Hotels have long been considered a stable, long-term investment.
In 2022, the cost to develop a midscale hotel in Canada averages between $145K and $197K/sq. ft. This includes all land, construction, furnishing and soft costs. These figures vary by province and market, with the Vancouver/Lower Mainland area and Greater Toronto Area being the most expensive.
In their annual 2021 U.S. Hotel Development Cost Survey, global consulting firm HVS divides hotel costs into six categories.
This is the cost to purchase the land. It does not include closing costs, realty fees in some cases and land entitlement costs, which all fall under soft costs. As you would expect, the price of land differs from market to market.
Building costs (the general contractor’s bid), subcontractor bids (plumbing, electrical, HVAC and finishes) and contractor overhead are covered in this category. It also includes fees associated with permit applications, engineering costs and signage.
Site work encompasses grading, stormwater systems, utility tie-ins, above or below ground parking and landscaping. As with any large-scale construction project, a hard cost contingency is built-in.
Soft costs cover everything from the architect, consultant and professional fees to financing and holding costs (taxes, insurance, etc.). Legal and accounting fees fall under this category.
All furnishings, fixtures and equipment must be budgeted for. This applies to guest rooms, meeting rooms, common areas and public spaces. FF&E also covers carpeting, drapes, room accessories, technology and telecommunication equipment.
If your hotel is part of a chain, most of these items will be built into the specification – which ensures a consistent customer experience from one property to the next. The franchise will typically provide a list of trusted vendors who can supply these items at a preferred cost, based on the hotel brand’s buying power.
Before you can open your doors, you will need to budget for a variety of start-up expenses. An operating reserve will need to be established. Linens will need to be purchased. The bar will need to be stocked. Funds must be allocated for recruiting, training and onboarding of staff. Technical service fees also fall into this category.
If you are working with a developer, you will generally be charged a developer fee. This covers the developer’s time, effort and risk to develop the property.
According to the 2021 U.S. Hotel Development Cost Survey, the average development cost was 2% of the total cost. In Canada, these fees can be a % or in many cases, they are a static one-time fee.
HVS last published its last Canadian Hotel Development Cost Survey in 2018. Back then, the average total per-room cost was $179,288 CDN. While these numbers have certainly climbed, the following breakdown of costs still serves as a good guide.
Working with a hotel chain that has a set design standard for their hotels will provide cost efficiencies as opposed to building a custom-designed property.
Microtel Inn & Suites by Wyndham is an example of an upper-midscale brand that has moved to a modular/standardized hotel package in order to meet the market demand for a lower-cost product.
“Custom hotel builds where every property has distinct elements is challenging for all parties involves. It increases the risk around budget and timelines,” said David Donaldson, President & CEO of MasterBUILT.
“With Microtel’s next-generation modular MODA floorplans, we are able to give customers options, while bringing greater predictability to the project.
Microtel offers investors the choice of three design packages: no pool, indoor pool, or indoor pool + slide. The cost for a Microtel’s 76-room, 8,525 sf base package starts at $16M CDN (all in). This includes The Lobby – a branded bar & lounge.
No one will have a better or more accurate picture of costs than your hotel franchise agent. They have extensive experience building multiple properties. In many cases, they are in the best position to serve as your construction manager. Their in-depth knowledge and understanding of construction requirements will ensure nothing is overlooked and that no shortcuts are taken at the expense of quality.
Next to you, there is no one more invested in your brand and in your long-term success. For investors, it’s a level of experience you can bank on.
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