The continued strength of ADR and RevPAR in many jurisdictions kept hospitality development advancing despite soaring costs. Average Caribbean construction costs surge 19%By Mary Scoviak | July 7, 2023Share Unprecedented hikes in shipping, materials costs drove up development price tags throughout the region from 2020 to 2022, but there could be smoother sailing ahead. MIAMI - Hospitality developers targeting the Caribbean had to sharpen their pencils to shoehorn dramatic upswings in construction costs into real-world budgets in 2022 and the opening months of this year, according to Sanjay Amin, director, BCQS International.Detailing the findings of BCQS’s recently released “Caribbean & Latin America Construction Market Trend Report 2022-2023"at the 2023 Caribbean Hotel & Resort Investment Summit (CHRIS) conference held here in May, Amin delivered the not unexpected but no less unwelcome news that the 14 jurisdictions included in the survey averaged nearly 20% gains in construction costs from 2020 to 2022....the data are showing us a real upswing in ADRs and occupancy levels for 4- and 5-star hotels.Sanjay AminShare this quoteWhat’s revving the cost engineA network of 10 BCQS Caribbean offices compiled and collated data from those jurisdictions to identify the key trends and the reasons behind them. That started with a review of six core areas of cost evaluation, Amin explained:• Materials (core construction materials): Concrete blocks, concrete, aggregate, cement, reinforcement, timber, sheetrock, plumbing and electrical materials etc.• Plant (equipment typically found on most sites): Dump truck, backhoe, D3, Skytrack, excavators etc.• Labor: Tradesman: skilled, semi-skilled, general labor and general artisans• Preliminaries/general conditions: Site establishment costs/ supervision; site setup and accommodation, project running costs/insurance• Overhead and profit• Associated factors reviewed: Cost of living indicators“Obviously, labor costs are always an important part of the cost equation. They’re roughly 40% of construction costs in the Caribbean,” said Amin. “That’s an ongoing challenge because of the shortage of workers that continues to impact the global supply chain as well as the lack of local workers available for construction crews.” However, he credited soaring materials and shipping costs as the primary drivers behind the 13% to nearly 30% increases in construction costs from 2020–2023 reported in the individual jurisdictions covered in the survey. Factors ranging from inflation in the United States, previous port lockdowns or closures in China and shipping costs to increasing fuel and energy costs and the continuing upward spiral for the price of products such as concrete, steel and gypsum were major contributors to what proved to be unprecedented cost hikes in some jurisdictions, according to Amin. “And that did not address the impact of inefficiencies, poor productivity as well as costs associated with procurement,” he added.Results variedAlthough two years of double-digit construction cost escalation affected the price of development throughout the region, the extent of the price hikes varied significantly with the location. Anguilla topped the chart with a 29.99% hike in development prices from 2020 to 2022. Amin attributed part of that steep climb to a pair of local causes: The 13% Goods and Services Tax (GST) introduced in July 2022 and the pace of ongoing construction activity in that jurisdiction.Data for St. Barthélemy, the Cayman Islands, the Bahamas, Jamaica, Guyana and St. Maarten revealed 20% to just over 22% jumps over the survey’s timeframe. At the opposite end of the spectrum, developers in Curacao “only” had to face down a 13.10% spike, which may reflect its more measured development pace. St. Lucia and Trinidad and Tobago were also on the modest end of upticks, with average increases in the 14% range.Cost of living indicators have always been variables in the development cost equation but, “They’re a big factor now,” said Amin. Wide variances in both raw numbers and trends mean that developers will have to factor in these costs when calculating the impact of these indicators.For example, he pointed out that in jurisdictions such as Aruba, Barbados or the Cayman Islands, developers may be looking at $9 to $10 per gallon gasoline prices. In Trinidad and Tobago, the price would be about $3.76 per gallon or $4 in Guyana. Import duties on building materials and essentials can go from 0% in St. Maarten to 43% in Jamaica. The range in import duties on luxury goods is even broader – from St. Maarten’s 0% to up to 100% in jurisdictions such as Barbados and Guyana, Amin added. Increases in insurance premiums were one of the few jurisdiction-agnostic cost drivers, with premiums up as much as 40% or 50% for catastrophe-exposed properties with poor risk quality throughout the Caribbean.Sanjay AminNot surprisingly, these factors had a representative ripple effect on indicative construction costs, Amin said. BCQS’s survey data revealed that St. Barthélemy posted the most expensive dollar-per-sq.-ft. indicative construction costs for a typical 5-star, low-rise property: from a low-end average of $630 per square foot to a high-end of $1,350. Those averages dropped to a low/high of $460 and $800 in the Bahamas and a regional bargain of $250/$410 in St. Lucia and $250/420 in Guyana.The luxury cost barometer is coming under increasing scrutiny as more big-name chains shop growth opportunities in the region, but there’s some sunshine in other sectors. “People began changing their lifestyles after Covid,” said Amin. “Now, the data are showing us a real upswing in ADRs and occupancy levels in 4- and 5-star hotels.”On the upside, average rack rates somewhat, but not perfectly, mirrored the supply-side price tags. St. Barthélemy counterbalanced its high cost of development with the highest average regional rack rates, said Amin: $2,230 to $3,710 for a low-rise, 5-star property; $320 to $520 for a 3-star. However, Anguilla wasn’t far behind, with $1,200 to $2,100 for a 5-star and $230 to $380 for a 3-star. The difference in the two top spots was more marked since Anguillas indicative per-sq.-ft. costs averaged $440/$740 for a 5-star and $300/$490 on the economy end. Trinidad and Tobago held down the low end: $150 to $250. For context, the survey noted that ADR was increasing across the board.Why waters might calm down Across the Caribbean, said Amin, cost increases are likely to moderate. The big if? What happens with inflation in the United States? While owners and developers may be stuck, along with their global peers, to a wait-and-see approach to U.S. inflation – and the recent European Central Bank annual conference saw leaders from around the globe agree that inflation is “persistent” – Amin outlined strategies to control unnecessary cost spirals.Bearing lead times in mind, as in any market, is key, especially when adding on the logistical challenges and costs of shipping to an island. The survey puts lead times for several key components in a range that caps out at well over a year – owners could find themselves waiting 30 to 80+ weeks for switchgear and 45- to 80-plus weeks for switchboards. Generators take 52 to 90 weeks to arrive onsite. Chillers range from 42 to 52 weeks. Panel boards range from 30 to 52 weeks. Elevators will be ready to take guests on a ride in 20 to 48 weeks. Air handler units range from 40 to 75 weeks. Imported fabricated millwork, curtainwall, steel and roofing have the shortest lead times, from 4 to 20 weeks for roofing to 12 to 30 for steel.While the impact of world macroeconomic, geopolitical and monetary policy factors on development costs remains uncertain, BCQS' commentary on what's ahead was not all gloom and doom for the hospitality industry. Travel and tourism have rebounded through unprecedent YoY growth in 2021 and 2022 as measured in occupancy, ADR and RevPAR and are close to soaring past 2019 peaks.