In recent years, the hotel industry has faced a challenging landscape as the combined forces as rising build costs, inflation, labour shortages and the energy crisis threaten the viability of new hotel development projects across the UK and Europe.
Data from EU member states, Eurostat, and the UK Department for Business, Energy and Industrial Strategy reveal a staggering increase in construction material costs between 2015 and 2022 – 60 per cent in the UK and 35 per cent in Europe. Fluctuating prices for building materials over the past two years have added to the difficulties in planning for new construction projects, complicating projections and budgeting.
With construction-related inflation in the UK anticipated to surge to a staggering 9.7 percent to 10.7 per cent in the second quarter of 2023, and Eurozone countries’ salaries and construction hourly rates expected to rise by 2.9 per cent to 3.3 percent this year, experts stress the need to adapt, innovate and think outside the box.
Adapt hotel development strategies
One of these “outside the box” solutions, John Harding, partner at architectural firm Studio Moren says, is a phasing of building works in situations where building out the entire hotel is deemed unaffordable. He explains that many clients are now considering phased development, starting with phase one and progressing to subsequent phases when the financial situation improves.
“Lots of clients are saying ‘we don't want to sit still so let's phase the work’. So we'll do phase one now and then when maybe things get a bit better, we can do phase two, and maybe in phase three, and then take it through to completion."
Ben Martin, economics practice director at HKS Architects, suggests another option would be to mix up the land uses, with concepts that include both hotel and residential. He elaborates, "It's a feature of life that some land uses are very good at making money, and some land uses look nice. You can use the stuff that looks nice to help sell the stuff that makes you the money."
And for mixed uses such as this, he highlights there are benefits to be had on placing increased emphasis on higher-earning components. “For example, if a project had a hotel and ten residences, by making the hotel smaller and adding more residences, the project could become more profitable.”
Cost-saving solutions
Martin adds another option would be to change the market positioning for hotels which will be cheaper to build.
“Instead of using marble and gold and building swanky five-star or five-star hotel Four Seasons-type hotel, building something more budget Travelodge-style will be cheaper in terms of construction costs and can actually make pretty good money.”
Another option Martin proposes is modular development, where the building is constructed off-site and assembled on location. This approach can lead to quicker construction times and potentially lower costs.
Stuart Taggart, head of cost management at Colliers agrees that utilizing modern methods of construction could be a handy solution as it offers greater speed and could reduce overall construction costs.
"In some of the work I’ve done previously, we’ve looked at frame solutions. Typically, people go down the route of concrete frame solutions, however lightweight frame solutions is where we see things done at greater speed and with less costs."
He notes, however, that while lightweight frame solutions may not offer the same flexibility as traditional construction method, the increased speed of construction can result in cost savings.
Taggart also suggests that larger operators can look into smart procurement, saving on costs by purchasing materials in bulk and issuing them to contractors.
“Operators rolling out a hotel with a large number of beds and who know what exactly goes into each room, can do deals direct with suppliers where they agree to buy large amounts of material which can then be free issued to the contractors. It’s a competitive tender process that operators with large buying power can leverage in order to reduce costs.
Another solution, which is currently being pursued by Travelodge, is partnership with local authorities. In March, the hotel chain wrote letters to 220 local authorities, expressing its interest in entering joint development partnerships to support its goal to open 300 hotels across Britain.
Harding says partnering with local authorities is another avenue to ease the pressures, not just in terms of costs but also in giving stakeholders confidence that their plans will be looked at by the authorities in a favourable light.
“We’ve done schemes with some clients where there have been partnership agreements, not just with lower budget hotels but with high budget ones and it does work quite well. The fact that the local authority will be able to influence design right from the first stages through to completion removes some uncertainty from the process and can help save time and money.
He adds further, “Sometimes, the local authorities can also put their own money into the project and sometimes they’ll provide sites for hotel development.”
Taggart adds another creative solution being explored by hotel clients is having pubs tied to the development, which serve as the food and beverage offering for the hotel.
He explains, “By not having to dedicate the majority of the ground floor to the food and beverage offering, they can fit in more beds. We have a client looking at that potentially across a number of sites.”
Collaboration
However, even with these innovative approaches, Taggart notes that build costs are unlikely to see a significant downward shift in the near future, making it even more important for investors and stakeholders to work together to ensure projects are viable.
He suggests breaking down trust barriers and fostering collaboration between contractors and developers as well as maintaining consistency within the consultant team for multiple projects.
“Historically, in construction, the contractor thinks the developer is out to get them and vice versa. We need to try to break down those `barriers and get mire towards collaboration. Collaboration is a little bit of a buzzword but it works.
“And this ties to the consultant team as well. If you drove one project successfully with a consultant team, bring those same people along to the next project. That level of consistency is always going to help.”
Alternatives
In situations where building a new hotel may not be viable in the current circumstances, experts say it may be worth considering other alternatives.
“Build to rent may be a possibility in terms of that it’s broadly in line with hotel design. We’re also seeing some clients buying smaller buildings and converting then to Airbnb-type operations,” Harding says.
Taggart adds: “In terms of alternatives, assuming its in a city centre location, student accommodation is one of the more buoyant markets at the moment in terms of yields. One which is a but more radical is industrial; it’s fairly cheap to build and people are looking for them in central locations.”
Looking to the future, Harding stresses the importance of focusing on long-term strategies and maintaining confidence in the market.
"We've all got to keep our nerve and not panic over this. Don't look at this short term. Look at it long term. I've been through quite a few recessions and we always come out the other side. One way or another, we come out and things get better so I'm sure that will continue. I don't see it getting any worse."