Are Hotel Chains the Answer to Jumpstarting Prefabrication?

Authors: Nolan Browne, Colby Swanson and Jen Taylor

Off-site construction has a multitude of benefits when compared to traditional on-site construction. The lead times are shorter because inclement weather delays are eliminated, building envelopes tend to be tighter which results in fewer issues with moisture and drafts, and there can be significantly less raw material waste. With less waste and a tighter, more energy-efficient envelope, off-site construction seems to be a strong pathway to decarbonize and advance the construction industry. So, the question remains; why is there still hesitation about implementing off-site construction?

The most likely reason for this phenomenon is the bespoke nature of most construction projects, which is not conducive to a manufacturing approach. The upfront costs of off-site manufacturing can be higher than traditional construction costs. It takes a few builds before the initial  investment is recovered, so there is little motivation to make the switch unless a developer is building many of the same buildings. In contrast, developers who choose to invest in a well-designed, replicable product, are ideal offsite candidates and can reap the benefits of offsite construction.

Building many iterations of the same core building structure significantly reduces prefabrication costs well below the price of on-site construction through standardized building processes, increased safety, and reduced materials and labor costs. Depending on the type of building being repeatedly manufactured and assembled, we have modeled savings as low as 80% of traditional on-site construction cost and 50% of the build time.

So, what types of companies tend to build similar buildings many times over? Fast food, for one. Chick-Fil-A is already testing this model. But we’d like to propose a more compelling candidate — where the benefits of off-site construction increase exponentially for larger, multi-story buildings that are found across the United States. Specifically, we’re referring to economy and chain-scale hotels.

Prefabrication in the Hotel Industry

Economy hotels already exhibit limited variation. They typically contain only one to three floors and often lack a substantial lobby. Every room and bathroom has the same look and feel, which contributes to their consistency across regions. Customers come back because they know what experience and price point to expect. Off-site construction can offer more efficient production and assembly of hotels at a more affordable price while also reducing operational and maintenance costs for true cradle to grave savings. Because off-site construction ensures a tighter seal in the building envelope, hotel owners reap the benefits of lower energy bills and general maintenance savings.

On August 3-6th, Nol Browne of ADL Ventures and Colby Swanson of MIG/MMC attended the Asian American Hotel Owners Association (AAHOA) conference in Dallas, Texas to discuss the idea of prefabrication in the hotel industry. AAHOA is the largest hotel owners association in the nation, representing approximately 60% of U.S. hotels and exemplifying the common franchise model within the hospitality industry. Any hotelier can pay an upfront fee and ongoing royalties to the franchiser to become a franchisee, receiving access to the use of the trademark as well as ongoing operational support from the franchiser. 

Although the economy hotel industry appears to be a great candidate to adopt off-site construction, it has not yet seen widespread adoption. The franchise model adds an additional layer of complexity: it is unlikely that a singular franchisee would build at a high enough volume to drive economies of scale. Thankfully, there are multiple ways that off-site construction can be adopted by a fragmented and franchised hotel chain.

Multiple Paths to Success

Government intervention in the prefabrication market could effectively reduce the initial upfront costs of off-site construction in the hospitality sector. The success of the prefabricated, modular hotel holds all of the key components to catalyze the entire U.S. off-site construction industry by demonstrating how prefabrication is the cost-effective, energy efficient, and reliable answer to the myriad of issues facing the construction industry. The hospitality sector could effectively pioneer the blueprints of high-performing prefabricated buildings for others to follow, ranging from government buildings to affordable housing complexes. 

A second adoption method could be going directly to the franchisers. Before the global pandemic, Marriott and Hilton were building over four hundred hotels each annually. For franchisers to break even on initial construction, they would only need to aggregate sufficient numbers of hotel development deals (from franchisees) in order to be manufactured off-site en masse. This would be appealing for a variety of reasons, not the least of which are a consistent and reliable customer experience and a shorter lead time to collecting royalties. Travelers who seek variety and unique experiences book Airbnb’s – but those who want a reliable experience free of surprises, book hotels. There is tremendous value in consistency!

Finally, another aggregation model that could enable off-site hotel construction at scale is if individual franchisees under the same brand collaborated to invest in off-site construction for all planned new hotels. Although this model concentrates risk, the overwhelming benefit is that the hotels would be up and running up to six months faster than typical on-site construction. This would increase initial revenue streams driven from a quicker building occupancy. Also, the more user-friendly experience could keep guests coming back for more, while maintaining the lower operational costs described above. 

Once off-site hotels prove to be more comfortable, efficient, and complaint-free, it could prompt a sub-branding of the prefabricated locations. Or, perhaps the parent brand (e.g. IHG/Choice/Hyatt) could incentivize prefabrication by offering discounted royalty rates to these locations for their commitment to customer experience, satisfaction, and adoption of climate-friendly construction practices.

The Motivation to Switch is There

In the long run, there are big incentives for hotel owners to standardize their hotels with off-site construction: reduced costs for acquisition, construction, maintenance, and operation, enhanced building quality, user experience, and more reliable construction timelines. If the hospitality  industry is the perfect candidate to jumpstart prefabrication all over the U.S., the question we are left with is: Who will be the first to make the jump?