HVS International, San Francisco, California
Hotel Development Cost Survey 2004
The performance of many primary and secondary hotel markets showed promising signs of recovery beginning at the end of 2003, interpreted by investors as a time to add capital to the industry, through acquisitions, sales, and renovations. As occupancies improved, investors continued to pursue projects that had been shelved during poor post-September 11 market conditions. For some projects, raw material and insurance costs, among others, had notably increased since the original project budgets, forcing costs upwards. Many developers expect that average rate rebounds will coincide with revised construction schedules, supporting project feasibility.
In the hotel development cycle of the 1990s when recession and war dampened hotel performance, the mantra of “Stay alive ‘til ’95” did indeed materialize as RevPAR, largely driven by average rate gains, propelled a strong hotel market through 2000. The expectation that 2003 was the bottom of this cycle seems to be supported by subsequent events in 2004. While hotel development is expected to continue to be more expensive, the improving hotel market will undoubtedly spark additional hotel development.
The following tables set forth the overall results of the 2004 Hotel Development Cost Survey. Due to the wide variety of development projects and their diverse geographic locations, ranges of development costs per room for all of the other property-type categories overlap. Additional differences in site characteristics, density, height, construction materials, building and zoning codes, local labor markets, and other construction costs, account for the wide range of per-room costs in each category. As an example, extended-stay and limited-service hotels may be more expensive (on a per-room basis) to develop in downtown urban areas than full-service hotels in suburban or tertiary cities.
Even with all the different circumstances that affect hotel development across the different segments, it is interesting to note that the allocation of costs among the five different components tracked by HVS International result in consistent contribution ratios to total development cost. With the exception of the luxury and resort development category, all of the cost components show consistent trends in their distributions of costs. In the luxury and resort category, the different land and building and site improvements costs reflect the expense of procuring typically larger sites with high barriers to entry in urban and resort destinations.
It is important in this analysis to note that there is no uniform system of allocation for hotel development budgets. Hotel development costs are accounted for in numerous 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, fixture, and