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Rising lumber prices, manufacturing slowdowns, and a shortage of shipping containers is a perfect storm of issues threatening construction costs and timelines for U.S. hotel developers.
Random length lumber commodity costs were up nearly 271 percent from last year, just before the close of trading Thursday. Real estate developer Trinity Investments reports shipping container costs this week were up 614 percent from 18 months ago. Hotel furniture and equipment suppliers say there’s as much as an eight-week delay on upholstery and three months on larger goods.
None of these problems are expected to go away anytime soon, especially since there’s an expected wave of hotel renovations — put off during the pandemic — finally expected to take place across the U.S. over the next four years.
“If you’re not prepared, and you’re not planning for the disruption, you’re going to get smoked right now,” said Joe Ward, vice president of asset management at Ohana Real Estate Investors, owner of properties like the Montage Beverly Hills.
Rising construction costs and labor shortages were already gripping the hotel industry before the pandemic, but supply chain issues around manufacturing and deliveries as well as the shipping slowdown are a newer frontier.
Many manufacturers quickly shut down production in the early weeks of the pandemic, expecting a massive economic downturn. Instead, various degrees of government stimulus around the world kept consumer spending high and led to major delays in materials production.
That may not seem like a direct correlation to the hotel industry since furniture, fixtures, and equipment at a hotel are often customized rather than a couch found on Pottery Barn’s website. But hotel products do use many of the same raw materials.
“We’re spending a lot of time making sure that what we want to get is achievable,” Ward said. “It’s a lot of advanced phone calls and a lot more diligence and research on what we want to order to make sure that there’s not going to be any known disruption.”
While there has been plenty of debate around how much opportunity a brand affiliation brings to owners, the brands do have a leg up when it comes to supply chains, experts say.
“When things get scarce, you make your biggest customers happy. That’s just a universal law,” said Chris Nicholson, CEO of Pathmind, a company that works to improve supply chains with AI. “That means the smaller players don’t get what they asked for.”
Companies like Hilton and Marriott offer significantly more purchasing power with their thousands of hotels and ensuing brand standards than smaller brands or independent hotel operators. Hilton even looked into using different materials beyond lumber to sidestep some of the rise in construction costs.
But even a massive global player like Hilton can’t avoid shipping bottlenecks happening at ports across the U.S. Dozens of freight ships this spring anchored off the West Coast and faced triple the delays seen last fall trying to get into ports. Labor and processing equipment shortages in light of unprecedented demand were to blame.
“Our greatest challenge is the ability to ship and deliver product in a cost-effective and timely way, particularly ocean freight lanes and product between China and the West Coast of the U.S.,” said Anu Saxena, head of Hilton Supply Management.
The Hunt for Containers
The rise in consumer spending during the pandemic exhausted the available supply of shipping containers coming out of China, and that sent prices sky-high.
Trinity Investments, which owns hotels like the Westin Maui Resort & Spa and a JW Marriott and Ritz-Carlton in Orlando, is grappling with shipping container costs exploding in less than two years. The company normally spent as much as $2,800 on a 40-foot container to go from an Asian port to Honolulu, but it was quoted nearly $20,000 this week.
With 2,500 hotel rooms currently under renovation at its various hotels, Trinity normally needs several hundred containers for a large project. Trinity has only been able to secure as many as 80 in light of all the demand, said Sean Hehir, a principal and managing partner at the firm.
“We’re getting movement but not enough movement to stay on schedule with our projects,” said Craig Lovett, vice president of development at Trinity Investments. “We’re delaying a little bit just to kind of give us breathing room to allow everything to come in, but we’re really fighting for container availability.”
The soaring costs in shipping can add as much as $1.5 million to a project’s cost, Lovett added.
“As long as I’ve been moving containers of anything from Asia to the U.S., the cost from Asia to Los Angeles has been relatively stable. Maybe every August through October, it would spike up a little bit ahead of the holidays,” said Dan Ryan, co-founder of Agency 967, a firm that has provided furniture to hotels through several economic cycles. “I’m talking like 20 to 30 percent, but now it’s as much as four or five times the typical cost.”
No Quick Fix
Many hope the problems will fix themselves, but viable solutions are likely years away.
While a few weeks or even months in shipping delays may not seem like a lot now, keep in mind even more demand is expected from the hospitality sector in coming years. Hotel owners that deferred renovations during the pandemic are likely to return en masse between 2022 and 2024.
Hotel companies relaxed brand standards last year in order to enable owners to hold onto cash and maintain operations during long stretches of low demand. But the expected flood of demand this summer will likely make companies reinstate renovation schedules in order to avoid bad reviews.
“I don’t think any hotel or any brand can afford to have a huge amount of negative press,” said Alan Benjamin, founder and president of hotel furniture and equipment procurement firm Benjamin West. “That is going to cause the capital expenditures to dial up just so that you have a competitive product.”
Companies like Hilton are already pursuing a shift to domestic manufacturing in the U.S., and others are likely to follow suit. But that shift doesn’t happen overnight. It takes time to build warehouses, and industrial space is already highly coveted by outside industries like retail.
“What happened with oil will slowly happen with manufacturing, meaning we will become net exporters of manufacturing,” Nicholson said. “We will do it through a combination of robotics, which makes operations much more efficient, and partnerships with Mexico and Canada. But factories don’t get built in a day. The fix will take a couple of years.”