How to Conduct a Hotel Feasibility Study and Analyse Hotel Projects

Conducting a Hotel Feasibility Study and Analysing Deals
November 10, 2015 Michael Metcalfe

Conducting a Hotel Feasibility Study and Analysing Deals

hotel feasibility study

So you’re thinking about a new hotel development or hotel repositioning project? You’ll want to understand the financial viability of the proposed project. That’s why you need a hotel feasibility study – to determine if the overall economic gains generated outweigh the hotel’s project costs. This guide details how to conduct a hotel feasibility study analysis and prepare the documentation required.

What’s a Hotel Feasibility Study?

A hotel feasibility study is a report produced for hoteliers, owners, investors and lenders. It researches and analyses variables that impact profitability of new hotel developments or turnaround projects. The investigation looks at supply and demand of specific locations and competition, then forecasts demand and project returns from revenues and expenses. Voila… that’s the basics of the hotel feasibility study!

It’s typically completed by Hotel Consultants, to offer an independent yet expert opinion. If you ‘DIY’ it, you’re massively increasing your risk of misguided investment plans and rejections from lenders. 99% of hoteliers, investors and owners demand economic return. Other owners may be ego driven and will still progress projects regardless of hotel feasibility study findings. Read hotel investment reasons.

hotel feasibility study tips

Your hotel feasibility study links with your hotel business plan and financial plan. Here’s the key steps…


1. Supply/Demand Dynamics

a) Undertake research into the specific market. You can find detailed reports and trend analysis from HotStats, STR, National, Regional and Local Tourism Offices, plus inbound tour operator reports. Search for target market news that will impact supply and demand. It’s the start for your hotel feasibility study.

b) Review the existing hotels, accommodation facilities, quality segments, rooms and total supply at the location. Analysis should quantify and then allocate room-night demand across present and proposed supply of lodging (by comparing competitiveness) and understanding the destination actual guest mix.

Your hotel feasibility study now has a projection of local hotel demand.


2. Occupancy & Average Rates

Using demand projections, forecast annual occupancy and average room rate. Consider how the hotel will be positioned in the local market. Assess its competitive set, quality segment, inclusions, facilities, target guests, location, distribution and brand strength. You can use a comparison of the strengths and weaknesses verse competitor hotels, then assess occupancy and rate differences based on existing data and the local demand projection. When doing a hotel feasibility study, benchmark all competitors.


3. Hotel Revenue Projections

For the hotel feasibility study, we must now estimate the rooms, F&B and total revenues. Forecasts for 5 years are needed. A formatted Hotel Real Estate Financial Model helps to summarise the financials.

a) Using occupancy and average room rate from above, calculate room sales revenues and cycles
b) For other revenue centres (like food and beverage or concierge sales), forecast the percentage of guests who will likely use such services or the average revenue per guest, to know their influence
c) Consider other ancillary revenue, like meeting bookings, day sales and conference event sales


4. Hotel Expense Projections

The hotel feasibility study must then consider expenses against your revenue model.

a) Work out the hotel’s forecast operating costs. This will include labour and be listed by department
b) Analyse the fixed overheads. This forecast is based on the scale and type of property (inc. general admin, electricity, power maintenance, franchise or management fees, plus sales and marketing). It’s often calculated on room totals and percentages of revenue, based on known regional benchmarks

c) Other ownership costs (i.e. building and other insurance, rates, furniture, equipment and reserves)


5. Net Operating Income Model

The hotel feasibility study now has a net operating income financial model. A sensitivity analysis may then be applied (e.g. the project impact of 5% less revenue only in Yr 1 & 2, or inflated labour costs of 20% etc). All these projections can be compared with the hotel development or repositioning costs.


