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Hotel feasibility study: Methodology

Opinion
Tourism & Hospitality

Last updated on 09 January, 2024

Welcome to our series of articles on feasibility studies.

Today we are going to give you more details on how we work feasibility studies for hotel projects as tourism consultants.

Introduction

In the world of hotel development, a hotel feasibility study plays a vital role in evaluating the economic viability of a proposed project. Typically required by mortgage lenders or investors, this study examines whether the projected value of the hotel development surpasses the associated costs. Conducted by specialized independent consultants, a comprehensive feasibility study analyzes revenues, expenses, and net income to determine the financial feasibility of the project.

A hotel feasibility study is a crucial step that involves an in-depth analysis of various factors. In this article, we will explore the essential elements and methodologies of a hotel feasibility study, providing valuable insights for investors and developers.

The following major parts should be included in a hotel feasibility and financial analysis study:

Location Assessment
Market Analysis
Technical considerations
Financial Analysis
Risk Assessment

Let's go one by one with further details below:

Location Assessment

Choosing the right location is critical for the success of a hotel project. Considerations one may have include:

Transportation access: Accessibility and proximity to transportation hubs, airports, major highways, and public transportation.
Evaluation of local attractions, amenities, and business centers to gauge the potential for guest demand. What are the demand generators for leisure and group travelers?
Assessment of the neighborhood's growth potential, demographics, and compatibility with the target market. How large is the typical household? What is the area population and is the number increasing or decreasing?
Household economics: What is the unemployment rate? What is the median income? How much disposable income do area households have?
Analysis of zoning regulations, land availability, and potential development constraints or opportunities.
Area economics: Which large corporations are based in the area? Who is growing or shrinking? What is office vacancy rate?

Location analysis in Hotel Feasibility study. Source: Aninver

We will also review the subject parcel’s size, access and visibility, topography, availability of utilities, and other site-related necessary attributes. And it will be very important to understand demand generators for hotels.

Market Analysis

The consultant will analyze occupancy, average daily rate (ADR), and revenue per available room (RevPAR) of a market area. A comprehensive market analysis is essential to understand the demand, competition, and market dynamics.

How to get that information? A hotel market report from STR, identification of hotels under construction and interviews with management of competitive hotels.

Key considerations include:

Evaluation of local and regional tourism trends, visitor statistics, and economic indicators that may impact hotel demand.
Identification and analysis of competitor hotels, including their size, quality, market positioning, and performance metrics. We will also understand their performance in last years.
Market segmentation and identification of target markets based on traveler profiles, preferences, and trends.
Assessment of market drivers, such as major events, attractions, business sectors, and government initiatives.
Recent and potential hotel openings: How many hotels have opened in recent years and how have they impacted the market? How many hotel projects are in the works? Types, rooms, etc.
Market segmentation and market penetration: What is the market segmentation and penetration of each competitor in the market?

Market analysis - Evolution of visitors. Hotel Feasibility Study

Market analysis in Hotel Feasibility study. Evolution of visitors. Source: Aninver

We will analyze its likely future performance in terms of occupancy, ADR, and revenue per available room (RevPAR).

Technical considerations

Thorough evaluation of technical aspects ensures a hotel project's functionality and efficiency. The general steps include the following:

Classification and size of the hotel based on market demand and local regulations.
Room and suite configurations, amenities, and facilities required to meet guest expectations and industry standards.
Evaluation of architectural design, construction costs, renovation requirements, and compliance with building codes.
Assessment of technology and systems, such as property management systems, security, energy efficiency, and sustainability initiatives.

Technical considerations in Hotel Feasibility study. Source: Aninver

Financial Analysis

Conducting a comprehensive financial analysis is crucial to assess the project's profitability and return on investment. Key considerations include:

Estimation of initial investment costs, including land acquisition, construction, interior design, and pre-opening expenses.
Calculation of operating expenses, including staffing, utilities, maintenance, marketing, and administrative costs.
Revenue projections based on room rates, occupancy rates, average daily rates (ADR), and revenue per available room (RevPAR).
Financial metrics such as net operating income (NOI), return on investment (ROI), internal rate of return (IRR), and payback period.

Financial analysis in Hotel Feasibility study. Source: Aninver

Risk Assessment

Evaluating risks associated with a hotel project is crucial to minimize uncertainties. The following are some aspects to consider:

Market risks, such as changing travel patterns, economic downturns, competition, or shifts in demand.
Operational risks, including staffing challenges, regulatory compliance, reputational risks, and safety/security concerns.
Environmental risks, such as natural disasters, climate change impacts, or seasonal variations affecting tourism demand.
Mitigation strategies and contingency plans to address identified risks and challenges.

With extensive experience in the tourism and hospitality sector, our team has established itself as a trusted advisor and consultant in the industry. Over the years, we have successfully assisted numerous clients in developing and implementing strategies to capitalize on the potential of the tourism and hospitality markets.

Our expertise covers a wide range of areas within the sector, allowing us to provide comprehensive support to our clients. From conducting market studies and feasibility assessments to advising on investment opportunities and tourism development plans, we have a proven track record of delivering valuable insights and actionable recommendations.

See below a few of the consulting projects we executed lately:

About the author

Alvaro de la Maza

Alvaro de la Maza is one the founding partners of Aninver Development Partners. Alvaro is a Civil Engineer, MS on Infrastructure Management and MBA by IESE Business School.Alvaro has extensive experience in Infrastructure and Public Private Partnerships. Alvaro has worked and led multiple consulting projects for clients such as the World Bank, the African Development Bank and other donors.Alvaro enjoys creating digital products and he has led the development of market intelligence platforms in d...

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