One of the 889 guest rooms in the InterContinental Downtown Los Angeles. Purchasing Management International of Dallas, Texas, was involved with the development of the 73-story hotel. Opened in March 2018, it is tallest building west of the Mississippi. Hanjin Group, the parent company of Korean Air, owns the hotel.
For U.S. hotel developers and designers, the world has become one big shopping mall. Just a couple years ago, project managers for new construction or renovations bought most FF&E and OS&E from China.
But increased tariffs levied as a result of the U.S.-China trade war has forced procurement specialists to shop worldwide for these things. Trade negotiations between the Trump White House and China are approaching their second year.
The shopping trend is opening new channels of trade. It’s also boosting manufacturing in the U.S. and abroad. And it’s expanding the global supply chain.
However, it’s not helping the cost of hotel development.
HVS reported in September that non-residential construction costs increased by an average of nearly 6 percent last year and by more than 5 percent by June of this year.
HVS cited the Turner Construction Index, which takes into account the cost of labor and materials, productivity and competitive market conditions.
HVS noted soft costs such as architectural, design and project managers make up 12 percent of a hotel construction budget.
FF&E comprises 9 percent.
The cost ratio is the same for hotels undergoing renovation or re-development.
HVS recently reported hotel construction costs have increased along with the level of supply in the U.S. hotel sector. The chart show land costs and building and site-improvement costs, have been determined, as these two cost categories add up to approximately 70 to 75 percent of a hotel’s total development budget. (Source: HVS)
Though new hotels continue to be built, renovations are picking up as a result of an active transaction pace in 2018.
STR reported more than 700 property sales closed last year. They total $29.5 billion in transaction volume.
It was a 25 percent increase in the number of transactions and a 49 percent increase in volume over 2017.
The first half of this year saw 74 single-asset sales, totaling $5.6 billion, reported LW Hospitality Advisors.
The transaction pace of the past two years matters because most newly acquired hotels typically undergo renovations or brand-mandated PIPs.
Renovation Season Ahead
He foresees the busiest PIP season since the Great Recession, especially as the industry experiences a leveling off of performance.
“After the downturn so many people lost [up to] 50 percent of their business overnight. That includes designers, purchasers and others in the hotel industry,” Langmade said. “Five years later things started to turn upwards and all of sudden rates and occupancies in hotels began to hit record levels. During that time, no one wanted to take their rooms out of order.
“We were doing all new construction for years, seeing very few renovations, very few PIPs. And we expected it was because no one wanted to take their rooms out of order.”
But that’s changing, Langmade said, because of a few factors: Industry performance has plateaued; the record number of sales last year means a high level of PIPs over the next couple of years; and older hotels are now competing with a lot of new properties.
“All of a sudden now we are starting to see more requests for renovations. Most are not soft goods. It’s tear everything out of the room, including case goods and start all over again because no one hasn’t touched them in five to 10 years.”
Langmade said PMI work is mostly comprised of new construction, but the company is receiving more RFPs for renovations that it has in a decade. “We think it will continue over the next couple years, which is good for everybody.”
For developers and owners in the planning stages of either a new build or a renovation, it’s smart business to start thinking early about finding a procurement specialist.
“It’s important to get the procurement specialist in front end, when the designer is starting to do design, especially if it’s custom,” Davis said. Mixing up the vendor pool is smart as it would save time and avoid getting locked in on a bid price the owner does not agree with. “We may end up not getting the product the designer originally intended to get,” Davis said.
Premier Project Management mainly does renovations. It starts the buying process six months before renovations begin. It’s not only because shipping takes time, the paperwork, if not managed well, can be a major boondoggle.
“Most people don’t realize the amount of paperwork that goes into buying out a hotel renovation,” Davis said. Orders, manifests, delivery claims all have to be tracked to make sure the goods arrive on time. “Most projects go smoothly,” she said, “but if there’s a snowstorm that affects transportation or the goods get stuck in customs, you have to follow the paper trail.”
Premier Project Management of Dallas, Texas, was part of the recent $11 million renovation of the 390-room Hilton Boston Back Bay in Boston, Massachusetts. Pictured is the ballroom set for a dining event.
Langmade echoes Davis in dispelling myths relatively new developers and owners may have about the purchasing process.
