The Ultimate Guide to Hotel Feasibility Analysis

The process of developing a hotel is usually complicated and expensive, often involving several parties who all have different goals that sometimes clash. Since investors, operators, lenders, and consultants all use different standards to assess a hotel's future value, they can approve initiatives that are unlikely to meet the market and financial objectives of the other stakeholders.

When building a hotel, investment in the construction is generally preceded by a feasibility study, the stated goal of which is to give the necessary stakeholders the data and analysis required to evaluate the project's financial viability. In this article, we’re taking a look at how to deliver a feasibility report for a hotel project in an optimal manner.

What is a hotel feasibility study?

A hotel development feasibility study examines a potential hotel construction project to see whether it would be a sound and profitable financial venture. The amount of investment needed, financial factors, anticipated revenues, IRR (internal rate of return), rate of return on investment, market viability, and site studies will all be investigated. In short, demographic, geographic, economic, market, and financial analyses are required for feasibility studies for hotel developments.

Why is a hotel feasibility study important?

Hotel feasibility studies are important because it is crucial to try to manage, and then decrease the developer's risk and provide the tools required to assist decision-makers in assessing whether the project is financially feasible or not, and if so, how best to proceed given the substantial capital expenditure frequently required in hospitality projects. As a result, without a thorough feasibility study, investors, lenders, and other important stakeholders are not likely to support your hotel company, which makes finding finance increasingly difficult.

The assessment of new chances for hotel projects is another important component of high-quality feasibility studies, which is crucial in uncertain economic times. For instance, hotel brands have recently grown quite fragmented, with new names constantly emerging seemingly at random, making consumers confused about what each brand does and stands for.

Steps to do your hotel feasibility analysis

Step 1 - Focus on a comprehensive Hotel location analysis

In this stage, the physical size and location of the proposed hotel development are analyzed in detail. This includes site accessibility, visibility, and proximity to demand generators as well as evaluation of labor skills and vendors in the local area, existing infrastructure, communications infrastructure, zoning laws, local government restrictions, parking availability, and access to transport. The feasibility analysis will also evaluate the demographics, economic, and social conditions of the local area, looking at population trends, household growth, area economics, and tourist attractions.

This can be critical in attaining local planning approvals, while also helping determine the amenities you should offer, the optimal room type and mix, parking requirements, and even forecasting future expansion. Additionally, it is also important to look at the scope of the proposed project as a whole to understand the different participants in your hotel development team and their roles.

Step 2 - Research a detailed, up-to-date Hotel market analysis

Assessing the current and future market penetration expectations is another important part of a hotel feasibility study, essentially answering the question “If we build it, will they come?”. To forecast this accurately is challenging, however solid analysis is essential to understand the levels of supply and demand that exist, where the demand lies, and what draws people to your destination.

This part of the hotel feasibility study tends to focus on two key areas – assessment of present and future demand in the market, given the current competitors to your proposed hotel or resort, and estimating operating income and expenses over the first 5-10 years to determine profitability.

This stage should also answer questions about defining your target market and looks at your competition, answering questions about the performance and number of similar hotels and resorts in the area, their average daily rate, revenue per available room, their successful marketing tactics, and so on.

Step 3 - Understand the financial costs and forecasts

A hotel feasibility study should lay a financial analysis of the project in detail, forecasting as accurately as possible the development of the hotel or resort, and the operating costs over the next 5-10 years. This is critical, as no matter how good an idea is, it’s the financial impact that will be the most important deciding factor in moving ahead with the project.

This includes evaluating the resources needed to implement the project, where these resources are coming from and the costs involved, the realistic forecasting of income year-by-year, the break-even schedule, the discounted cash flow, and the financial risks associated with the project, to name a few.

Step 4 - Analyse and review your data to get a complete picture and develop flexibility

The hotel feasibility study presents your idea on the table and demonstrates its potential using measurable data and expertise. This information is crucial for making decisions about the project's overall direction as well as how to modify it to take advantage of any new opportunities the research has found. It highlights potential risks, examines how market dynamics or expectations may have changed, considers how the competition is performing and evolving and assesses the business environment as a whole to get a broad perspective.

The plan will be thoroughly understood by all parties involved with the aid of a thorough hotel feasibility analysis, which will also serve to guide important decisions on the interior design, technology, staffing, vendors, facilities, and menus.

Comprehensive Hotel Feasibility Reports from Industry Specialists

Proven Partners has established itself as one of the best hotel and resort feasibility study companies for national and global hotel development. Based on years of experience specializing in hotel and resort development, we deliver the expertise, guidance, and insight needed to deliver a comprehensive hotel business strategy needed to attract key investors and move forward with your business plan.

If you’re looking to determine the viability of your hotel project, raise capital, or restructure, Visit the Proven Partners Hotel Feasibility Services page to get started with your own hotel development feasibility study.