Hotel Building Q&A: Part 2 – Trends in Construction

12 min read

This month, EquityRoots had the opportunity to sit down with hotel construction builder, Neil Kumar of KCM, Inc.  We’ve had a lot of our readers ask us questions about the construction process, and we hope this 2 part Q&A sheds some light on some of the in’s and out’s of hotel construction! (For part 1 on hiring labor practices and value engineering, click here).

If you have more questions about hotel construction, hotel crowdfunding, or the hotel industry in general, visit our contact us page!

Okay. Moving on to construction trends – why are 4-story models in hotel construction really popular?

NK: So, hotels typically choose between using wood or steel for their structural skeleton. Steel is a bit heavier, and needs additional support. With a four story construction, you can build a solid structure out of wood without needing that additional support. Historically, that would save on building costs tremendously.

Most building codes will allow you to do wood construction up to five stories. The issue is that depending on where you are building, because some cities won’t let you do five stories of wood construction. For example, Austin, TX and Schaumburg, IL are both cities that do not allow more than four story wood construction, unless you’re using fire-treated lumber, which can often be more expensive than steel.. If you go a little further out west in Illinois though, you have DeKalb which does allow five story wood buildings.

Ah – so there isn’t a set national standard for wood buildings? Is it just whatever each city decides?

NK: The general decision for each city is between four or five stories as the limit. The main reason that most people do wood for four stories is because wood construction has traditionally been the most cost effective of all the construction types. Structurally speaking, there is no difference between wood studs and steel studs.  But some cities do not want to take the risk for many reasons – one of them being fire safety.

So between wood and steel, is there a clear preference among builders? Is the steel worth that investment despite wood being less expensive?

NK: So how we approach that is changing from what has traditionally been done. So again, structurally speaking, there is no difference between wood studs and steel studs, but steel studs were say – twice as expensive as wood studs. Recently, that difference in price has decreased. The cost difference was 100%, then 50%, then 25%, up until today. Today, the steel and wood studs are almost identically priced. The cost of lumber has been going up, while metal has kept its rate of increase under more control.

Is there any particular reason why lumber would be going up so fast? Is it just higher demand, shorter supply, etc?

NK: A lot of our lumber does come from Canada, and because there is discussion of more tariffs to Canada, the increased costs of lumber reflect that.

So are we seeing the trend towards building more steel buildings now?

NK: When you go to Texas, for instance since I know that market, the move towards steel studs is almost one hundred percent from wood. If the price is similar, developers like steel because steel is non-combustible.

So when you talk about a steel structure, you have to take into account those non-combustible benefits. Your insurance goes down for the steel building even compared to fire resistant wood, which I know some buildings are using now. But there is no comparison in terms of steel being much safer. The fire marshall can tell you that.

Steel also happens to be sustainable, since all the metal studs can be made from recycled metal. You can attach value to a steel building for being more environmentally sound.

If you look the next ten years worth of savings for that insurance. It’ll be significant. When you get into selling hotels in your exit strategy, you’ll also have an added benefit. Many owners of hotels don’t stop building with just one hotel. A lot of larger owners have five or six or seven or eight hotels in their portfolio. So imagine selling all those hotels in that portfolio, and having the benefit that all the hotels in that portfolio are non-combustible. That’s hugely attractive to investment groups. Some of those investment groups might have buying policy that looks for non-combustibles as a characteristic of their investment because of their safety. So that opens the investment up to a specific class of institutional buyers.

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Got it. So let’s say you build with steel then. How does that change the construction process of the hotel?

NK: So what happens when you change from wood to steel studs is that you know need to have a concrete foundation on each floor. You’ll need a metal deck on every floor to support that concrete. You’ll need a steel staircase instead of a wood staircase.

So naturally, all this is going to add up. The weight is going to be a little higher due to the floors, not because of the studs, but because our foundations are going to be slightly different. They’re likely to be a little more expensive since you need to support that weight of the floors.

