The hospitality industry is ever-increasing and ever attracting new investors. Building hotels is always an excellent financial investment. However, stakeholders need to know the costs necessary to build one before setting up one. Hotels vary in size and use, from simple hotels to mega luxury hotels. Many factors affect hotel construction costs like size, location, amenities, and complexity of services. This article will discuss the costs necessary to build a hotel.
But first, where did we get this data from? The information on our estimated costs for building a hotel comes from various sources. We have used construction estimating databases like Rsmeans, independent publications, and reports from contractors and suppliers.
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So, what is the average construction cost for a hotel per square foot? These costs heavily depend upon a hotel’s size and location. Not all hotels cost the same per square foot. According to Statistica, construction costs of a three-star hotel range from $212 to $550 per square foot across different cities in the US. The location alone can account for up to 70% of the construction costs of a hotel.
| TYPE OF HOTEL | AVERAGE CONSTRUCTION COSTS PER SQUARE FOOT |
| Motel | $160.04 |
| 3 Star Hotel | $282.5 |
| 4 Star Hotel | $335 |
| 5 Star Hotel | $441 |
Apart from location, the hotel type is one of the most significant cost drivers in hospitality projects. They are always a massive part of the initial discussions during cost estimation to arrive at the project’s expected costs. The four major classes of hotels are motels, 3-star, 4-star, and 5-star hotels.
A motel is a small hotel primarily designed for motorists with rooms and parking arranged directly from the parking area. Motels were developed when highways developed in the 1920s, and long-distance journeys became common. There was, therefore, a need for accommodation close to major highways. Motels usually are 2 to 3-story buildings with a few amenities. Different cities have different construction costs per square foot. The average construction cost for motels per square foot in the US is $160.04. Since the amenities in a motel are lower, construction costs for building a room are also lower. A hotel with the same number of rooms as a motel would cost more to construct. The average cost to build a room in a motel is about $75,000.
A three-star hotel offers average amenities, high attributes, and design with a comfort ranking of three. These hotels are typically located near expressways, business centers, and airports, thus providing clients with brief but comfortable stays. They often have gyms and pools. They must have phone services and WiFi in public and private quarters. The average construction cost for a 3-star hotel is $282.5 per square foot. This brings the average price for constructing a room in these hotels to about $221,000.
A 4-star hotel is a hotel with above-average deluxe services for guests. These hotels are located near city centers and have exclusive spa areas, in-house gyms, and swimming pools. The hotels must have designated reception areas and serve breakfast and dinner throughout the week. These hotels have a comfort rating of 4. Due to the more amenities these hotels have, the construction costs are also higher. The average price for constructing a 4-star hotel is $335 per square foot. Therefore, the average cost for building a room in a 4-star hotel is $318,200.
Five-star hotels offer guests the highest luxury levels through sophisticated accommodations and personalized customer experiences. These hotels meet and sometimes supersede guest expectations regarding luxury, décor, and comfort. 5-star hotels have child-keeping services, a high staff-to-room ratio, multilingual staff daily, and other exemplary services. They have superior guest rooms, night lighting, pools with day beds and umbrellas, gyms, and spa services in terms of comfort. They also have communal and shopping areas. Due to the high number of amenities provided in these hotels, the construction costs are subsequently higher. The average construction cost for 5-star hotels per square foot is $441. On average, it costs about $604,200 to construct a single room in a five-star hotel.
There are different construction costs associated with building hotels. Hotels vary in size, number of rooms, construction materials, and land. Therefore, one needs to be wary of the construction cost breakdown to develop accurate budget estimates. We will discuss below some of the expected associated land costs with hotel construction.
Land costs heavily affect the costs of building a hotel. In some locations, land costs can account for up to 70% of the total project cost. However, land costs are about 15% of the project’s cost. You should therefore have a realistic budget range to invest in your land costs. The land costs are the price of the land and include financing, taxes, licensing, and real estate fees. They are a one-time expenditure but heavily affect a project’s profitability. However, a new construction project increases land value thanks to the investment in the asset.
Soft costs are also referred to as indirect costs. These costs are associated with the non-tangible items of a construction project, and examples of these costs are design fees, taxes, and insurance. The design fees are the costs of feasibility studies, design work, and project planning. We also have soft costs in the form of inspection fees, including the charges for building permits, inspection, and occupancy permits. They are necessary for the client to gain authorization to commence a project. Equipment, tools, and rentals are not associated with final project delivery. A contractor needs to budget for these costs as they are necessary to keep a project running.
Other soft costs include professional dues, insurance, project management, and loan interests. These costs should account for about 12% of the total project costs.
