Hotels can see profits from a number of the services they offer, whether it be dining, wellness, or retail and can be seen as a relatively safe business investment with the steady growth the industry sees.
However, with hotels coming in all shapes and sizes, profits don’t only depend on how much you invest, but also on what type of hotel you are endeavouring to produce. With hotels ranging from simple stays to luxury living, the type of establishment you want to create will determine the cost of building your hotel.
Before you decide to invest in any hotel construction project, it’s important to have a good understanding of the costs and factors that go into it. So, how much does it cost to build a hotel?
Note: All values are USD
Average hotel construction cost
There isn’t one set cost for building a hotel and any other accommodation options. Robert Marsh, Vice President of Turner & Townsend, a global construction company states “With hospitality in particular, it’s hard to assign a set range given all the parameters: urban centre, oceanfront, high rise, low rise, branding, what star level or amenities would be included in the property.”
We can approximate average costs of building a hotel, which can range anywhere from roughly $7m for a low budget motel all the way up to $60m or more for a luxury 5-star hotel or resort.
A number of factors can impact the overall hotel development costs; type of hotel being built, location of the hotel and amenities are to name a few that can cause construction costs to widely differ.
To get a more accurate pricing on what the average cost of building a hotel depends on:
- Personalisation and overall experience guests will receive
- Country and specific location (rural or urban areas)
- Design and styling
We’ve put together some other cost considerations associated with hotel development ventures.
Cost of building a hotel in popular cities
Cost of building a 5-star hotel
The cost of building a 5-star hotel will be on the more expensive end. They’re luxury properties that provide a multitude of services to guests including high end spa and fitness centres, fine dining and bars as well as many communal areas and shops. This puts the average cost of building a hotel between $332 and $550 per square foot depending on location.
Cost of building a 4-star hotel
While a 4-star hotel may not have the same grandeur as a 5 star property, it is still considered an upscale accommodation option providing better quality service and more amenities than what a 3 star hotel would include. Costs of including additional facilities means average costs of building a 4 star hotel can range anywhere between $260 and $410 per square foot.
Cost of building a 3-star hotel
Cost of building a 3-star hotel tends to be a bit more reasonable as they are considered standard hotel establishments. While some provide some communal areas, gym and pool access, not all 3-star properties do and so average costs can range from $190 to $375 per square foot. Not only is this dependent on features provided but also on the location of the property.
Hotel construction costs per room and per square foot
As previously discussed, construction costs can differ for a number of reasons and this is no difference when breaking costs down per square foot or per room. Cost of architects, contractors, land purchase, prep and additional enhancements of the property can all affect the overall cost with further fluctuation dependent on the location.
We’ve provided an approximate costing guide, split between cost per square foot and cost per room for different hotel types. Per square foot parameters include lower end pricing in rural areas to upper end cost in city and urban areas.
Specialty hotel construction costs
With the hospitality industry being so lucrative, accommodation options for travellers have never been higher and companies are exploring more niche, quirky or luxury USPs to beat the regular, standard hotel.
Cost to build a motel
Building a motel can cost a lot less than the average hotel; a two story motel would cost approximately $7,500,000. It can range from $160 to $240 per square foot depending on size and location. Motels are usually no more than 3 stories and tend to provide the basics, so not many amenities or common areas are offered, meaning construction costs are lower.
Cost to build a resort
Resorts are known to be a destination in itself for vacationers and are usually classified as a 4-5 star property. Building a resort will cost a lot more than the average hotel and can range from $300-$550 per square foot. A lot more services and facilities are offered to provide guests recreation and relaxation options, with interior design and landscaping a priority too.
Cost to build a boutique hotel
Boutique hotels are smaller than the average hotel but are still an upscale property that look to provide personalised services to guests. Depending on the amenities included and design aesthetics, a boutique hotel can cost anywhere between $200-$550 per square metre.
Cost to build a bed and breakfast
Building B&B can be a lot cheaper than any other hotel accommodation options as it is a much smaller establishment, however is fast becoming a more common option for travellers.
Most bed and breakfast properties are converted houses, where the owner may even be staying on the property itself.
The cost to build a guest house from scratch can range massively depending on the amenities provided, size of the property and location. Guest houses can range from a small AirBnB house or apartment to a more luxury bed and breakfast, with associated costs between $150-$500 per square foot.
An alternative is to outright buy a property to convert into a B&B as a cost-effective option.
Hotel construction cost breakdown
Every hotel is different and so costs can vary from property to property. To better understand the overall construction cost numbers, it is best to break them down into key planning elements and percentages. This can help with the budgeting involved in hotel construction.