6. Hotel Feasibility Study ROI

You must now assess if the return on investment is attractive enough to warrant the cost and energy. If you require debt and / or equity financing, does the hotel feasibility study show sufficient return for the lenders and investors? Numerous analysis options exist. These options translate net operating income models into more simple decision making metrics. It’s the key outcome within the hotel feasibility study.

a) NPV    Net Present Value
b) IRR     Internal Rate of Return
c) DCF    Discounted Cash Flows

These evaluation methods are common. The weighted cost of capital discounted cash flow procedure is popular. It creates a forecast of economic value for comparison to the total project cost. Banks and lenders use IRR rules, debt coverage ratios, other covenants and investment performance hurdle rates (as do hotel operators and corporate finance teams). Everyone wants a highly positive project NPV.


7. What happens once complete?

The hotel investor or developer will review the hotel feasibility study results. They’ll likely consult with partners and lenders. A decision to proceed, cancel or redefine the hotel project will occur. If returns aren’t sufficient, variables might be changed to improve ROI (i.e. development costs, total rooms, hotel design standards, pricing rates). Tweaking and re-tweaking projects to reach hotel feasibility is normal.


A Hotel Market Demand Study…

Sometimes hotel investors and developers aren’t ready for a hotel feasibility study. Maybe they’re just exploring a destination market or product niche within a market, and they’ve not yet formed a project.

That’s when a hotel market demand study is best. It’s quicker, simpler and answers key questions like, what’s this accommodation market like and would accommodation product XYZ potentially work here.


Can Hoteliyo help your project?

Sure. Whether you need a hotel feasibility study or hotel market study, get a quote and we’ll guide you through the options. Depending on your phase, progress and goals, your specific needs might differ. In completing the hotel feasibility study or market demand study, we can be on-location or work virtually.

 

As always, we're interested to hear your thoughts on this topic. Let us know in the comments below!

Good luck with your hotels!
- Michael Metcalfe @ Hoteliyo

PS. Need more hotel and resort help? > See our Services | Get a Quote | Hotel E-Store | Contact Us

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22 Comments

  1. Sam Julian 4 months ago

    A helpful article on hotel feasibility study projects Michael. Many thanks

  2. Dave Andrews 5 months ago

    Awesome! Your hotel feasibility study article was very helpful for my school project. Thanks!

    • Author
      Michael Metcalfe 4 months agoAUTHOR

      Sounds like a fun school project. You’ll enjoy your hotel career!

  3. Gabby Sebastian 5 months ago

    I’m from New Zealand and looked for hotel feasibility study articles to help me with a hometown hotel idea. Needless to say, this post had been very helpful. Thank you Michael for this blog and I hope to talk with you and view your other services to help me expand my hotel business.

  4. Patrick 5 months ago

    You’ve just helped me in passing my exam. Thanks

  5. Adrian Levi 8 months ago

    Very very useful! For someone with no idea of how to approach ‘feasibility’ for an investment, this feasibility study article is super – many sincere thanks.

  6. Frank Wyett 1 year ago

    I agree with what you said on some hotel owner’s being ego driven sometimes. A great hotel feasibility study is the smart way to enter into this business. Must be nice to start projects which don’t make financial sense!

    • Author
      Michael Metcalfe 11 months agoAUTHOR

      That’s the reality! It’s sometimes not just for ego reasons also. A owner-operator, if branded or seeking to expand a brand, might take on an initially loss producing location if it creates high brand awareness and achieves other strategic goals. So it’s always good to look big picture as well as asset picture. Thanks for reading Frank.

  7. Banu 2 years ago

    Hi, I am a student and I have to do this as a project for the course i am taking at the moment. The project requires valuation and feasibility for any hotel of our choice. Is it possible that you could guide me on step by step process, (or show me a sample ) on how i should do this, I have never done such a course or project and I find it very challenging on how and where to start. I can choose any hotel in the UK – I am thinking about the Ritz-Carlton.

    • Author
      Michael Metcalfe 2 years agoAUTHOR

      Hello Banu – sounds like a beneficial hotel feasibility study project. I’m available for short or long calls to help… you can set these up on https://clarity.fm/hoteliyo, or just request a quote with more detailed information.

