How Much Does it Cost to Build a Hotel

The investment in building a hotel could prove valuable to many investors looking to launch a new venture in a promising community. Hospitality may be a lucrative commercial real estate investment for many, but there are numerous costs to keep in mind, and those costs can amplify over time depending on the size, location, and type of project. Consider the following to learn more about the cost of building a hotel.

What are the Common Types of Hotels?

The average cost to build a hotel is dependent, in part, on the type of building constructed. Various hotel styles exist, including:

• Motels, typically with outward-facing doors
• Chain hotels, which are the most common and offer rooms connected by interior hallways
• Resorts, which typically offer numerous onsite amenities and features
• Conference and convention center hotels have large spaces and technological features to support events
• Extended-stay hotels, which offer a kitchenette and other features for long-term guests
• Boutique hotels often are specially designed or unique spaces

Factors That Affect the Cost of Building a Hotel

The average cost to build a hotel ranges from $13 to $32 million. Various factors play a role in that figure, and some are far lower in cost than this. Key to this includes:

Location

Availability of property in key target markets may be one of the biggest factors in hotel costs. The cost to build differs from one city to the next, as well as within the markets themselves.

Type of Hotel

The hotel type also places a factor in cost. The larger and more fully featured the property is, the higher the costs are likely to be. The type of hotel, in most situations, is dependent on the demands of guests within that target market. For example, a beachfront hotel is likely to cost more as a resort than a motel that is off a highway interchange with few local attractions.

Building Materials

Building material costs are a core factor in hotel development costs. The cost of materials will make up the second largest component of the cost after the purchase of the land. This will cover all costs related to the following:

• Baths
• Exterior and interior walls
• Foundation
• Interior finishes
• Kitchenette features
• Onsite amenities
• Windows and doors
• Plumbing and Electrical
• Speak features
• Roofing

Labor Costs 

The cost of building a hotel is also dependent on the cost of labor within the market. When labor is limited, due to demand, that can lead to a substantial added cost. Architect and contractor costs alone make up between 10 and 17% of the total cost of the construction project in a typical situation.

Permit and Other Fees

Each city sets fees and permits. Often, this begins with pursuing approval for the project, and over time, that may include approval for the project at various levels, along with ensuring code requirements are met.

How Much Does it Cost to Build a Hotel 

The average cost to build a hotel ranges from $13 – $32 million, dependent on location. However, costs are dependent on numerous factors and may often be easier to compare when broken down.

For example, costs in an area like Miami or Chicago will likely range from $700 to $800 per square foot of space. In other areas, like more remote locations or smaller towns, the cost could range from $105 to $125 per square foot, with the overall average falling between $150 and $475 per square foot. This drastic difference makes it hard to pinpoint an actual value for any structure.

Land Acquisition

One of the core components of the cost of building a hotel is the land cost. The purchase of land large enough to accommodate the specific hotel needs while also being in a desirable location is the first step in the process. Before any building can take place, the investor must consider any local rules and limitations on some parcels of land for such projects. Estimate about 14% of the budget for the project to go to the cost of buying the land.

Hard Costs

Hard costs are those associated with the actual building of the project. This often includes the costs of the construction work as well as all materials and labor involved. The higher end the hotel is, the higher these costs are likely to be. They amount to 70% or more of the overall cost to build a hotel, though that may be less in some areas depending on the hotel classification and features.

Soft Costs

Soft costs involve other items, including architectural work, engineering, and permitting, as well as taxes, insurance, and maintenance costs. Labor costs are sometimes included in this figure as well. These costs will depend on the location as well as the scope of the project. Generally, they will also include the ongoing costs associated with the project, such as interest on mortgages during the build.

FF&E (Furniture, Fixtures, and Equipment)

The cost of building a hotel must also take into consideration all of the finishing touches. This includes the cost of furnishing the property with furniture, fixtures, and necessary equipment. Properties with onsite restaurants or luxury amenities may have higher costs associated with these features as well.

Contingencies 

Investors also must take into consideration contingencies. There are situations where delays can occur, lawsuits may be a factor or higher-than-expected costs are associated with the project. This can add to the cost and must be planned for in the obtaining of capital to build a hotel.

How Much Does it Cost to Run a Hotel?

Once the property is built, the investor must then consider opening and running the hotel. The cost of running it will depend on the type of hotel, onsite amenities, and location. Generally, the operating expenses will amount to as much as 90% of the revenue that comes in from the property. Costs are higher in some areas and significantly lower in others.

Financing Options for Building a Hotel

The cost of building a hotel is often financed. Commercial real estate lenders provide a wide range of resources to help support buyers and investors in the construction of desired properties like this. There are a variety of lending options available from local banks, investor funding, and SBA 504 and 70A loans, among other options.

Should You Build or Buy a Hotel? 

Investors may wish to consider the benefits of buying a hotel that is pre-constructed or building one. It is typically less expensive to purchase a hotel. However, location, availability, and the desirability of the currently existing hotel will make a difference not only in the need to upgrade and modernize but also in the type of clientele that is attracted to the space. A new hotel may warrant a significant amount of attention, while an older hotel may require repairs to older systems like the roof.

Wrapping Things Up

Investors considering the average cost to build a hotel must take into account many factors, including location, style, size, and scope of the project. The hotel development cost will also vary based on the cost of labor and hard materials, the financing used to purchase them, as well as the demand for qualified professionals to handle projects. The cost to build a hotel may also vary significantly based on local city laws and limitations on hospitality industry buildings.