Land costs
Location, location, location! If you do not already own land, choosing a location for your hotel should be strategically done to attract tourists year-round and avoid a strong seasonal fluctuation in business. The location is a key contender in your budget and you should aim to attribute between 9-14% of your budget to this.
Hard Costs (construction based costs)
Making up the largest portion of your budget, hard costs can dominate between 60-70% percent of your budget according to the hotel classification you are aiming for (budget or boutique). Your brick-and-mortar costs will fund your contractors, finishings, landscaping, and materials, the bigger and better you plan to go, the higher your hotel construction costs will be.
Soft Costs (non construction based costs)
Soft costs identify your indirect construction fees and focus more on the development costs of building a hotel through services such as, architects, engineers, permits, surveyors, LEED certification, insurance, financing, and interior designers. Also taking into consideration the payroll of your internal team throughout the project, expect to devote 20% of your budget here.
Furnitures, Fixings & Equipment (FF&E)
Furniture, fixtures and equipment are the finishing touch to your hotel aesthetic and account for around 10% of your budget. Including bedding, dining, technology systems and public spaces, this is your chance to enhance the appeal of your interior and create a fully functional environment for your guests.
Opening expenses
Everything you need to successfully launch, open and run the hotel should be included in the total construction cost budget. This includes everything from inventory and supplies, to marketing and technology. It is an important component to consider within your total budget however it only amounts to maximum 3% of the overall project costs.
Operational Costs
An often overlooked aspect of budgeting, operational costs won’t barter a large portion of your budget, but are critical for project success. This portion of your budget covers the hiring and training of hotel staff, technical and security services, electric and water expenses as well as inventory, costing 1-5% of the total budget.
How long will it take to build a hotel?
From initial designs to occupancy, hotel construction follows a rough timeline of 2 and a half to 3 years assuming you are opting for a traditional build. Limiting services offered in your hotel or going for a modular build can lessen your construction period by 20-30%.
Cost to run a hotel
So you’ve spent the money building a hotel, but now you’re wondering what it will cost to run a hotel. Your operational costs should be factored in when tailoring your budget at the beginning of the project to make sure that these numbers do not exceed your perceived revenue.
You can create an estimation by calculating rough percentages of your RevPAR and establishing what will be funnelled into operations.
This alone will not amount for all of your expenses as there are a number of factors that can contribute to the final operating costs of running a hotel including size of hotel, available rooms, amenities offered, number of employees, and level of service.
You’ll spend far less running a limited service motel compared to a 5* all inclusive resort.
Fixed Costs
Although these costs may change variably, they are not directly influenced by day-to-day fluctuation, examples being mortgage, property tax, insurance, fixed monthly bills and payroll.
Variable Costs
On the other hand, variable costs are directly impacted by day-to-day activity and can range based on demand and operational efficiency. This includes hourly labour, utility costs, marketing, inventory and supplies, and payment processing fees. The number of guests you have staying in the hotel will indicate the rise and fall of these costs and can be unpredictable.
Reducing hotel operating costs
Look into the expenses that are dominating your operating costs like labour, energy and marketing and strategise an effective and long term way of keeping costs down. Do weekends require more cleaning staff than mid week?
Try to source hourly workers to meet the demand rather than over staffing during low periods. Are you able to implement key card energy saving switches in each room to lower utility rates from vacant rooms? Small differences in your highest business expenses can see a large difference in your operating costs in the long term.
Provided you are able to collect all the relevant data, tracking your TrevPAR allows you to take a more meaningful look into the overall profitability and revenue of your hotel.
Through this, you are able to analyse performance, geography and demographics of your guests to distinguish patterns of revenue fluctuation that will aid in marketing strategies and resource allocations to overall lower unnecessary costs.
Additional hotel enhancements and facility costs
Depending on what type of hotel you are building, the level of services you want to provide to guests will differ. Each amenity you incorporate into your hotel is not only an added investment layer that can increase revenue and profitability but also creates a competitive advantage for businesses.
With studies showing that customers are pickier than ever, amenities are the leverage that can be the reason guests leave a positive review or book in the first place and are vital in shaping guest experience.
Despite amenities being an overall positive addition to a hotel, it is important to conduct key market research and analyse your target clientele to see if your added amenities would make sense financially.
Cost to build a hotel restaurant
Adding a restaurant into a hotel is a highly sought out amenity when booking travel accommodation, as in-house dining can provide a sense of ease for all types of guests.
