Hotel construction eases up on completion timelines

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The coronavirus crisis has impacted the hotel construction industry in various ways, from increased costs in personal protection equipment for laborers to lenders seeking more accountability in how loan money is spent to a slowdown in new starts, which could lower labor costs, say experts.

Hotel construction eases up on completion timelines

Developers in no rush to open while coronavirus crisis prevails, experts say

“We’re going to be able to save money by pulling the trigger at the right time.” Bill Wilhelm, president, R.D. Olson Construction

Earlier this month the Occupational Safety and Health Administration updated guidelines on construction workers’ use of personal protection equipment, mandating that face masks are a must at all building sites.

Stephanie Hall, president of DAG Construction in Cincinnati, Ohio, said she spends an inordinate amount of time and money trying to comply with workplace health and safety guidelines during the coronavirus pandemic.

DAG Construction’s costs have increased as it has to provide face masks, sanitation stations and hand sanitizer at all job sites. Making sure that workers adhere to social distancing guidelines is an additional task under Hall’s purview.

In its latest guidance, OSHA notes the differences between cloth face coverings, surgical masks and respirators. It advises construction supervisors to require workers to use respirators – not surgical masks or cloth coverings – when the task calls for it.

OSHA also notes social distancing guidelines, even when workers are wearing face masks.

Face masks and social distancing are problematic at construction sites, Hall said because workers must talk to one another and be heard over construction noise.

At a hotel site with a 24-foot-tall masonry wall under construction, workers hand up bricks one at a time. “By the time the brick layer gets the brick, four people have touched it,” Hall said.

The masonry workers struggle to remain six feet apart to get the job done. They try to speak to each other but are inhibited by the face masks. “It’s definitely a challenge,” she said.

Another challenge for construction companies is knowing the health and safety guidelines for workers in the states in which they do business.

DAG Construction builds hotels, apartments and other commercial buildings in Ohio and Kentucky.

According to a chart updated regularly on Littler Mendelson’s website, Ohio requires employees wear face masks at all times while Kentucky allows workers to take off the masks if they inhibit their ability to do their job.

LISTEN: UNEXPECTED CHALLENGES: Episode 274 of Lodging Leaders podcast explores the challenges hoteliers and builders face in getting a property developed and opened during the COVID-19 pandemic.

Stopping Not An Option

Hall grew up in the commercial construction business, working with her father, Dale White, at the company he founded. Last year, Hall was named president of the company, becoming one of few women in leadership in the construction industry.

The coronavirus crisis has presented Hall with challenges she never conceived of facing. The same goes for her clients – hoteliers struggling to complete development projects despite revenue shortfalls and an uncertain future.

Hall said the company has several hotel projects in various stages of planning and construction. Financing for ongoing projects is the biggest challenge facing owners and developers during the crisis.

At one of the building sites, the concrete slab was recently poured and the masonry walls are going up. But the owner, Hall said, “is struggling financially because of the whole COVID-19 issue.” They talk each week about how to keep the project moving forward.

Another project that would expand the portfolio of an owner, she said, was to break ground in April. “But when COVID happened it halted him because he was expecting revenue from his existing hotels to be able to pay for the construction of the new one.”

The owner was approved for construction loan with a local bank but had hoped not to have to draw down on the account. When the coronavirus crisis took his hotels’ overall occupancy from 90 percent to about 5 percent, the owner turned to the bank for the pre-approved construction funds. Despite qualifying for the loan before the pandemic, the hotelier learned the lender was not as willing to let the money go.

“Now the bank wants more information about the project,” Hall said, adding bank representatives have visited the construction site and asked if there is any way her company can reduce the project’s costs. Hall has already signed price agreements with subcontractors that she cannot renege on. The only way to save money, she said, is to put the project on hold. “And that’s the last thing we want to do.”

Construction Numbers

Despite the challenges the coronavirus outbreak has created in the hotel-construction sector, industry analysts say the pace of construction remains high.

In March, the U.S. had 150,000 rooms under construction, said STR. It’s the highest end-of-month total the company has reported.

Jan Freitag, senior vice president of lodging insights at STR, said he expects hotel construction to continue throughout the year. But because of low customer demand caused by the coronavirus crisis, hotel developers are not in a rush to open and projects will spend more time in construction.

