The costs associated with building a hotel are rising rapidly. Building vertically and adding other components, such as retail, to the development are two workarounds.

Hotel companies are finding ways to work around the increasing costs that come with their development efforts.

Most Hampton-branded projects, for instance, call for a three-floor property. However, the 128-room Hampton Inn & Suites Bellevue Downtown—Seattle in Bellevue, Washington, has five floors. David M. Ward, VP of operations for OTO Development, told Hotel News Now during an on-property interview at the Hampton Bellevue that the cost of land in the Seattle area is so expensive that it was more cost effective to build vertically.

That kept the footprint—and development costs—to a minimum. Ward declined to specify how much it cost to build the property, which was the 2,000th Hampton-branded hotel to open.

“We definitely always look for the minimum amount of land we can use to make the numbers work,” he said.

Officials at NewcrestImage also keep a close eye on land costs. The company has a half dozen properties under construction. Mehul Patel, chairman and CEO of the Frisco, Texas-based company, which has a total of 20 operating properties in its portfolio, said construction costs are rising by 2% to 4% on an annual basis depending on geography and the local labor market.

“The ongoing cost increase, it’s there,” he said during an in-person interview at the official opening of the 220-room AC Hotel Bourbon/French Quarter Area in New Orleans. “That number will be there in the years to come; no one can change that number, in my perception. We take that into consideration.”

Despite the cost increases, Patel said he still believes new construction is worth the cost. Guests who are likely to stay at new-build properties are likely to be higher-paying customers.

“I think the financial calculation does justify it,” he said.

‘A tremendous strain’

Real estate investment and development company Robert Finvarb Companies, which has three properties under construction and is in preliminary talks for a fourth, recently partnered with Hyatt Hotels Corporation to develop the Hyatt South Beach, which marks Hyatt’s first foray into Miami Beach.

Company founder Robert Finvarb said he has seen construction costs jump by 20% to 25% during the course of the past year on two of the projects in Miami and New York City.

“The revenue potential of those assets hasn’t increased by that much in the last year,” he said. “It’s a tremendous strain on resources.”

He is seeing costs quickly rise for raw materials and labor.

“There’s only a limited supply of qualified companies that have the ability to build these hotels,” he said. “We’re competing every day with condo developers and office developers.”

So what’s the best way to deal with these rising costs?

“It’s not to build,” Finvarb joked. “If you’re going to build, you’re going to be paying 25% more than last year. If you feel the value of these assets is going to correspondingly increase, go for it.”

In the case of the Hyatt South Beach, location played a big role in Finvarb’s decision to go for it. The addition of retail to the development helped offset costs, too.

“We felt the location merited this brand, and the operating model will be almost as efficient as a select-service hotel given the size of the property,” he said. “The retail component is so significant in this location that it helps drive the economics.”