Tips for Developing in a Hot Hotel Market

by John E. Osborn

Owners eager to upgrade their properties or build new hotels should ensure that they are not rushing into projects without following sound development principles.

New York City's hotel market has entered another golden era.

A combination of flourishing tourism and a growing number of business travelers assures peak demand for Manhattan hotel rooms. Existing hotels are undergoing upgrades while staying open, and new boutique hotels are sprouting in SoHo, the Bowery, and elsewhere across the city. Some observers believe the market is already overheated.

Building or renovating a hotel in such an active marketplace presents as many risks as opportunities. Several strategies can help developers, consultants, and contractors avoid the potential pitfalls and contain costs.

A first step is for developers to carefully choose a design team. They should not hesitate to bring together various specialists to get the highest level of expertise. On one recent successful project, the owner hired a "production architect," a residential architect to design the condo units, a prominent hotel architect, and a well-known hotel interior designer.

The developer should lead the team and make it clear that a close working relationship among the design professionals is a prerequisite to participating on the project.

Another step is to ensure that the team has a handle on the vagaries of developing a hotel in New York, such as union requirements, landmark restrictions, environmental regulations, and the city's building code. The architect must have a clear idea of all of the risks and regulatory requirements. For instance, some ordinary projects, even in Manhattan, complete work with a team of lower-priced, non-union contractors. In the hotel context, which is a highly unionized environment, this approach is less likely to succeed.

Once project teams are set, the contractors and design professionals can provide valuable advice to hotel owners and developers. A well-developed bid package by the architect, based upon extensive due diligence, is most likely to assure that the project cost and schedule will be predictable and realistic. Contractors who are adept at scheduling, sequencing, and keeping accurate records, meanwhile, will often be able to avoid unwelcome project surprises.

While there are many similarities between renovations and new construction in the hotel market, renovation work demands that design professionals complete thorough due diligence of the property. Do not scrimp on knowing about the wiring, piping, and asbestos. One recent hotel renovation experienced drastic cost increases when the contractor discovered corroded plumbing pipes inside the walls during the construction phase. Replacing the pipes also disrupted the project schedule.

Although new construction can be more straightforward, a recent project offers caution. The project team unexpectedly encountered underground gas tanks that forced budget changes and schedule problems.

Despite the lure of fast-tracking, developers should focus on reaching full design before bidding to ensure a balance between aesthetics and cost effectiveness. The initial bid package should be detailed to help avoid change orders, especially for asbestos, mechanical, electrical, and plumbing work.

On the renovation side, asbestos management remains the biggest project impediment. Developers should choose environmental professionals carefully, consult environmental counsel, and run the project "by the book." Note that because standard insurance excludes asbestos management coverage for construction managers, it is typically the developer, environmental consultant, and counsel that oversee the asbestos mitigation team.

Similarly, the developer should direct the architect and engineer to design solutions that prevent mold caused by water intrusion or excessive moisture, and to design ways to limit the mold-causing potential of features such as kitchen floors, vinyl wall coverings, mechanical systems, and HVAC systems.

Planning ahead, paying attention to potential risks, and making prompt and well-reasoned decisions can avert the type of runaway construction costs that are endemic to working in an overheated building industry in which labor is in short supply.