STR has also noted about 30 projects in planning stages were deferred or shelved.

RECORD NUMBER: STR on April 20 reported the number of hotel rooms under construction in March was higher than the previous peak in December 2007.

Freitag’s forecast is upheld by hotel company CEOs who in May shared their industry outlooks during first-quarter earnings calls.

Geoff Ballotti, president and CEO of Wyndham Hotels & Resorts, said during a May 5 call the pace of new openings will be slower than in recent years as COVID-19 has negatively impacted the lodging industry.

Other major hotel franchisers including Hilton, Marriott International and Choice Hotels International echoed Ballotti’s outlook.

They reported interest from owners in developing new hotels remains high but the number of deals done in 2020 will be less than in previous years. Hotels under construction when the pandemic hit are going forward but with some delays.

Unexpected Costs

Longer timelines mean higher costs for developers and construction companies.

As DAG Construction has experienced, construction engineers and contractors have had to quickly pivot to adhere to revised job-safety playbooks issued by OSHA and the CDC in the shadow of the coronavirus pandemic.

One of the major issues construction companies faced early in the crisis was a lack of labor at job sites because workers feared contracting the virus.

Hall saw an immediate impact. Ohio had deemed construction an essential business and work was allowed to continue but DAG Construction had difficulty finding skilled laborers too fearful to come to work as the pandemic unfolded.

“In the last three weeks of March, I struggled with scheduling and getting people to the job site,” she said. “We lost a good three weeks of excellent weather and great productivity because of the fear that was out there.”

Time is money and Hall said nearly all the hotel owners for whom she is building properties understand the delays but do not want to pay for a general contractor’s extra time on the job. If a project that was set to finish in 12 months goes another month, the extra cost comes from DAG Construction’s coffers.

The impact of COVID-19 on procurement and the business supply chain is both immediate and delayed.

For now, GEP, a procurement company, recently reported the global pandemic has disrupted the construction industry’s supply chain. China provides about 30 percent of America’s building materials. Another 20 percent each comes from Canada and Mexico. Other major suppliers are in Japan, Korea, Vietnam and Germany. In the first quarter of this year, U.S. ports reported cargo volumes dropped 20 percent.

SUPPLY CHAIN IMPACT: Consigli, a construction company in Massachusetts, reported in April that COVID-19 is affecting the global supply chain of building materials.

Less Aggressive Bidding

While builders like DAG Construction wrangle with costs in real time, a company in Irvine, California, anticipates an eventual decrease in the price of construction materials and labor in the months ahead.

Bill Wilhelm, president of R.D. Olson Construction, said the sector is getting price competitive as projects underway pre-pandemic are coming to a close and contractors are seeking new jobs.

Consigli, a general contractor in the northeastern U.S., reports it expects subcontractor bidding on new jobs to be less aggressive than before the pandemic. It also anticipates construction costs will level off in the near term.

Non-union labor costs, especially, will improve over the next eight to 12 months, he said.

But Wilhelm cautions that cost forecasts depend on the type of product that is being built. He advises hotel developers to be aware of that as well as the pricing differences among markets and project timelines.

He pointed to a project R.D. Olson is working on in which the hotel owner has financing in place but is contending with getting permits. The owner halted the project about two months ago, but has come back on board with plans to break ground in November as “project pricing has already seen some significant opportunities,” Wilhelm said. “We’re going to be able to save money by pulling the trigger at the right time.

“Advice I would give to the developers is to be smart. You’re not going to see 30 percent savings but right now you might see 8 to 10 percent, maybe 12 percent.”

TREND REVERSAL: After a dramatic 25 percent drop in total construction starts in April, the industry saw a slight reversal in the trend in May, reports Dodge Data & Analytics. In April, non-residential building starts dropped 37 percent as a result of the coronavirus crisis. In May non-residential starts were up 8 percent. In the first five months of 2020, commercial starts were 19 percent lower than in the same time period the year before.

While some analysts have wondered if pent-up demand in travel will create a surge in profitability for hotels, Wilhelm said he does not expect such a trend to lead to an uptick in hotel construction as the number of prospective new starts has declined over the course of the crisis. But in actuality, new projects were on the decline a few months before the pandemic struck. “All that COVID really did is kick start” the downturn, Wilhelm said.

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