Five Quick Tips about Hotel Development
You've decided to develop a hotel, but don’t know where to start. Developing a hotel from the ground up is a truly rewarding and challenging experience. From idea conception to opening the doors, hotel development takes a clear vision, proper planning, perseverance, patience, and of course FUNDING. There are so many questions when starting: what type of hotel? Should it have limited or full service? Should it be part of a major brand or are can I take an even riskier step and go independent?
1. Location. Location. And did we mention location?
Finding the perfect location is often extremely challenging. If you own the land, it may have to be rezoned for residential or mixed-use. There may be environmental issues or site control concerns that you have to be aware of when acquiring land. There are many questions to ask: Is it near other market demand generators? Is it in a desired market area with a lack of supply? Do you add it to an area where there are many other options and differentiate yourself? Or is it in the middle of nowhere by itself? The main goal is having the best location! And you have to ask these questions before you finalize your brand vision.
2. Brand Selection
First step is identifying a location the next major step is to identify a brand. With Marriott International has 30 brands. Hilton has 14 brands. Hyatt has 13 brands, and there are countless others. Differentiating between the major brands can be extremely confusing for those in and outside of the industry.
The most important decision is what brand will best fit your desired market. Do you want to be paired with a well-known brand? Pairing with a well-known brand creates a dual effort for the brand and you because they are partnered in your success. Do you want to develop an independent brand? There’s also soft branding, if you’re concerned about a brand being saturated in a market. These decisions are tough, but key in matching it to your desired location decisions.
Finding an operator is like getting married. You collaborate with this person to manage and operate your idea as a dedicated partner. You’re trusting this management company to help you manage your new hotel asset.
When determining a management company or hotel operator it’s important to do your due diligence to make sure that the company has the experience to operate your hotel l. For example, if you develop a small boutique lifestyle hotel, it’s probably not a good idea to select a hotel management company that only has experience managing full-service convention hotels because boutique-ish lifestyle guests are not the same type of guest as those visiting conference or convention hotels. So it’s important to obtain a management company that understands your brand and target market to attract the right guests for your hotel.
Once you’ve selected a few location options with brand and operator pairings, it’s time to get to the nitty gritty-- conducting a feasibility study It’s extremely important to get a feasibility study completed by a third-party company,such as CBRE PKF, HVS, or Horwath HTL. This study has several components to determine if the project is feasible, profitable and in demand. It’s important that this is prior to obtaining financing and before finalizing your hotel brand selection.
Elizabeth Beliakova, a Consultant for Horwath HTL states while preparing a feasibility study, one thinks about every aspect of the proposed hotel that may not be considered otherwise. The feasibility study provides a deep dive into the market demographics and economy, site location, current and future demand, hotel branding and programming, possible competitors, future supply, sources and uses of funds and the return on investment. All of these details provide a crucial understanding of the possibilities of the proposed project, which can benefit the developer in the branding, financing, and even project incentives.
5. Money: Find the Funds!
According to the HVS 2016/2017 U.S. Hotel Development Cost survey, cost per room accounts can range from $95k (budget/economy hotels) to $551k (luxury hotels). These costs include land acquisition, building and site improvements, soft costs, FF&E, pre-opening and working capital. So it’s important to do your research and determine your total project cost before trying to obtain financing. You have to know when your project will become profitable based on your building costs and have a plan for each level of major cash purchases during your development process.
I know this can sound daunting and you’re not sure where to begin after reading this. If this is your first time developing a hotel, it is highly recommended to get a consultant or find an experienced real estate developer to work with as soon as possible to help you walk through every step of the process. You also want to begin developing your development “A” team sooner than later.
This is part one of our three-part hotel development series, providing tips and insights on launching a hotel from the start.