Of course, one side benefit of those steel floors is that the floors don’t squeak. With a wood building, there is a chance that as the building ages the floor will start squeaking. If you have a Hampton Inn, let’s say, there might be a product satisfaction guarantee. If the customer calls and says “hey, my floor is squeaking so I couldn’t sleep,” you might have to refund that customer. This doesn’t happen often, but it is something to be aware of.

Another one of our readers asks: “Are there any prefabricated hotel models that you’ve personally worked with or seen?” Maybe Modular construction or paneling?

Visit our article on modular construction for more information!

NK: Paneling we do all the time, but modular our team doesn’t do too much since most cities don’t allow it. Or to be more precise, a lot of bigger cities that we’ve worked with don’t allow modular construction where you can bring in whole pre-fabricated rooms and bring them in to be assembled on site. We can do modular constructions in very rural areas where there’s absolutely no presence of a city.

Why is that?

So there’s a lot of inspection-related things. Many cities are not comfortable with installing electrical or pipes in a pre-fabricated room and just bring it into the site. They want to make sure a license individual has done that work on-site, you know? So a lot of it is city code again. They want to make sure that the job is done properly, particularly for those more intensive components like pipes.

So what is the difference between modular construction and paneling then? You said your team does a paneling all the time.

NK: So paneling refers to mostly wood paneling and steel stud paneling. In other words, the walls for the skeleton of the building can still be built in pieces – panels – like Lego pieces in a manufacturing environment and you can bring all those pieces and tag them together.   So it’s very similar to modular building except you are dealing mainly with the skeleton as opposed to entire rooms.

One question we received is, what is the cost difference to build a hotel compared to a condo or apartment in terms of square footage?

NK: So let’s say you’re a real estate investor trying to decide whether to go into the hotel asset class or an alternative real estate investment, such as a condo or apartment. Those are quite different from each other. I suppose the most fair comparison would be comparing that condo or apartment to an extended-stay type hotel where you have that kitchen and is set up more traditionally like an apartment.

Generally speaking, apartment buildings are built with wood construction. So we could compare it to a wood construction hotel, but the dollar per sqaure foot would be almost identical.  But let’s say you have both a three story wood-frame apartment and a three story wood-frame hotel. Let’s make that assumption. And stretch the imagination to make a fairer comparison – say that both buildings are 100 rooms. One 100-room apartment, and one 100-room hotel. If you talk about dollar per room, you will see that the cost per apartment is much higher because the in the apartment there is still more variability in the rooms. You have a living room, the bedroom, and entrance area, closets – and a lot of apartments have two bedroom and two bathroom setups. With hotels, most of the rooms look the same, or at least are very similar. All the rooms share the same entrance; all the hotel rooms share the same facilities.

I think the better way to look at it is the potential for revenue. So for example, let’s say in Schaumburg you have a two bedroom, two bath apartment renting at $2,100 a month. That’s about $70 a day to rent out those two bedrooms. Yet with the hotel, you might be earning far more than that $70 a day with one hotel room – and the reality is that your hotel has far more than just one or two available rooms each night.

You’re pulling in guests at a much higher rate. That’s where real estate investors should focus. The question of development cost is important, but you also need to look at what the profit margins are. How much money are you spending on an apartment versus a section of a hotel, and how much are you pulling in?

I see. So why are multifamily and apartment investments still so popular compared to hotels?

NK: I think a lot of people do what they are comfortable with, and I also think that the ability for investors to invest in something like a hotel wasn’t really an option until recently. The barrier to entry to get a hotel has been very high- too high for many people. So they may not even have had the option to invest in a hotel until firms like yours have come online and democratized the playing field.

Anything else you want to add that readers might want to know?

NK: I’m very excited about this EquityRoots project that we are currently working on in Schaumburg. We haven’t done anything like this before in a crowdfunding kind of a situation. If this develops successfully, it’ll truly be magical, because I’ve never seen a hotel developed like this before. It could really mean many more crowdfunded hotels across the nation in the future and really catalyze a new trend in investment.

For part 1 of our Q&A series, Neil addresses how his team hires labor for projects, as well as value engineering!

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