Whether they are struggling to find parking, have a tight schedule or don’t have access to a vehicle of their own, an on-site restaurant allows guests the option of food right at their doorstep as well as the added safety of returning to their room at the end of the meal.
Where restaurants have been traditionally operated as an amenity rather than a profit generator, the booming growth in the hospitality industry has allowed hotel restaurants to generate a substantial profit independently.
When restaurants and hotels are operated and managed independently, it becomes more than an additional service to guests and can draw in a clientele of its own seeking a certain menu or experience.
The cost of including a hotel restaurant can vary depending on the establishment’s level of quality. With most upper scale hotels offering at least one restaurant in their plan, the cost of building a restaurant of similar standard can reach the higher bracket of $150 to $750 per square foot with ultra high end or mega projects greatly exceeding this.
It can be expected that roughly 60% of your allocated budget will go towards front of house operations and the remaining 40% to the back of house.
Cost to add a spa service in hotels
With many 4 and 5-star hotels including spa facilities, it provides an exclusive and valuable guest experience.
However, with options for accommodation rapidly increasing and customers becoming more selective, more hotels are adding spa facilities to meet the demand and guests are beginning to expect leisure facilities.
Hotels of any size and location could see benefits of adding a spa due to the greater guest satisfaction and revenue it can bring.
Regardless of this, adding spa facilities to your hotel is no light cost and an extensive market analysis should be conducted before any installation begins to ensure you can achieve respectable returns on investment.
The cost of adding a spa can vary tremendously with renovations to an existing area ranging from $100 to upwards of $400 per square foot. Building a new spa facility can see prices in the range of $200 to $500 per square foot, with the lower end range correlating to 3 star facilities.
An average cost of adding a spa to a 3 star hotel can be anywhere around the $500,000 benchmark.
Other hotel considerations and costs
External factors
There are external factors that should also be taken into consideration as they can influence your overall hotel project and investment. These factors range from location demand, domestic and international travel, industry trends and consumer spending and confidence.
These aspects will change over time and throughout the year. Keep a close eye on them and to avoid any risks.For example the COVID-19 pandemic dampened any hotel construction project growth.
Within the coming year and 2023, new hotel openings are expected to increase but this also comes at a much higher cost post pandemic. It would be best to factor in contingency plans that could result in these factors negatively impacting the hotel.
As previously highlighted, location to build a hotel not only impacts overall construction costs but is key to a hotel’s success. No matter the type of hotel being built, it is important to scout out the competition and ensure there is ample opportunity for your hotel to do well.
Renovations
In some cases, it may be more beneficial and cost effective to purchase and renovate existing buildings or hotel properties. Earlier we highlighted that B&Bs and guesthouses are accommodation options that tend to opt for redevelopment due to the size and services offered.
It’s always a good idea to speak to specific hotel architects and builders for a better evaluation of costs that would go into a renovation and make an informed decision from there.
City & state regulations
An important factor to consider and will usually appear when purchasing land are regulations within the area or city. Building zoning laws and registrations differ across countries, cities and states. Depending on how many amenities you wish to build within your hotel will influence the number of permits and regulations needed to be met.
Some examples of this between states and countries may include hotels ensuring the building and materials meet natural disaster requirements i.e. Earthquakes or hurricanes. Other permits and regulations to think about include:
- Planning and building permits
- Building permits for pools depending on size
- Accomodation that provides food will need additional registrations
- Insuring the hotel business (public liability, product liability etc.)
Is it cheaper to buy or build a hotel?
This isn’t a simple answer and all depends on the buyer and type of hotel being built.
Building a new hotel can be more beneficial in the long run as less money is being spent on repairs and maintenance, which in some cases can cost the same as installing new systems.
In addition, hotel new builds perform better in the market as consumers aren’t opposed to spending more on something new.
It’s important to invest in a reliable market when deciding to build a hotel. Hotel renovations can be a more suitable option especially in popular markets where available land is not easily found and construction costs are much higher.
You’re also able to get a better look on what the hotel ROI would look like as you can use existing hotel operation data.
In comparison to building a hotel where it could be at least a 3 year process, you’ll see profit and income much sooner when buying an existing hotel; acquisition costs can be significantly lower than construction costs. However, there are less branding and design options than what can be done with a new hotel.
Overall, there is a high demand for all accommodation types, so don’t be swayed by not having the budget to create the world’s best 5* resort getaway from the start. Motels, B&B’s, and 3 star hotels bode just as well in generating revenue but at a smaller capacity and can be a good stepping stone into the hospitality industry.
There are also a number of benefits and cost savings associated with a hotel renovation rather than a new-build which could allow you to start higher up on the ladder.