Hard costs are brick-and-mortar costs. They are the costs associated with the actual construction of a project. As a good rule of thumb, hard costs account for about 70% of construction costs. Hard costs include labor and material, site and landscaping, contingencies, overheads, and change orders. The labor and material construction costs vary from one location to another. All materials and labor necessary for the construction of a hotel are quantified as hard costs. There are also hard costs in the site preparation and landscaping. There are costs such as paving, grading, and site piping in site preparation. In landscaping, the associated costs include tree planting, lawn mowing, and preparing the land to look aesthetically appealing. Contingencies refer to the money kept aside to cover unexpected conditions. Change orders are the additional expenses when costs deviate from the original project’s scope.
This refers to the operating reserves necessary for clearing technical service fees and buying inventory before the commencement of operations. These are not calculated together with construction costs, but they are essential for a hotel to start operations, and they cover 1% to 4% of the total project costs on average.
A hotel cannot be complete without furniture, fixtures, and equipment (FF&E). Guest rooms, conference rooms, and business centers in hotels need FF&E to run smoothly. Every hotel has standard furniture such as desks, chairs, shelves, headboards, partitions, tables, and podiums. Hospitality facilities also have computers, projectors, televisions, and printers. FF&E purchase costs are about 5% of the initial total construction costs, but the costs increase up to 9% during the hotel’s lifespan due to the need for renovation and replacement of items.
Before constructing a hotel, you need to consider some key factors that affect costs. Below, we have listed some of the most common factors affecting hotel construction costs.
The project’s location heavily affects construction costs. If you are constructing a hotel in a high-value area, you will build a high-value property. Land acquisition costs are also higher in high-value areas. If a location is far from the available resources, it costs more as the transportation costs for labor, equipment, and materials spike. Different locations have varying design and planning regulation procedures and separate tax and environmental requirements. This ends up impacting the construction costs.
Another critical factor that drives up the construction costs in a hotel is the site conditions. The construction costs are affected by extreme climatic conditions, seismic zones, mountainous topography, groundwater, poor soil conditions, and stream crossings. A contractor might need to involve a more considerable labor force to overcome some hurdles accompanying unfriendly site conditions.
It is easy to underestimate the cost of finishes and furnishings when estimating the construction costs for your project. These are the most expensive parts of a building. The finishes and furnishings cost even more than the roofing materials. Clients who want an exquisite look spend more on a project’s finishes. Some of the interior finishes in a hotel are cabinets, doors, paint, tiles, lighting, and mirrors. Over the years, the owner also incurs more costs for upgrading the finishes. There are also external finishes that are meant to create good scenery for the hotel. These exterior finishes are the costs for erecting walls and landscaping in the project. These costs also vary depending on the client’s needs and the type of project.
Construction costs are also heavily affected by a project’s size and scope. Large hotel projects need more materials and labor to complete. There might also be the need for highly skilled labor for more significant projects. The more detailed and extensive the project, the costlier it will be.
Hotels are big projects that take a long time to complete. The longer it takes to complete a project, the higher the costs. If the project utilizes additional resources, project implementation can be accelerated. When projects take a long, there is also a need to account for the expected inflationary rates over a period. Initial cost estimates rarely account for inflation, but it is crucial. Inflation rates are sometimes as low as 1-2% per annum but sometimes are as high as 10% per annum.
Sometimes regulatory and insurance requirements can be costly and must be considered during cost estimation. General insurance requirements include performance and payment bonds and contractors’ public liabilities. Some projects might have additional regulatory requirements that bring about additional costs.
With the figures in mind, we can conclude the average construction costs for hotels. The more luxurious a hotel is, the more expensive it gets. Small 2-3 story motel facilities cost an average of $7,265,000.
For a 100-room three-star hotel, the total construction costs are about $22.1 million.
Defining average costs for construction can be problematic due to the high number of variables involved. Does the hotel have a pool? Does it have a fancy lobby? Does it have a gym? Despite the variability, a study conducted in 2017 by Cushman and Wakefield came up with average hotel construction costs and classified them into five classes. This study assumed each of the hotel classes has 115 rooms. Based on these averages, below are the average construction costs for these hotels:
A four-star hotel with 100 rooms averages $31.82 million, while a 100-room 5-star costs over $60 million to construct.
Hotel construction is a big undertaking, and it would be unwise to venture out in construction without computing accurate construction costs. Once you break down the construction costs and review your budget, the prospects will appear more doable. Using the figure depicted in this article will give you a clearer picture of what you expect to spend before embarking on construction.
