HVS International, San Francisco, California
Hotel Development Cost Survey 2004
their relative nadir for hotel lending, the amount of equity required to complete projects may be prohibitive for some developments.
many urban, suburban, and resort markets in the U.S.
In the luxury and upper-
upscale market, hotel projects are more likely to be developed when planned in conjunction with condominium, fractional, time-share, or condo-hotel components. These mixed-use assets allow developers to subsidize the hotel costs with the more lucrative ownership units. Purchasers of the ownership units, be they condominium, fractional, time-share, or condo-hotel, avail themselves of the hotel services and amenities, elevating the traditional second-home purchase into
a vacation experience.
HVS International’s 2003 Hotel Development cost survey incorporates new trends in hotel development that directly affected the survey results. In addition to the impact of material price increases, the geographic distribution of hotel development challenged some of the ranges of overall development costs per room in the different categories of our analysis. In 2003, New York City’s strong hotel market dynamics attracted hotel developers. In particular, per-room costs ranges in the budget/economy and mid-scale with food and beverage categories are driven by development budgets for hotels in Manhattan. While average rates for these Manhattan hotels are likely to push the envelope for the particular brands, so are the development costs. Many brands continue to seek representation in New York, currently one of the strongest hotel markets in the country, and other urban locales.
The decline in the low end of the range of per-room costs for the luxury segment in the HVS survey is based on development budgets for five-star hotels that are constructed as part of mixed-use projects. By allocating the infrastructure and land costs to complementary uses such as residential and retail, the hotel component can be more feasibly developed. Outright sale of residential or hotel condominium units and initial lease-up of retail and restaurant space can help leverage the construction costs of the project so the hotel’s cost basis is significantly lower than a stand-alone lodging development.
Midscale brands, both with and without food and beverage, continue to actively seek distribution for their products. Many of these brands are being planned in different types of markets than in prior development cycles. Some franchised products are being developed in secondary and tertiary markets with smaller prototypes, while other midscale brands are being approved for development in dense urban markets. The higher development costs are sometimes rendered more feasible by larger projects or mixed-use projects, which may include two or more differently branded hotels in the same structure.