Hotel Development: The Risk of “Something for Nothing”
By Julia Watson Project Director / Sr. VP of Business Development, FARROW Commercial, Inc. | October 30, 2011
As the bottom fell out of the United States housing market in 2007 resulting in a crash of both the domestic and global economies, hospitality construction nationwide came to a near-screeching halt. The almost immediate cease on hospitality construction which was rooted in the prime mortgage sub-crisis coupled with high oil and commodity prices, consequently led to a radical economic slowdown.
As a result, many constructors within the industry were forced to shut down their operation, while others laid-off employees, decreased overhead, and reduced their prices to survive the recession.
In the short-term, hoteliers have been able to take advantage of incredible savings from drastically reduced rates, but the long-term effects of this behavior may prove risky for both construction service providers and hoteliers alike.
The probability that hospitality construction will soon recover from this cyclical conundrum, while unrealistic expectations for pricing become more and more entrenched, is slim. As the crunch for reduced fees gets more severe, desperation to sustain may lead to increased use of unskilled and illegal labor, additional bankruptcies, and further default on contracts, putting both the project and investors in jeopardy.
In order to understand the possible ramifications of the economy on hospitality construction, we must first explore how we got to this point. As we entered into the decline of new-development and hospitality renovation projects following the crash of the housing market, competition among service providers increased exponentially. As a result, prices took an immediate hit.
Additionally, hoteliers who had more time on their hands due to slower construction schedules began to realize their ability to shop numbers and solicit numerous competitive bids. Where reputation and quality of service once mattered, getting the most out of what little money hoteliers were able or willing to pay became the precedent.