According to Tony Cohen, EVP of Toronto-based Crescent Hotels & Resorts, the hotel industry has not only become more expensive, but economic conditions across the country have forced operators to reconsider their approach to building new hotels in major markets and change their outlook on hotel renovations and repurposing brands.
“With Le Germain, we bought the land in 2001, opened in 2003 and had a litany of challenges before, during and post construction,” Cohen says. “There were not only budget restrictions before and during construction, including cutting out certain room features and guest amenities, but [post-construction], when the revenue levels did not hit as quickly as originally expected. Looking back, our price-per-buildable square foot was ridiculously low, by today’s standards — in the mid-$20/sq. ft. — and the total project cost, including land, was less than $230,000 per room.” Today, according to the latest report from HVS, the average development cost per room sits at $456,300.
Cohen also helped develop the Thompson Hotel in Toronto, a mixed-use project that “wasn’t a totally proven concept at the time,” he adds. The property was in the western-most part of the gentrified area of Toronto, with no comparable hotel to use as a basis for financial modelling. What’s more, the model, which has more than 60 per cent of the revenue in mostly non-traditional food-and-beverage offerings, had yet to be proven in the Toronto market. While condo sales boomed and the residential portion of the deal was virtually sold out prior to construction, there were no certainties as to financing and available funds due to the global financial crisis in 2008.
“The brand was small and, as such, did not have the rigid standards that may have required some cost-prohibitive materials,” Cohen says. “We took a hotel with a poor brand, management and product, invested and changed all of the above and dramatically changed the financial performance — close to tripling the value in three years.”
Fast forward to today, hotel operators are following similar blueprints, building more profitable boutique and luxury hotels with a residential component. According to Bruce Ford, SVP of Lodging Econometrics, the number of projects in the pipeline has increased by about nine per cent in the last year, while number of rooms in the pipeline has increased by three per cent overall. However, hotel footprints are getting smaller due to the different service models that exist.
“We’re building more upscale and upper mid-scale than we are full-service hotels these days,” says Ford. “If you look back at the average size of hotels developed in this cycle — which is about 10 years since the last downturn — hotels are smaller; there’s more boutique and upscale luxury hotels.”
Supply growth over the past decade has been limited across the country and the best-performing markets have significant barriers to entry. Operating costs have continued to climb in many markets and competition with other developments has driven up the cost of labour — both construction and operational talent — as well as the cost of desirable development sites. Statistics from Lodging Econometrics show a total of 221 projects are currently in the Canadian pipeline, including 26,533 rooms in the midscale-to-luxury category. Only 44 projects (6,710 rooms) are in the pipeline in the economy, unbranded and casino categories. Toronto leads the country with 46 projects in the pipeline, followed by Edmonton and Calgary at 14 each and Vancouver at 11.
Hotel construction today is not just about designing a building — it’s about creating an experience that flows seamlessly from check-in to sleeping, to bathing, to dining. Guests are looking for the total package. “As a hotel developer or owner, you’re planning — both aesthetically and from a technology perspective — between two to five years, which can bring its own set of challenges on how you ensure you’re relevant when you’re open”, Cohen says.
In addition to facing significant barriers, such as cost and availability of land, cost of labour and permit processes, hotels are also facing challenges when it comes to renovationing or rebranding hotels. According to David McMillan, president and CEO of Axis International, hotels have shifted from full-service to a DIY approach and are focusing more on the experience.
“Renovations without repositioning or rebranding [a hotel] don’t do a lot,” says McMillan. “[If] an existing franchise agreement or management agreement [lasts for] 20 years and the renovation is needed in a seven- to 10-year window, the owner may face challenges when it comes to severing the agreement — there’s a big cost to wiping out a brand.”
Many operators have been looking at suburban markets to construct select-service properties that can make money by offering meeting space and select amenities normally found in boutique and luxury hotels.
“You’ve got the added advantage of being in an industrial or commercial area where these select-service [hotels] are easily accessible and more cost effective for the travelling salespeople or business people,” McMillan says. “It’s the select-service or limited-service [properties] that are more cost effective and more profitable to the developers and the owners of those properties. They enjoy a much higher gross-operating-profit level.”
Whether it’s the costs of design or construction, Cohen says success in overcoming the many challenges that impact hotel construction has always been found in working with the various stakeholders — owner, brand, operator — to find both short and long-term solutions.