Hospitality How-To: How to strategize when building a new hotel

The journey from conceptualizing to constructing a hotel requires more than just a vision. It demands a strategic roadmap, underpinned by thorough planning and insightful decision-making. And as we head further into the year, sources said building new hotels is poised for success.

“Interest rates and construction costs have stabilized, and though they’re higher than they were, the volatility we saw in 2023 has subdued, giving people confidence to move forward with planned projects,” said Kyle Hughey, CEO of hotel management company Charlestowne Hotels, which has seen demand for building projects return this year. Where things slowed down in mid-2023, Charlestowne’s clients are looking to resume projects in the second quarter of 2024.

Understanding the Market

Stabilized interest rates are key for building success. So too is assessing a market’s demand and supply.

“A general assessment of the market and submarket would include the overall economic health. Is this a business-friendly environment? Are new businesses coming to this market and are existing businesses expanding and creating job growth? Is the community’s population growing across multiple age groups? All of these factors and more will indicate the likelihood of continued growth in demand for lodging product,” said Rick Takach, chairman and CEO of Vesta Hospitality.

Additionally, site visits with established hoteliers are critical, according to Mike Nixon, chief development officer and president of Expotel Hospitality. “As are meetings with the local chamber of commerce to understand what’s driving tourism or business growth in the area,” he said. “We want to help owners establish a plan so they can succeed in the market we have today and adapt to how it will evolve over the next few years.”

Location, Location, Location

The adage will always hold true: Location, location, location. The success of a new hotel is significantly influenced by its location. But there’s more.

“These days I also lean into thoughts of brand, brand, brand,” Nixon said. “Regarding specific site selection, you want to prioritize ease of access and guest visibility from the road. At least, that’s how it used to be. These elements all still play a factor, but mobile bookings have become so prevalent that direct visibility is not always as critical as it once was. Hotels can instead benefit from proximity to local attractions, restaurants, and more if they have the right positioning. This is where picking the right brand plays a role.”

Location is “everything,” Takach said. “We are focusing more than ever on finding locations for new builds or value-add acquisitions that are arguably irreplaceable. You can always improve upon an existing physical structure once you have a great location,” he added.

Beyond that, he said it’s important to understand the demand generators in a given area and the overall submarket strength, along with site specific factors. These site-specific factors can include everything from technical construction aspects like the need for soil stabilization or landscaping and stormwater management to traffic patterns, parking and accessibility to nearby restaurants, shopping and attractions.

“Over time, you understand that it can cost just as much to build and do periodic property upgrades at a less desirable location than at a premier location. But it is that premier location where you can best project and drive revenues,” Takach said.

Managing Risk

Risk management is another key to the equation. According to Hughey, there are two categories to consider when embarking on a new project: developmental risks and operational risks.

Developmental risk is all about feasibility. “Does the cost and interest rate in the current market make a project worthwhile? Is there the right return? We’re going to be a partner in reviewing current market costs and setting expectations,” Hughey said.

Operational risks are about understanding there’s a ramp to stability and financial viability, he said. “A hotel can’t open on day one and be stable. At Charlestowne, we want our clients to have a roadmap for a three-year ramp up to get a property operationally efficient in terms of offerings, revenue drivers and expenses. We encourage them to trust the process and trust that we’re going to be pulling every lever operationally to maximize revenue and flow to the bottom every dollar that we can,” he said.

Adapting to Industry Trends

Hughey also emphasized the importance of identifying trends with staying power, especially for independent hotels. This foresight can guide the development process to ensure the hotel remains competitive and relevant.

“We’re very focused on research and data analysis. We need to have a clear understanding of what’s trendy versus what has staying power, especially for independent hotels,” he said. “We can analyze a trend and help it evolve into something that has staying power based on what the market or guest demands.”

Takach said flexibility to adapt amid changing industry trends is paramount. “We understand that over time guest expectations for their lodging experience will change and our current strategy is to own and operate our hotels over a long period of time,” he sad. “Keys to success therefore include flexibility to modify our operations to accommodate these expected changes.

“It is also critical to maintain sufficient capital reserves to renovate and reimagine our hotels to remain competitive with the competition,” he added.