+ to + o7er the past two years. ,ther

marets ha7e shown more moderate construction cost increases.

In contrast to the cost trending or hotels; nationwide construction costs are reported to be around #.2+ to .+ higher in

#'3 than #'. Costs o the largest material components ha7e 7aried. Bumber costs are reported to be up 8.>+ or the

year; while steel increases are '.3+ to #.+ or the 7arious building products. Cement prices are 8 .+ higher than in #'.

ccording to reports; the construction labor wororce has declined #$+ rom its pea o $.8 million worers in #$. !he

shortage o silled laborers is epected to continue to aect construction cost o7er the oreseeable uture; as the a7erage

age o construction worers is 83 years.

,setting some o these ad7erse trends; cost controls are continually impro7ing with the integrated design and

construction technology. Costing is c onsidered the ith dimension in modeling-increasingly sophisticated sotware allows

the attaching o costs to the designs and in real timeD showing the impact o changes on the construction budget. =7ol7ing

proect sotware will incorporate lie cycle modeling that will proect what the long-term costs o building maintenance and

replacement costs will be o7er time based on the materials and c onstruction.

%esign onsi4erations

In the current de7elopment cycle; design and construction trends are anticipated to continue to inluence de7elopment

costs. Current trends in hotel de7elopment include the ollowing:


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Bimited- and select-ser7ice hotels remain the most easible to de7elop due to their less- etensi7e

acilities and proitable operating models.

6esigning or millennials is a hot topic. illennials are seeing out hotels which promote sustainability

and healthy liestyle choices with a local personality. ey amenity reEuirements or millenials are

communal spaces and great technology.

Fublic spaces are increasing in importance (again). Spurred by the preerences o millennials;

woring and socialiHing; or ust hanging out in the lobby and/or public space; are a priority or some

guests while staying in the hotel. Bobbies are being designed with all-day ood and be7erage options.

Seating areas are becoming wor areas or indi7iduals or small groups. obust high-speed access and

plenty o electrical outlets are critical.

!echnology in all areas o hotels is adding to construction costs. dditional wiring is needed to meet

guestsK reEuirements or more outlets in public areas and guestrooms. Aac-o-the-house eiciencies are

also epected to be supported by more technology. =perienced de7elopers ad7ise holding o on tech

decisions or a proect until the last possible moment to tae ad7antage o the most c urrent technology

and trends.

!he increasing number o new brands is helping to dri7e the s urge in de7elopment. !he a7ailability o

new brands and products in strong and growing marets pro7ides de7elopers with more options.

reas with high barriers to entry a re attracti7e marets or de7eloping hotels with micro guestrooms.

Oust as residential de7elopers are building multiamily proects with smaller apartment units; hotel

products with guestrooms o '2 to #8 sEuare eet are being considered in many urban areas. !he small

guestrooms mae the attracti7eness and utility o the lobby space e7en more essential.

=nergy eiciency is more important than e7er. Solar panels; 7ehicle-charging stations; acade solutions;

lighting systems; and other tools or sustainability are becoming mandatory considerations or hotelde7elopers. ,perators report that hotel guests and meeting planners consider the en7ironmental

strategy o hotels to be part o the booing decision.

H!"E %E,E!'E" !S" A"E!R$ES

!he Uniorm System o ccounts or *otels pro7ides industry participants with a common language or analyHing the

inancial perormance o a hotel. Ghile the merican Institute o Certiied Froessional ccountantsK methods are

prescribed or construction accounting; a consistent ormat or de7eloment budget is woeully lacing. s consultants

preparing maret and easibility studies or as appraisers de7eloping opinions o 7alue or construction inancing; we

ha7e re7iewed hundreds o hotel de7elopment budgets and no two are alie. =7aluating the completeness o a budget

is oten challenging; as dierent line items are used and some components are unintentionally omitted. Ge can be

presented with budgets showing etraordinary line-item detail; with e7ery material component itemiHed. ,thers are too

cursory and lump together maor items without suicient detail. Ge are oten ased or input on hotel de7elopment

budgets and ind that lacing a common language or identiying rele7ant cost items is a challenge or many industry

participants. Aased on our eperience preparing the annual *otel 6e7elopment Cost Sur7ey we ha7e de7eloped the

ollowing summary ormat or hotel de7elopment budgets; which orms the basis or our cost categories. Ge ind these

categories are meaningul or hotel proessionals when undertaing an analysis relating to hotel easibility. Ghile our

structure is not an accounting practice; it does pro7ide a basis rom which to analyHe proposed proects.

!he ollowing chart shows our i7e categories and the typical items that each include.

