Hospitality can be a very lucrative segment of commercial real estate, but it’s important to have a good understanding of the costs and factors that go into that industry. So, how much does it cost to build a hotel? Early 2020 saw an all-time high in United States hotel construction. However, the Covid-19 pandemic put a damper on that growth. Hotel rooms in construction went down by 61,000, according to pipeline data from STR. As of December 2021, there were 158,906 hotel rooms in construction in the U.S., down by 19.2% one year earlier. Nonetheless, research analysts expect an increase in new hotel openings in 2022 and 2023. Now could be the right time to invest in a hotel construction project, depending on your situation.
When it comes to building a hotel, hard and soft construction costs can vary greatly depending on a number of factors, including city, type of hotel, and more.
“There’s a lot of factors that go into the cost of any building in any sector,” said Robert Marsh, Vice President of global construction firm Turner & Townsend and lead of the Hospitality Construction team. “With hospitality in particular, it’s hard to assign a set range given all the parameters: urban center, oceanfront, high rise, low rise, branding, what star level or amenities would be included in the property.” Depending on who you ask and what types of hotels and locations they work in, you may get widely different answers for hotel development costs.
According to Marsh, four- or five-star hotels in cities like New York, Los Angeles, San Francisco, and even Miami or Chicago could range from about $700 to $800 per square foot (PSF). On the other hand, according to Vimal Patel, owner of Q Hotels, operating primarily in Louisiana, pre-pandemic costs for hotels in his area were around $105,000 to $130,00 per room, or around $105 to $125 PSF. Patel added, “Now those costs have gone through the roof. Every day it’s changing.” And of course, budget hotels and motels are a different story altogether.
“A 100-room economy hotel/motel will cost around $7,750,000 to build, with a mid-range version costing $22,500,000 and as much as $61 million for a 5-star hotel,” said Reid Hogan, a commercial real estate advisor at LandCashin. “The corresponding average cost per room is $77,500, $225,000, and $610,000. Costs per square foot range from $150 to $475.” Again, depending on location and type of hotel, the costs vary greatly, so it’s important to speak to someone knowledgeable in the location you want to build in and the type of hotel you’re interested in building.
Much like the cost of building a multifamily apartment complex, there’s a wide range of costs and factors to consider when building a hotel.
The first factor to consider is the cost of the land itself, which varies based on location. If you don’t already own a piece of land, then land costs need to be factored into your total budget.
Furniture, fixtures, and equipment includes furniture for guest rooms and public spaces, carpeting, bathroom fixtures, kitchen equipment, laundry equipment and more. The FF&E varies depending on the type of hotel you’re building. For instance, a five-star hotel or resort will have much more expensive FF&E than a budget hotel or motel.
Hard costs include the brick-and-mortar costs of building a hotel, which can also vary widely depending on location and type of construction. For instance, a smaller hotel in the suburbs that only requires a four-story wood frame will have significantly fewer hard costs than a steel-frame high-rise in an urban location.
Soft costs include any non-construction fees: permits, engineering, architecture, taxes, insurance, maintenance, etc. Labor costs fit under the umbrella of soft costs as well. These costs will also vary depending on location. Be sure to fully research your specific area to determine how much soft costs will be for your hotel, so that you can budget accordingly. “Construction material and labor costs are volatile and are not likely to settle down anytime soon,” Hogan said.
Another factor to consider when building a hotel, aside from hotel construction costs, is the regulations in your district. For instance, “In California, there’s quite a bit of seismic requirements,” March said. “A beachfront in Florida has hurricane requirements. Urban settings such as New York have their own codes and requirements for high rises and small footprints, as you can imagine.”
According to Hogan, hotels can take over two and a half years to build, sometimes less depending on the type of construction. Patel said it usually takes approximately 18 months to build a limited-service hotel, meaning without food or beverage service.
The costs of running a hotel again vary greatly depending on the location and type of hotel. Some hotels, Hogan said, have operating expenses that amount to 75% to 90% of revenue, with higher rates during the pandemic.You’ll want to consider your operating expenses compared to your hotel’s revenue per available room (RevPAR) before you buy or build a hotel.
Whether it’s cheaper to build or buy a hotel depends on the buyer, Patel said. Building a hotel, beginning with simply finding a location, can be a three-year process, which means no profit for that amount of time. However, in the long run, building a brand new hotel can lead to a more fruitful result with fewer costly repairs, like old rooves or bad HVAC units.
Hotels “can be very profitable,” Hogan said. “A 100-room economy motel can net over $250,000 [per month] if there are no significant economic, weather, or health-related business interruptions.” Nonetheless, the pandemic created a good deal of business interruptions, leading to less profit for many hotel owners. As Hogan said, the success of your hotel depends on a number of factors that may be outside of the owner’s control. According to Patel, “Branded hotels are becoming less and less profitable because of the lack of support the brands give the franchises.” Some examples of branded hotels include the Marriott, Hilton, Best Western and more.
The most common way to get financing for building a hotel is through a bank loan or investor money. “For experienced operators, SBA 504 and 7-A loans and conventional financing are available,” Hogan noted. “Rookie operators should consider partnering with an experienced operator for their first hotel.”
The most important task to remember when building a hotel is to do your due diligence. This means researching the costs that are specific to your location and looking at the profitability of similar hotels in your area. It’s best to talk to a financial advisor who has experience in the hospitality industry. If you’re new to commercial real estate, then partnering with someone who has experience building hotels is a good idea.
