Hotels can be a very successful sector for commercial property, but it is essential to understand the industry’s costs and influencing factors. How much does it cost to build a hotel?
Early in 2020, hotel construction in the United States reached an all-time high. However, the Covid-19 pandemic impeded this expansion. According to STR pipeline data, the number of hotel rooms under construction decreased by 61,000. As of December 2021, there were 158,906 hotel rooms under construction in the United States, a 19.2% decrease from the previous year.
In 2022 and 2023, however, analysts anticipate an increase in new hotel openings. Depending on your circumstances, now could be the right moment to invest in a hotel construction project.
How Much Does It Cost to Build a Hotel?
When building a hotel, the hard and soft construction costs can vary widely based on various factors, such as location, hotel type, and more.
Robert Marsh, Vice President of global construction firm Turner & Townsend and leader of the Hospitality Construction team, stated, “There are numerous factors that influence the price of any building in any industry.” “It is difficult to assign a particular price bracket to the hospitality industry due to all the variables: urban center, oceanfront, high rise, low rise, branding, and what star level or amenities would include in the property.”
Depending on who you question and the types and locations of hotels they develop, you may receive wildly divergent estimates for hotel development costs.
Hotel Construction Costs Per Room and Per Square Foot
According to Marsh, four- and five-star hotels in major metropolitan areas such as New York, Los Angeles, San Francisco, Miami, and Chicago could cost between $700 and $800 per square foot (PSF).
According to Vimal Patel, owner of Q Hotels, which predominantly operates in Louisiana, pre-pandemic costs for hotels in his region ranged between $105,000 and $130,000 per room, or between $105 and $125 PSF.
Patel added, “Now, these expenses have skyrocketed. Every day it’s different.” Moreover, budget hotels and motels are an entirely different scenario.
“A 100-room economy hotel/motel will cost approximately $7,750,000 to construct, with a mid-range version costing $22,500,000 and a 5-star hotel costing as much as $61 million,” said LandCashin commercial real estate advisor Reid Hogan. “The average room costs are $77,500, $225,000, and $610,000.” Prices per square foot vary between $150 and $475.”
Again, costs vary significantly based on location and hotel type; therefore, speaking with someone knowledgeable about the place you wish to build and the kind of hotel you want to construct is essential.
How much does it cost to build a hotel?
Similar to the expense of constructing an apartment complex, there are numerous costs and factors to consider when making a hotel.
1. Land Costs
The initial consideration is the cost of the land itself, which varies by location. If you do not own land, your total budget must account for land costs.
2. Furniture, Fixtures, and Equipment (FF&E)
Furniture, fixtures, and equipment consist of furniture for guest rooms and public areas, carpeting, bathroom fixtures, kitchen equipment, and more. The FF&E varies based on the type of hotel being constructed. For example, a five-star hotel or resort will have significantly more expensive FF&E than a budget hotel or motel.
3. Hard Costs
The hotel’s hard costs include brick-and-mortar expenses, which vary considerably based on the spot and kind of development.
For example, a smaller hotel in the suburbs with a four-story wood frame will have substantially lower hard costs than a high-rise with a steel frame in the city.
4. Soft Costs
Soft costs include permits, engineering, architecture, taxes, insurance, and maintenance. Labor expenses also fall under the purview of soft costs.
These expenses will also vary by location. Ensure that you thoroughly investigate your area to determine how much soft costs will be for your hotel so that you can budget accordingly.
Hogan stated that construction material and labor costs are volatile and unlikely to stabilize shortly.
5. City and State Regulations
In addition to hotel construction costs, a district’s regulations should be considered when constructing a hotel. March stated, “There are quite a few seismic requirements in California.” “A Florida beachfront must meet hurricane requirements. You can assume that urban environments such as New York have their codes and requirements for high rises and small footprints.”
How Long Does It Take to Build a Hotel?
According to Hogan, hotels can construct in more than two and a half years or less, depending on the sort of construction. Patel stated that building a limited-service hotel takes about 18 months without food and beverage service.
How Much Does It Cost to Run a Hotel?
The costs associated with hotel operations vary significantly based on location and hotel type. According to Hogan, the operational expenses of some hotels range from 75% to 90% of revenue, with higher rates during the pandemic.
Before you purchase or construct a hotel, you must compare your operational expenses to your hotel’s revenue per available room (RevPAR).
Is It Cheaper to Build or Buy a Hotel?
According to Patel, whether it is cheaper to construct or buy a hotel depends on the buyer. The construction of a hotel, commencing with the search for a suitable location, can take up to three years, during which time there is no profit. However, constructing a brand-new hotel can be more profitable in the long run due to less costly maintenance, such as replacing old roofs or HVAC units.
Is Owning a Hotel Profitable?
Hotels “can be very profitable,” according to Hogan. Without significant economic, weather, or health-related business disruptions, a 100-room economy motel can earn more than $250,000 monthly.
Despite this, the pandemic caused numerous business interruptions, decreasing profits for many hotel proprietors. According to Hogan, your hotel’s success depends on various factors that may be beyond the control of the proprietor.
According to Patel, “Branded hotels are becoming less profitable due to the brands’ lack of support for franchises.”
Branded accommodations include Marriott, Hilton, and Best Western, among others.
How to Get Financing to Build a Hotel?
The most common ways to finance the construction of a hotel are bank loans and investor capital.
Hogan noted that SBA 504 and 7-A loans and conventional financing are available to seasoned entrepreneurs. For their first hotel, novice operators should consider partnering with an experienced operator.
When Building a Hotel, Make Sure to Do the Research
The most essential consideration when constructing a hotel is to exercise due diligence. It involves researching the costs unique to your location and analyzing the profitability of comparable hotels in your area. Consult a financial advisor with experience in the hospitality industry for the best advice. If you are new to commercial real estate, consider partnering with someone with experience constructing hotels.
Thank you for reading….