Modular construction is something like Legos — and hotel developers can’t get enough of the new building trend.

Built section-by-section in a factory, hotel units are shipped to a site and stacked, sometimes practically overnight. Hotel developers are pushing the high-speed, low-cost construction process so fast that suppliers can’t keep up and fill orders.

“I think the whole industry is looking at modular off-site construction. It is the only way to drive costs down and quality up… We like to build in a controlled environment, instead of in the war zone of a construction site,” said Mikael Hedberg, CEO of Finland-based hotel module manufacturer ADMARES.

Marriott (MAR), a Maryland-based hotel licensing company, opened its first modular hotel three years ago and today Marriott executives want at least 40% of its hotels built modularly. To incentivize the little-known method, the hotel licensing company offers $250,000 cash incentives to franchisees who build modularly.

Marriott will open AC Hotel New York NoMad — the world’s tallest modular hotel, with 168 rooms and 26 floors — in New York City by the end of 2020. Developers secured a $65 million construction loan for the project, according to reports. The project would have cost about $100.8 million with traditional methods, according to the HVS Global Hospitality Services hotel cost development survey. The average cost to construct a hotel is $600,000 a room, the survey said. Modular construction costs 30% to 50% less that traditional construction methods, according to an ADMARES representative.

But despite the emphasis on efficiency, the units will have to be shipped in from Poland — a common problem for modular developments. With only about six Marriott-approved U.S. manufacturers, demand has grown so quickly that U.S. manufacturers cannot keep up, said Paul Dille, marketing manager at Guerdon Modular Buildings, a leading modular hotel developer that has completed 12 modular hotels with over 15 more currently under construction.

“There aren’t that many [modular] manufacturers who can take on huge commercial projects like that in the U.S. — between five and, maximum, 10 in the U.S.,” said Antony Kountouris at Georgia-based BMarko, a modular construction company that is part of the wave of new facilities coming online to meet demand.

‘Faster return on investment’

Despite supply issues, the speed and cost efficiency is attractive for developers dealing with rising supply costs and an undersupply of construction labor. A modular hotel is operable and profitable sooner than a traditional hotel would be. Using modular construction instead of conventional construction methods, reduces completion by 70% to 90%, according to an ADMARES representative.

“Buildings are occupied sooner, creating a faster return on investment,” said Peter Rudewicz, Virginia-based hotel brand Hilton’s vice president of architecture, design and construction.

Hilton’s (HLT) first modular project, a Home2 Suites in San Francisco launched in June 2019. The 155-key project took only 16 months to complete, from ground breaking to occupancy, compared to an estimated 24 to 30 months using typical construction methods. The early launch added over $6 million in additional revenue, inspiring Hilton to launch modular projects under construction in San Jose, Calif., and two in the United Kingdom.

But initial cost and time savings are just a taste of the efficiencies to come. After the initial design plans are complete, rapid, low-cost replication can begin.

CitizenM’s new Los Angeles hotel, set to open at the end of 2020, will take 16 months to complete, shaving eight months off projections at 15% to 30% cost savings. After the 315-key hotel’s plans are developed, the company will be able to reproduce the hotel in an even shorter fraction of time.

“There is more money going into it up front, but they are going to replicate this across the country, especially on the West Coast. So now we have the formula to use on future projects,” said Margaux Rotter of Los Angeles-based real estate developer BLVD Hospitality.

Sarah Paynter is a reporter at Yahoo Finance. Follow her on Twitter @sarahapaynter

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