E1H$5$" *: H,S H!"E %E,E!'E" !S" A"E!R$ES




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!he categories are not meant to be all encompassing but do relect the typical items in a de7elopment budget. Band is

oten the most important component as this cost can mae or brea the proitability o a proect. ,tentimes; the dollar

amount o the land in a de7elopment budget is based on a contribution by an eEuity participant or an allocation based onthe o7erall cost. Ghen e7aluating the easibility o a proect; the land cost is most rele7ant when it is an actual purchase

price or based on the maret 7alue o the site Nas is.N In some budgets; we may see a de7elopment ee or de7eloper

o7erhead. I the amount represents the o7erhead and salaries and wages earned by the de7elopment team during a

proect; this is included in the sot costs. I the ee represents the proit on the proect; it will be ecluded.

9inancing and operating reser7es are important items to include in de7elopment budgets. !hese costs are oten missing in

budgets that we re7iew. Sometimes these costs or other pre-opening and mareting costs are omitted rom the budget and

amortiHed in the proit-and-loss statements. It is critical to acnowledge their o7erall costs as part o the potential

easibility o a new hotel.

In construction accounting; de7elopment budgets are generally presented in ar gr eater detail than or general in7estment

analysis. 9or the purposes o considering the o7erall easibility o a proposed hotel; we ind our *otel 6e7elopment Cost

Sur7eycategories co7er the maor components o hotel construction costs.

'ER-R!! H!"E %E,E!'E" !S"S

!he nadir o hotel de7elopment costs in the most recent cycle was #'D costs in most categories ha7e increased sincethen. !he a7erages and medians relect a broad range o de7elopment proects across the US; including proects in areas

with low barriers to entry and in high-priced urban and resort destinations.

E1H$5$" : 6*2/*7 H!"E %E,E!'E" !S" 'ER R!! A!&"S




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EXHIBIT 3: HOTEL DEVELOPMENT COST SURVEY PER-ROOM RANGE OF COSTS FOR 2014/15

It is important in this analysis to reiterate the lack of a uniform system of hotel development budget allocation. Hotel

development costs are accounted for in numerous and varied 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, fixtures, equipment installation, and construction finish work can overlap. ccounting for

these items is not always the same from one project to another.

!and components of budgets can be based on purchases, appraised value, or a s equity contributions by parties to the deal.

For many projects the land component may have been acquired several years prior to the development. "ome land

transactions did not include entitlements. #he range of land amounts in budgets does not necessarily equate to a site

recently purchased for a hotel project that is ready to be developed and fully entitled.

Finally, we recommend that users of the H$" Hotel %evelopment &ost "urvey consider the per(room amount in the

individual cost categories only as a general guide for that category. #he totals for low and high ranges in each cost category

do not add up to the high and low ranges of the sum of the categories. )one of the data used in the survey included a

project that was either all at the low range of costs or all at the high range of costs. property that has a high land cost may

have lower construction costs and higher soft costs. Hotels developed in high(cost markets such as )ew *ork account for a

small percentage of the projects but typically have per(room component costs that set the upper end of the range. #he

total costs shown in the preceding table are from per(room budgets for hotel developments and are not a sum of the

individual components.

ll individual property information used by H$" for the development cost survey is provided on a confidential basis and is

believed to be reliable. %ata from individual sources are not disclosed.

#ags+ hvs -latestnews-tag-hvs-/, hotel development cost -latestnews-tag-hotel0development0cost-/, elaine sahlins

-latestnews-tag-elaine0sahlins-/

AboutElaineSahlins

1laine "ahlins, 2I is a 2anaging %irector with H$" "an Francisco, "he joined the firm in 3445, and

authors the annual Hotel %evelopment &ost "urvey since 3446/. "he speciali7es in resort feasibility

studies, appraisal of complex leases, partial interest appraisals, management company valuations, and

hotel market analysis. 1laine is a state(certified general appraiser in &alifornia, and received her 2I

designation from the ppraisal Institute in 893:. ;rior to joining H$", she analy7ed hotel investments for

$2" niversity.

&ontact+ Elaine Sahlins

esahlins?hvs.com mailto+esahlins?hvs.com/ - 03 :3@/ 8A6(9B:5

AboutHVS




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http+--www.hvs.com/

H$" is the worldCs leading consulting and services organi7ation focused

on the hotel, mixed(use, shared ownership, gaming, and leisure

industries. 1stablished in 3469, the company performs :@990

assignments each year for hotel and real estate owners, operators, and

developers worldwide. H$" principals are regarded as the leading

experts in their respective regions of the globe. #hrough a network of

more than B9 offices and :@9 professionals, H$" provides an unparalleled range of complementary services for the

hospitality industry. www.hvs.com http+--www.hvs.com-/

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