Much cheaper to buy than build full-service in US: JLL

NATIONAL REPORT – JLL has new research out illustrating the rise in cost-to-build for U.S. full-service hotels, particular in urban markets. The cost per key for full-service hotels in those markets has soared to $819,000 as of Q3 2023, up 46% from 2019.

Driven by the cost-effectiveness, JLL said to look for investors to prioritize acquisitions over development in the short-to-medium term, which should fuel U.S. full-service hotel urban liquidity.

Ophelia Makis, JLL Hotels & Hospitality Research, told Hotel Investment Today that they expect development costs will remain relatively elevated over the short-term but should begin to abate in the back-half of 2024 and into 2025 following the easing of supply chain disruptions. “Simultaneously, we expect pricing for full-service urban hotels to increase as fundamental performance accelerates underpinned by the return of group, corporate, and international travel,” she said. “As such, we expect acquisition and development cost to converge within the next 18 to 24 months, meaning that now is the opportune time for investors to acquire full-service urban assets.”

Despite reaching a peak in 2022, U.S. hotel construction prices have continued to rise due to various factors, according to Makis. These include persistent supply chain disruptions as a function of a reliance on offshore materials production, labor shortages resulting in higher wages, the upward trend in energy prices, rise in land prices particularly in urban cores, and heightened demand for construction services. “Collectively, these factors have exerted upward pressure on pricing within the construction industry,” she said. “Although the pace of price growth is moderating from its peak in 2022, the sustained demand for construction is expected to keep prices elevated over the medium term.”

Given the historic opportunity to acquire high-quality urban assets at a discount to replacement cost, coupled with the meaningful accelerated recovery in urban markets, Makis said JLL expects urban hotels to drive the largest portion of full-service hotel liquidity in 2024, nearing 2019 levels.