In many cases, Langmade said, inexperienced developers or owners “believe that we’re going to go out and find this furniture. It’s sitting in a warehouse somewhere and we can buy it cheap and get to them in three to four months.
“We have developers all time that come us and say, ‘I want to start renovating a hotel three months from now.’ The reality is you might be able to do that with an economy or set program type of a hotel but anything custom today is somewhere between 20 to 25 weeks out from the time you cut a purchase order.”
Before the actual buying process comes designing the FF&E specifications then shopping for the products at the best price. “It’s quite detailed and it’s quite complex,” Langmade said.
A new trend challenging the procurement process is the advent of online furniture retailers such as Wayfair and Restoration Hardware. Hotel designers like the looks, for sure. But buying from an everyday retailer is different from procuring for a 100-room hotel.
Companies like PMI that purchase in bulk has no control over the shipment of the goods. Langmade said Procurers also face the possibility that an item has been discontinued and if items do come in on time but are damaged, there is little that can be done to deal with the damaged freight.
Langmade said he’s not knocking online retailers of residential-grade furniture and accessories, but it’s an important distinction to make when supplying a hotel.
Manufacturers of hospitality FF&E typically make special orders in bulk and adhere to quality and safety standards created for public use and spaces.
One difference may be Wayfair, which created a commercial division five years ago to supply offices and hotels with trendy furniture and accessories.
Last year, Wyndham Hotels & Resorts deemed Wayfair a preferred vendor for FF&E for brands such as Howard Johnson and Super 8.
Until the deal with Wyndham, Wayfair had not sold in bulk at the scale the franchiser requires. Most of its 10 million items ship directly from more than 100,000 suppliers.
One hospitality-related company that sees an opportunity with online retailers is Audit Logistics of Denver, Colorado. Darlene Henke, co-founder president and CEO, said the third-party delivery venture is working with companies like Restoration Hardware to get goods to hotels.
“We are seeing a big uptick in the trend,” Henke said. “It’s not just hospitality. Even colleges are ordering furniture directly from those companies.” Audit Logistics is “actively pursuing contracts with online furniture retailers,” she said. The company offers a “white-glove service” in which it will deliver and install the furniture, even taking the cardboard and packaging with them so the dorm or hotel does not have to deal with the discards.
Trade War Woes
When it comes to finding solutions for new problems, the U.S.-China trade war is having a significant impact on the hospitality industry.
The tariff tit-for-tat has been going on for nearly a year.
READ: Logistics Management covers the impact of international trade tensions on overseas shipping to U.S. ports.
The Trump administration has four different levels of tariff rates related to goods coming to the U.S. from China.
Most hospitality products coming from China are slapped with a 25 percent tax. That’s furniture, lighting, carpeting and other things.
The two countries are reportedly engaged in talks and may come to a new agreement soon. In the meantime, purchasers like Davis and Langmade struggle to find ways to cover the cost increases.
“Because our goal is to buy out six months before construction, we aren’t budgeted” for the extra cost, Davis said. “If we get hit with tariffs of 25 percent of the goods, we have to dig for that money. That means we have to ask for more money and we have to go into our contingency fund.”
Oftentimes, larger manufactures will split the extra cost with Premier Project Management. “They’ll eat 50 percent and we come up with the other 50 percent,” Davis said. “It’s just an unfortunate situation.”
Because of the tariffs, manufacturers in China are moving to other countries in Asia. Procurement specialists in America are shopping in Vietnam and Indonesia. They also are curating FF&E from Canada, Mexico and Europe.
“We’re looking to buy all over the world,” Langmade said.
The skyline of Shenzhen, China. The National Retail Federation reports the U.S. tariff war a year later is having a greater impact on the international supply chain.
Besides finding the best prices, hospitality procurement involves shipping the goods from overseas to the U.S. In that process, the new challenge is making sure manufacturers in places such as Vietnam and Indonesia understand how to package the items to withstand the voyage.
Audit Logistics has a virtual front row seat to the journey from a Far East factory to a hotel in suburban America. Henke co-founded the company more than 15 years ago.
