In the evolving landscape of hospitality investment, a notable trend is emerging: the increasing appeal of hotel projects valued under $20 million. As institutional capital becomes more cautious and traditional lending tightens, investors are gravitating towards smaller, more manageable developments that promise quicker returns and reduced risk.
Economic Factors Driving the Shift
The hospitality sector has witnessed a pivot towards select-service and extended-stay properties, primarily due to their cost-effectiveness and operational efficiency. According to industry experts, the median per-room development cost for full-service hotels stood at $405,000 in 2023, whereas select-service and midscale extended-stay properties averaged $255,000 and $160,000 respectively. This significant cost disparity makes smaller projects more financially viable, especially in an environment of elevated construction costs and stringent financing conditions.
Advantages of Smaller-Scale Developments
Sub-$20 million hotel projects offer several benefits:
- Faster Development Timelines: These projects typically require less time to complete, allowing investors to capitalize on market opportunities more swiftly.
- Lower Capital Requirements: The reduced financial commitment makes these investments accessible to a broader range of investors.
- Operational Simplicity: Smaller hotels often have streamlined operations, leading to higher gross operating profits, sometimes ranging between 45% to 55%.
Moreover, major hotel chains like Hilton, Marriott, and Wyndham are expanding their midscale and extended-stay brands, recognizing the profitability and resilience of these segments. Brands such as Hilton’s Spark and StudioRes, Choice Hotels’ WoodSpring Suites, and Wyndham’s Everhome Suites are gaining traction among investors.
Geographical Hotspots for Investment
Regions experiencing population growth and economic expansion are becoming prime locations for these smaller-scale hotel developments. Cities like Nashville, Boise, Savannah, Greenville, and parts of Texas, including Waco and Midland, are witnessing a surge in sub-$20 million hotel projects. These areas offer favorable conditions such as lower land costs and supportive local policies, making them attractive to investors seeking efficient and profitable ventures.
Conclusion
The hospitality investment landscape is undergoing a strategic transformation, with a growing emphasis on sub-$20 million hotel deals. This shift reflects a broader trend towards risk mitigation, operational efficiency, and adaptability in response to economic uncertainties. As the industry continues to evolve, these smaller, cost-effective projects are poised to play a significant role in shaping the future of hotel investments.