How much will tariffs impact hoteliers?

Welcome to the complicated world of tariffs, which could be coming soon to a hotel’s operating profit near you.

Alan Benjamin

With news of tariffs against China, Canada and Mexico from the Trump administration fresh in the news, as well as reciprocal tariffs from those same nations back to the U.S. and the knowledge that anything written in this space could quickly be outdated with new negotiations or political turns, the chief question for the hotel investment space is: How much will this cost hoteliers?

The answer, like the example above, is extremely complicated.

Alan Benjamin, founder and president of Denver-based global procurement company Benjamin West, said he was recently talking to a senior vice president of an NYSE-listed hotel company who asked him an interesting question: how much of the interior of a hotel (not just the hotel rooms) comes from China?

“I said, 15 years ago, it was probably 50%-plus. Today, it’s probably 15%.”

When Trump, in his previous term, put tariffs on the vast majority of items that were coming out of China, that forced a lot of industries to start focusing on getting goods (specifically, FF&E for the hotels) outside of China with Vietnam being the biggest beneficiary for hotel-related items.

Vietnam was the huge gainer in the single most expensive thing that goes in a hotel room, which are the case goods, the wood bedroom furniture. I would say 95% of the case goods we buy now come from Vietnam. Ten years ago, it was 90% from China.

Alan Benjamin

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“Vietnam was the huge gainer in the single most expensive thing that goes in a hotel room, which are the case goods, the wood bedroom furniture,” he said. “I would say 95% of the case goods we buy now come from Vietnam. Ten years ago, it was 90% from China.”

That pendulum has absolutely swung to Vietnam now, but it took some time, Benjamin said. “It’s not just the factory getting built and up and running. It’s all those little subfactories — the people that make laminates, the people that make drawers, drawer glides or drawer pulls — similar to the auto industry.”

That’s not to say China is still not heavily involved in making products for the hotel industry, especially component parts to bigger items. “China’s still, overall, really good at making stuff at a certain value point… and I don’t see that radically changing,” Benjamin said.

Hotel room lighting is an example of something that features parts heavily made in China. 

“When people are buying lighting made in the U.S., they’re really buying lighting assembled in the U.S. with mostly Chinese component parts,” Benjamin said.

Increased cost of tariffs

In a recent newsletter article written by Benjamin West Director of Business Development Sarah Churchill, she tells clients to put about a 10% contingency on the total of any cost, even though the majority doesn’t come directly from China.

“It’s not based on the time you order. It’s based on the time the goods clear customs and are delivered,” Benjamin said. “In our industry, world-record lead time would be eight weeks. It’s much more common to be 12 to 16 or 18 [weeks], and sometimes more than 20.”

When factoring in increased costs, this is the most difficult and unpredictable part, Benjamin said.

“I anticipate there will be owners who, unfortunately, their product got delivered in the worst window. There could be a two-week window with an extra 25% tariff. Two weeks after that, it goes back to normal, and two weeks before that, it was less, but that’s when your product cleared customs, and it will become a five-dimensional chess game,” he said.

I’ve never seen so much need for capex, so little funds for capex. Now you’re adding tariffs and 3,4 or 5% higher loan cost if someone has to borrow money to do a renovation or new build. It’s a crazy storm.

Alan Benjamin

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A recent roundtable by PricewaterhouseCoopers partners projected that tariffs could raise the costs by as much as $800 billion annually. This will impact the hotel industry in a number of ways, but the construction industry has been especially bracing for the impact of the cost increases and has forced contractors to rush and buy more material in January before tariffs went into effect.

Benjamin said that buying supplies early is not an option for hotel companies.

“Ninety percent of what we buy is custom made one time for one hotel… even if it’s a standard package,” he said. “The fire retardancy of the foam in the chair and the sofa is going to change based on the city it’s going to… You can’t pre-buy hospitality FF&E outside of maybe TV mounts.”

When asked in January about the potential for tariffs and getting ahead of the costs, Dustin Fisher, senior vice president for Atlanta-based Noble Investment Group, had the same sentiment.

“It’s too soon to make any shift from a strategy standpoint, especially on economy extended-stay,” he said. “We are looking at more modular construction, which is somewhat insulated from some of the tariff issues we’re forecasting. But it’s too early to make a wholesale pivot on the strategy based on the current political rhetoric.”

Will tariffs stop development?

So, will the pressure of tariffs alone stop a hotel developer from going ahead with a project? Benjamin said it will be more about the overall costs than tariffs alone.

“If you have, at the time, a 10% tariff on the first cost…  I don’t think it will be a go/no-go for the whole CapEx of a hotel. It’s not going to be the decision maker,” he said.

But that doesn’t mean the overall skyrocketing costs of new construction or renovations couldn’t slow down development.

“I’ve never seen so much need for CapEx, so little funds for CapEx,” he said. “Now you’re adding tariffs and 3%,4% or 5% higher loan cost if someone has to borrow money to do a renovation or new build. It’s a crazy storm.”