CiRol TYME ob ad Focus on Hotel On a national basis, the current cycle of hotel development appears to have moved well beyond the peak of 2016. The number of hotel rooms under construction, as of January 2018, is 1.6% lower than the year prior. While new hotel development continues to be pursued across the country, the momentum has notably slowed. As construction and financing costs increase, lending becomes even more challenging to source. All of the factors directly impact the feasibility of new hotel construction, resulting in a decreasing pipeline of proposed rooms. Cushman & Wakefield's Hospitality & Gaming practice provides consulting and valuation services for new and existing hotel properties across the globe. This presentation focuses on U.S. hotel development. In recent years, the majority of new hotel projects we have worked on have fallen into the STR chain scales defined for Upper Midscale, Upscale, and Upper Upscale brands. This work is consistent with the total pipeline of hotel properties under construction as of March 2018, as shown in the following chart: Urattioted GLB Upper 28300,13% 820.4% OPS Economy at60" he 0% iscala 12,600 7% ~ ssc sehoo Six ice, ott00 3x source:sTR A consistent distribution of new hotel room construction in the three limited- and select-service categories has been evidenced throughout the current development. cycle. Supported by lower construction costs, smaller site requirements, and efficient operating structures, these projects remain the primary property type Construction Costs 2018 | CUSHMAN & uN WAKEFIELD planned to open in the next few years. As these property types represent approximately 76% of the new supply, the number of new hotel rooms in the other categories is relatively modest. The most recent statistics indicate that on the high and low ends of the product segments, only 8,200 luxury hotel rooms and'1,200 economy-level hotel rooms are under construction in the U.S. This makes sense, as both these sectors reflect the most challenging economic circumstances for feasible development, impacted by high land and construction costs. New hotel development has been a major topic of concern in the industry. But while overall supply has increased 8.2% (net) since the peak of the Great Recession in 2009, demand has grown almost 30%.As a result, national occupancy levels have risen from 55% to 66% over this period even as new rooms opened. New hotel supply increases are expected to continue to lag demand increases over the next few years, particularly as the construction pipeline subsides. In the current cycle, the decline in new hotel construction starts is partially influenced by rising construction costs. Driven by higher labor and material pricing, developers in particular markets are reporting increases of more than 20%in a year. Skilled labor is pointed to as one of the scarcest, and the lack of available sub-contractors can swell a project budget and cause major (and expensive) delays. Construction financing costs also continue to be a major consideration. Our findings indicate that financing cost is typically in the range of 2% to 4% of a turn-key development budget. Not all the development budgets that we are presented with include financing costs, which can substantial sway the perceived feasibility of a development. Using project data from actual budgets and other industry sources, Cushman & Wakefield has compiled per-room project costs for six major categories: (I) Land, (2) Hard Costs, (3) Soft Costs, (4) Working Capital, Pre- Opening, and Supplies, (5) Furniture, Fixtures, & Equipment (FF&E), and (6) Development Fee for the three most prolific STR Chain Scale properties. Composite budget data from recent hotel projects is, shown in the per room chart. We excluded the Economy chain scale due to insufficient date. cushmanwakefield.com | 1GLOBAL HOSPITALITY Focus on Hotel Construction Costs 2018 lh CUSHMAN & WM WAKEFIELD wicscale PPS Upscale UPBEE Luxury Land vin Pe Room $10,000 $4000 $5,000 7000 s17000 Max Per Room $5000 —~#03000~—~—~st6g900~—~«CZG00—«*I 07000 race $2000 ~~ #20000 ~—~—~—«s30000~=~*«S GO. ~—~*« OOD Average of Taal Coat ee oa oa oe Hard Costs vin Pe Room $3000 ‘48000 -—=—«$89000-—=—«sz0000-—336000 Max Per Room 3108000 —$197000~=«B.000"~« BECO ~~—~C«S7.0O race 373000 ~~ §96000~—~«*T3S00~—~*«AACO]~*«* TOGO Average Wf Taal Cost 7H cox cox eax on Soft Costs vin Pe Room $500 s1000 $2000 $5000 #88000 Max Per Room 384000 ——#35000~—~—~—=toao00~—~—~«TBLGOD—~S~*«STSODO mrace 316,000 312000 37000 47.000 —~—*$2809000 Average W of Taal Cost We 76 7% We 8 Working Capital, reopening and Supplies bin Per Room $100 $200 $500 $200 $3,00 Max Per Room $100 8.000 000 316000 #82000 race $100 $3,000 $5,000 $6000 ——~$23000 Average Wo Taal Cost % % 2 2 2 Furniture, Fixtures & Equipment (FF&E) hin Per Room $2,000 $2,000 $9000 ‘1900088000 Max Per Room s10000 38000 -~—=«s86000~«=~SC«E00.