  8. Steve Joshua 2 years ago

    Hi Sir… excellent article. I need your help. We need to prepare a hotel feasibility study.

    • Author
      Michael Metcalfe 2 years agoAUTHOR

      Steve hi! How are things progressing with your hotel feasibility study?

  9. Raya Camille Marmon 2 years ago

    Good eve Sir! We we’re just starting a Feasibility Study about Hotel. We seriously don’t know the things and risks especially the top priorities to be considered in putting up a business like this. We hope you can help us in making this study successful up to the end. Hope to stay in touch with you for more advises for us. Thanks a lot Sir!

    • Author
      Michael Metcalfe 2 years agoAUTHOR

      Thanks Raya. Contact us with more info and hopefully we can help. All the best!

  10. Angelie Papina 2 years ago

    Nice site!! It helps and give us info on how to make a feasibility study about hotels, specially my cousin..!!

  11. Shannan Reid 2 years ago

    Hi Michael – Our city has 1 B&B and no hotels. The nearest Resort on the lake is 5 miles away and does not send HOT taxes to us. The next closest hotels are the Super 8 and Best Western 8 miles away. Neither of them impact our community or us send taxes.

    We have a growing base of tourism happening naturally. We have a lot of history to explore and within 10 miles of our sweet little town, we have 6 “Pinterest-style” wedding venues that have popped up in the last 2 years. They are doing amazingly well, but for good accommodations, they are driving guests over 25 miles to sleep. 🙁

    I’m working with Economic Development Council to bring a Courtyard Marriott style hotel to our city. I’m understanding that a feasibility study is our next step. I liked your article but could really use some guidance as it’s not my area of expertise. Thanks!

    • Author
      Michael Metcalfe 2 years agoAUTHOR

      Greetings Shannan. I’d start with the simple steps of supply and demand. Measuring room supply won’t be hard there. Speak with the B&B and wedding venue owners to analyse overnight demand trends and displaced demand (bookings staying out of town). Let us know how things progress!

  12. Benbert Mecarsos 3 years ago

    Hello, i am Benbert, i am 28 years old, and to be honest i really don’t any idea about running a hotel though i already have a small Inn business of only consisting 8 rooms…and now, i am planning to have a bank loan and i was able to comply all the needed requirements but i have a big problem because the bank were asking me a hotel feasibility study to the hotel that i am going to establish.

    To give you a broad idea of the hotel that i am going to put up, it would be a first ever hotel here in the Philippines who’s swimming pool with a slide that is protruding in the 9th floor thats look like an over looking transparent aquarium, with a jacuzzi at the top of the building. It’s already approved by the city engineers office, coz its only a 9 stories building, that the 1st floor will consist an internet cafe, laundry business, mineral water refilling station and mini grocery. The 2nd floor till 6th floor will consist 55 luxurious rooms and the 7th floor will be Sky luxury tv bar and Sky luxurious disco – also a first in the Philippines, and in the 8th floor it will be the restaurant and luxurious space, which is also gonna be the first one ever here in the Philippines.

    Is it ok with you if i will ask for your services to make a hotel feasibility study of my propose projects because if i will be approved by the bank, i would definitely be the first ever and youngest entrepreneur and business man to have this kind of establishment and if i will be so lucky enough, i could make another projects with a much bigger scale because this small hotel is only 204 sq. meters….

    Your favorable response on this matter would greatly and truly appreciated by me since is a big break for me and hoping to be put in the history…thanks Michael!

    • Author
      Michael Metcalfe 3 years agoAUTHOR

      Greeting Benbert – thanks for sharing your plans. It’s great to read unique ideas. You’ll definitely need to analyse hotel feasibility! Good luck with it.

  13. Crystle McMillian 3 years ago

    Interesting post – enjoyed the point of view.

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