Cost Corner – Hotels

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by Michael J. Dwyer, Principal and Head of Plan, Cost & Review Group

A leading indicator of future non-residential construction spending hit a seven-month high in September 2013, which has many experts predicting a greater-than-expected 17% boost in commercial construction in 2014. The Architecture Billings Index (ABI) produced by the American Institute of Architects continued to accelerate in the fourth quarter of 2013.

Improvements in the bank lending environment will help the anticipated growth. A number of investment alternatives are also providing the financing of commercial construction projects. Overseas investors, such as those that comprise EB5 funds, are contributing to the decrease in lender risk and improved loan to value ratios.

Much of the anticipated growth in 2014 is expected to be in the hotel and hotel/resort construction. Four-diamond and five-diamond hotels are anticipated to start construction in a number of metropolitan areas where the resurgence of leisure travel is increasing the need for better/newer hotels.

While new construction is expected to increase, a lot of the activity is anticipated to be related to renovation projects. Many owners are also focusing on the property improvement plans (PIPs) which are required of the brand ownership. Much of the PIP work is focused on infrastructure improvements, such as heating, ventilation and air-conditioning; lighting systems; power; and mechanicals. Restorations of lobbies, restaurants and meeting rooms are also major areas of needed improvement.

Hotel construction costs are anticipated to increase by roughly 3% in 2014. In general, anticipated line item construction costs for a high end hotel are as follows:

Foundation 250.00 Footprint
Superstructure 27.00 Total Bldg
Exterior Glass 150.00 Ext. Glass
Exterior Wall 35.00 Other Ext.
Roofing 4,250 Roof Squares
Miscellaneous Metal 1.50 Total Bldg
Interior Partitions 57.00 Bldg Equiv
Finishes 46.25 Bldg Equiv
Specialties/Equipment 505 Rooms
Elevators 36,000 Elev Stops
Plumbing 23.00 Bldg Equiv
HVAC 34.00 Bldg Equiv
Fire Protection 5.50 Total Bldg
Electrical 27.00 Bldg Equiv
General Conditions 14.50 % of Total
Builder’s Fee 2.25 % of Total
Subtotal Building $375.00 Bldg Equiv

Product Improvement Plan construction costs typically range from $30,000 to $50,000/key, when incorporating common areas, restaurants, and exterior improvements.

When comparing project budgets to conventional historical data, there are many aspects of the actual project that require evaluation. Location factors, which are percentage adjustments for particular localities, are applied to mean cost estimates. Construction inflation factors, which are cost adjustments to historical data to reflect the latest labor rates and material cost adjustments for a particular locale, must also be applied. Lastly, the level of finish will have a significant effect on construction pricing.

Merritt & Harris, Inc. has been providing construction cost analyses for over 76 years and our industry-leading cost reviews are essential to the loan process. If you would like to discuss your project or have general construction cost questions, please contact me at 212.697.3188, ext. 309.

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