~=—=—C«62000 race $10,000 37000 #20000 ~—~—~=«33000~*« 000 Average W of Taal Cost om oa We o% om Development Fee vin Per Room $6700 $500 s409 $2900 si0200 Max Per Room 32000 #35000 —~—~—~#38000~=~«M28000"~*« OGD mrace $7,000 $6000 ‘0600 sme00—_$88000 Average Wf Taal Cost om 2 a > % Total hiner Room $2700 —$78000-—=—«s81000~=—=—«$200000 «$824,000 hax Pe Room s1ee000——*278000~=~=~« 7.000 ~—~=~«N BOO —~—«,078,000 average s1i5000 —«$148}000-—=«=08,000 —=—«s398000 —=s1si8,000 dust 207 a st that en cain te rg contin of ech conse costmanvaketetdcom | 2 ‘the total east over al the dats, the overall percantages will not equate to 100%GLOBAL HOSPITALITY Focus on Hotel ‘The data represents broad category ranges and should be used as a general guide only. The per-room data ‘compiled by Cushman & Wakefield represents projects across the U.S. Specific amounts from project budgets, are sometimes difficult to validate as individual developers may account for the same items in different categories and geographical costs can vary over 100% from one part of the country to another. For example, it may cost more to build an Upper Midscale hotel in a major urban center than an Upper Upscale hotel in a secondary Midwest market. Without consistent cost budget categories, some development budget line items such as equipment and fixtures can bleed from one category to another. Materials or fixtures may be included in certain categories by developers based on thelr expected depreciation, We have established a consistent allocation of the items to the represented categories for this analysis. ‘The Land components in the construction budgets are represented by different financial contributions as determined by the particular developers. Some land ‘components are direct market-based site acquisitions. while other property may have been purchased many years ago or inherited, Other developers assign a value to the land basis as part of the equity of a project. On a national average basis, the land component averages 14% of the total budget, a modest decrease of 1% from last year’s data Hard costs are the largest portion of hotel development and, depending on the location and type of construction, can vary widely for the same property type. Limited service hotel projects range from wood-frame three-story projects in secondary markets to steel-frame Class A highrises in major urban areas. The range of these per room costs are five times higher from the low- to high ‘end of the per-room range. Construction costs continue to escalate. Turner Construction reports overall an increase of 5.1% annually for non-residential construction for the twelve months ending the first quarter of 2018. This is the highest cost growth reported by the survey since 2010 but well below the construction cost growth rates of 9.5% to 10.6% reported for the peak Construction Costs 2018 lh CUSHMAN & WM WAKEFIELD of the prior cyclein 2005 and 2006. Oldcastle, North America's largest manufacturer of building products and materials, anticipates continued price gains in materials. Overall, material costs are forecasted to increase 2% to 3%, with Gypsum products having the greatest increase (6% to 7% in 2018, following a 7% expected increase in 2017).Lumber prices also surged in 2017, from 10% to 149% throughout the year. Impacted by steady demand, trade disputes, and fires, lumber costs are forecast by construction industry specialists to increase again in 2018 but at a more modest 3% to 4%. Soft costs include entitlement and permit costs, financing costs, franchise fees, due diligence, legal, insurance, and property taxes. Financing costs, and sometimes ‘entitlement costs, are typically the largest component of soft costs. Projects in urban and more environmentally, sensitive areas often have high entitlement costs and longer pre-development periods with higher holding costs. Note that we include architectural and engineering fees in the hard cost category. FFAE costs include guestroom and public space furniture and can include soft goods. Individual development budgets account for FF&E in different categories. For ‘example, we may be provided with budgets that show carpeting, bathroom fixtures, laundry and kitchen ‘equipment, and technology systems as hard costs, while ‘other budgets include some of these items in the FF&E category, These differences contribute to the wide range of per-room amounts. Working capital and pre-opening expenses are critical to the success of a property but are sometimes excluded from development budgets. The initial operating supplies and inventory and hiring of the pre-opening staff are a relatively small component of hotel development, ranging ‘on average from 1% to 4% of the total budget. These costs are part of opening a hotel, and experienced developers include the dollars expected to be spent on technical services, pre-marketing, staffing, and staring up the operating, ‘cushmanwakefield.com | 3CIR) TYME ad Focus on Hotel Construction Costs 20 We also include a category for Development Fee. More and more, we are seeing an allocation of the Project budget directly to the development team. ‘The fee accounts for the costs of the ground work and administering of the project, including payroll, technical services, travel, and other expenses. The ‘development fee is not related to any entrepreneurial incentive expected upon the successful completion of the construction. National RevPAR growth has declined in recent years but is anticipated to remain positive in the foreseeable future, even as new supply is being absorbed. New projects continue to be proposed for lh CUSHMAN & WM WAKEFIELD strong markets. Some developers are taking advantage of the wider range of available brands to further segment demand, Dual-branded developments are steadily opening across the country. For some projects, modular construction is helping to shorten construction timing ang tilt the expectations for the completion of a more feasible development. We are seeing demand increasing as new supply is being absorbed in particular submarkets, and for specific hotel products and brands in numerous areas. We remain optimistic that well located, planned, and executed hotel projects can be continue to be considered in the current cycle. About The Author Ms, Sahlins is an Executive Director in the Hospitality & Gaming practice of Cushman & Wakefield's Valuation & Advisory group where she provides appraisal and consulting services for hotels and casinos. With over 25 years of experience, Ms. Sahlins has performed valuations and market and feasibility studies of thousands of hotel and gaming properties throughout the United States. Previously a Managing Director of HVS in the San Francisco Office and a Senior Review Appraiser at Bank of America, Ms. Sahlins began her hotel real estate career in acquisitions at VMS Realty in Chicago. Ms. Sahlins' appraisal and consulting assignments span all types of hospitality and casino properties including select- and full-service hotels, destination resorts, and gaming properties. She performs assignments for lenders, developers, attorneys, management companies, and owners relating to financing, feasibility, and other real estate issues. Ms. Sahlinsis a designated Member of the Appraisal Institute (MAN and The Counselors of Real Estate (CRE). Hospitality & Gaming Practice Group, ‘The Valuation & Advisory Hospitality & Gaming Practice Group offers a full range of valuation, advisory, property tax, and litigation support services. The team is distinguished by its combination of industry experience, local market knowledge, global coverage, and responsive service. The Hospitality & Gaming Practice Group operates in four continents with offices across the globe - Australia, Brazil, Canada, China, Czech Republic, Hungary, India, Italy, Japan, Mexico, Portugal, Singapore, Spain, Turkey, the United Kingdom, and the United States. In addition, our staff of seasoned professionals has extensive experience and the ability to draw upon the diverse disciplines available from other Cushman & Wakefield core businesses, including Capital Markets, Consulting, Global Occupier Services, Investment & Asset Management, and Agency Leasing. For more information, contact: Elaine Sahlins, MAI, CRE, Executive Director +1415 773 3531 | elaine sablins@cushwake.com Cushman & Wakefield Western, Inc. Satin 201 California Street, Suite 800 San Francisco, CA Smt copyint ©2018 Cushman & Waki. Aight reserve Th etermation contained within th rapt ‘athoea ron mutiplesurcesconideeats be vlbleThewlermaton may containers or omisions 2nd ‘cushmanwakefield.com | 4