Hotel owners and operators are taking a more strategic approach to procurement as shifting tariffs, higher construction costs and supply-chain uncertainty create obstacles for renovation and development projects.
However, rather than putting projects on hold, the consensus from industry executives is that owners are increasingly revisiting budgets and leveraging long-term vendor relationships to help keep projects on time and make sure they pencil out.
The uncertainty surrounding tariffs and pricing has made forecasting particularly difficult, according to Alan Benjamin, president and founder of Benjamin West—a Denver-based purchasing firm which works on more than 250 new-build and renovation projects annually.
“I think there’s more disinformation than information throughout the industry,” said Benjamin.
Robert Habeeb, CEO of Maverick Hotels & Restaurants—a Chicago-based owner/operator with more than 50 hotels in its portfolio—reinforced the point. “Unfortunately, there have been a lot of surprises along the way,” he said.
Despite the uncertainty, Benjamin suggested tariffs have not generally caused owners to cancel projects. “I'm not really aware of any instances where people are saying, ‘I'm not going to build now or I'm not going to do my CapEx renovation now’ due solely to tariffs,” he added.
Construction Costs
Habeeb did point out that construction costs spiked some 6 percent last year, roughly twice the historical rate. However, while he acknowledged the cost increases have “created a more difficult environment to try to get PIPs [property improvement plans] or construction done,” he was quick to point out the company hasn’t cancelled any such projects.
As an example, Maverick is in the process of repositioning the SpringHill Suites Chicago O’Hare into a dual-branded property with the addition of the Fairfield Inn & Suites flag. Habeeb emphasized that owners and project teams should continually look for efficiencies rather than simply reducing scope.
“You have to really go back and re-examine your budget. You either need to increase your sources or try and cut back on costs. You want to do a lot of thoughtful sourcing on product,” said Habeeb.
According to Lisa Haude, principal, interior architecture at Studio RYS, a strong procurement partner can also help design teams identify value-engineering opportunities without compromising the original concept. She emphasized that becomes particularly important when owners need to reduce costs.
“It's important to focus on protecting the elements that have the greatest impact on the guest experience and look for efficiencies elsewhere,” said Haude. “The goal is to make thoughtful adjustments that preserve the design vision so the guest experience remains unchanged even if the procurement or execution strategy evolves.”
“I think on an overall scale it also makes the design process a bit longer just because of the uncertainty of these terms and so our design phase gets elongated. So as designers and architects we have to plan for a project duration being extended,” added Bhavini Hardev, senior associate, Studio RYS.
The San Francisco-based hospitality design firm currently has roughly 12 hotel projects underway, including a new boutique hotel development in Oceanside, Calif. Haude further noted the pricing increases have been “particularly broad across FF&E” categories while specifically citing the impact on items such as case goods, seating, lighting, mirrors and artwork.
“It's been fairly universal,” added Habeeb. “Case goods are obviously particularly vulnerable because it's a high-ticket item. In addition, so much of the inventory is imported and oftentimes from some of the more heavily targeted tariff areas.”
Haude further detailed some of those ‘hot spots’ from a geographic perspective. “China is usually the one we watch the closest because they have the most tariff regulations,” she said. At the same time, Haude noted that manufacturers are increasingly producing in Vietnam, Mexico, India and other parts of Southeast Asia, creating additional sourcing options.
Sourcing Options
Sourcing options are more critical than ever as many complications can arise as the result of changing regulations. As an example, Benjamin noted that items like case goods are often delivered over the course of several months for larger hotel projects creating additional challenges.
“You could literally have situations where different forms of tariffs change during the delivery time. If the deliveries are over the course of four, five, or six months you could have different tariffs for the same purchase order in the same hotel,” said Benjamin.
The timing of the tariff also matters, he said, because it is generally determined when goods clear customs rather than when they are ordered. Benjamin further noted there is no singular approach from a supplier perspective.
“Every vendor is treating this slightly differently. They're getting different legal advice; they're using different importers, freight brokers, agents and importers of record,” said Benjamin.
He later added, “Some vendors see [the tariffs] as a PR opportunity and refund the money right away, while other vendors have been advised they should hold back because the decision could get reversed.”
“Some vendors have been absorbing them [cost increases] while some have been passing them on. You don’t really know what to expect,” added Habeeb.
Industry executives, meanwhile, generally expect more clarity and certainty with regards to pricing going forward.
“I would hope by the end of the year this gets a little bit more flushed out. But, of course, there were new tariffs just implemented within the last 20 days,” said Benjamin.