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The six pitfalls for full-service hotel development (3/4)
By AP Hospitality Advisors
Wednesday, 24th April 2024
 

Hotel development is a complex undertaking, it requires little of the skills to operate and monetize the asset and owners and architects are often ill-equipped to measure up the requirements for running a successful hotel a few years down the road.

While certain industry trends exist, fundamentals still need to be observed. Words of caution for those attached to specific brands or roles a hotel is meant to fulfill – in today’s world of hyper-efficiencies it is becoming more difficult to provide everything for everyone. Or specifically: provide a comprehensive range of service to all types of travelers.

The real estate required to accommodate these service encounters has simply become too expensive to build. Thus, the question: is the classic full-service hotel concept in peril?

The following article discusses the major challenges that negatively impact the financial returns for new-built, full-service hotel in many markets in Asia Pacific and presumably, the world.

Read Part 1 here - Click Here

Read Part 2 here - Click Here

In this third part of the article, we discuss construction costs and (brand) standards.

5. Construction cost:

A large share of construction cost is tied to labor costs discussed above. At the same time, not unlike hospitality, the construction industry is not known for major innovations or revolutionary advances in their way of doing business.

One of the biggest changes has been the introduction of the Building Information Modelling (BIM) system to help design and maintain a building. To be implemented, all contractors and consultants need to be working on the platform.

However, in many markets, smaller firms and perhaps those that have been in business for a longer time, have been very slow to adopt this new technology favoring traditional blueprints, making projects more prone for errors. It should be noted that BIM has been in development for almost 50 years yet fragmentation and interoperability of standards due to proprietary data structures has considerably hampered wider and more rapid implementation along with investment scale (sounds familiar?).

At the same time, cast in place concrete appears to remain the method of choice for construction. While some projects have been executed with modular construction, the wider implementation across hotels remains in the distant future. The benefits of modular construction would mainly be in higher quality control and faster build times. Customized modules would not necessarily be cheaper to fabricate as they also need to be transported from the factory to the site, subject to (mostly) road suitability.

On top of that, inflation in certain commodities has increased the cost of input materials (though some have reportedly declined in cost). As a result, construction costs tend to be higher than before the pandemic, by as much as 25%. Scarping the bottom of the barrel by now, developers may find hard times to enhance returns from optimizing construction.

This discussion also merits a mention of sustainability, which often comes at a price premium. However, said premium is not always as significant as people imagine (reportedly less than 10%). Factoring in life-cycle savings and looming ecologic obsolescence, developers almost have no other choice but to opt for a high level of sustainability.

6. (Brand) Standards

A full-service hotel, by virtue of its name, offers a comprehensive range of facilities and amenities beyond guestrooms that travelers have been programmed to expect for more than a century.

Most common are food and beverage outlets with restaurants, bars, lounges, and room service plus meeting facilities, including a ballroom and various breakout rooms. Many would feature a spa, swimming pool, and gym.

Depending on the location, additional smaller amenities (may) include a concierge desk, gift shop, kids club, florist, watersports center, some smaller retail with tailors or jeweler and the list goes on to perfect the pampering of guests.

Unfortunately, the most profitable offering in a hotel are guestrooms, placing investors’ economic interests at opposing ends with guests’ desires and pampering. Over time, more streamlined operating models have emerged, yet in this article we focus on full-service hotels. As the industry flagship and defining instance of what a hotel is meant to include, full-service hotels’ legacy and thus impact on place-making should not be discounted.

Planting a full-service flag under a major operator in any (viable) market has a bigger impact compared to select- or limited-service operations. The scale and complexity of the ecosystem surrounding a full-service property has an impact on a multitude of stakeholders.

Stripping away any of the amenities will gradually deteriorate the heft a property carries. Yes, boutique hotels have found another angle, as have other business models and most of them have found their place in the market and brand portfolios.

Almost the sole defenders of full-service hotels’ programming are hotel operators that mandate specific brand standards. Over the years, operators have become more aware of owners’ challenges in balancing out a multitude and often opposing interests for the sake of their own accelerated growth to boost their share price.

Private groups may chart their own strategies, yet many innovations rub off over time and are emulated across the industry. After operators scripted various brand standards, developers need to contend their applicability for each project – hopefully within reason.

Needless to say, a feasibility study should provide the answers to whether a full-service hotel is viable in a site and market. We do see and welcome operators’ growing flexibility in programming food and beverage offerings, some of the most challenging aspects of operating a hotel. Some brands have also shown remarkable flexibility in room sizes for key markets.

In the fourth part we will discuss strategies and band aids to address the six pitfalls.

Read Part 1 here - Click Here

Read Part 2 here - Click Here

AP Hospitality Advisors serves owners, investors, developers, operators and lenders of hospitality assets across Asia-Pacific. The team blends expertise in operations, real estate and finance to support any critical step in the asset life-cycle.

www.ap-ha.com

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