Henke said when manufacturing of case goods moved from the U.S. to China a decade ago, Chinese manufacturers had to learn how to package products to withstand the voyage. With new manufacturers in other countries now getting involved, Henke is concerned whether U.S. hoteliers will have to deal with an increase in damaged goods.
Henke agrees with Langmade’s forecast about a surge in hotel renovation projects. She adds caution to that outlook, noting there are some extemporaneous factors that could impact the timely delivery of furniture and other items, including the Christmas retail shopping season.
“In today’s environment some of the challenges that we see in the logistics industry is the importation of these goods coming from either China or the Far East to West Coast ports in or near Los Angeles.
“Typically what we’ve seen in the last few years is once the goods arrive at the ports, we’ve seen some disruption with labor, maybe the ports are under strike. We’ve also seen a shortage of chassis that are required to pick up the containers for the port and just a lot of port congestion.”
It stands to get more challenging over the holidays, Henke said, because retailers have ordered products for the shopping season. Meantime, hoteliers often refresh or renovate during the holiday season because occupancies are lower than usual. “It’s the perfect storm for all the goods coming in,” Henke said.
The Port of Savannah in Georgia. Darlene Henke, CEO of Audit Logistics, said hotel owners throughout the U.S. would save money if they lengthened project timelines by about two weeks and had products delivered to ports other than those on the West Coast.
Long Beach and Los Angeles are the two busiest ports in the U.S. But given the shift in buying patterns to other countries, Henke said hotel developers, designers and project managers as well as her company are continually faced with shorter and shorter timelines. The trend is costing owners a lot more money than if they worked farther out and ordered goods farther in advance. Even two weeks can make a difference.
That gives buyers an opportunity to have products shipped to other ports and trucked to the hotel development site and meet project deadlines. For example, if a hotel in Atlanta adds two weeks to its timeline, investors can save money by having the goods shipped through the Panama Canal and to the port in Savannah.
“But we continue to see that they just don’t have time and cannot afford the additional two weeks to do things like that to save money,” Henke said.
Weather and Cannabis
Other trends affecting the timely delivery of products to hotel projects are natural disasters and legalized recreational marijuana.
First, here’s Henke explaining how the Federal Emergency Management Agency can actually do more harm than good to help a business community recover from a weather-related event.
“We have these things in our office we call these CapEx killers. They’re hurricanes, floods and other weather disasters affecting the supply chain.”
During storm recovery, FEMA commandeers most trucks to ship goods to damaged areas. That drives the prices of shipment up for logistics companies.
“We saw that in Houston with Hurricane Michael,” Henke said. “We were competing with FEMA on the availability of trucks and it was three to four times the normal cost.”
Another unexpected challenge facing the logistics industry is the increased use of recreational marijuana. Audit Logistics is seeing the impact in its home state of Colorado, the first state to legalize the use of cannabis, as well as in other regions it has offices.
Recreational use of cannabis is legal in 10 states; in 23 states it’s legal to use medical marijuana.
Audit Logistics is feeling the impact of Colorado’s legalization. More than 4 millions square feet of warehouse space has been turned into indoor hemp farms. In addition, trucking companies are having difficulty finding drivers who can pass a drug test.
Nicolas Graf, associate dean, clinical professor and chair of New York University’s Jonathan M. Tisch Center of Hospitality, will soon unveil the school’s new Hospitality Innovation Hub. Departure from the norms of doing business is key to the post-pandemic survival and success of the hospitality industry, says Graf. Companies that offer flexibility in thought and practice among employees will go a long way in leading the industry’s post-pandemic recovery. Episode 331 of Lodging Leaders explores what it will take for owners, operators and others invested in the industry to attract and retain bright young talent who can help build modern and sustainable hotel business models.
Bijal Patel, 31, is CEO of Coast Redwood Hospitality and the youngest chair of the California Hotel & Lodging Association. He’s made even more history at CHLA by agreeing to serve an unprecedented second term as the lodging industry emerges from the coronavirus pandemic. Patel is a third-generation hotelier. Being so steeped in hospitality at such a young age is not new for members of the Indian American hotelier community, but Patel fears the pandemic has drained the industry of emerging talent. Lodging Leaders spotlights Patel, who represents a leadership demographic that is fighting for the life of the hospitality industry as they watch their peers veer toward other career paths.