Buy or Build?
When it comes to running any business, especially a hotel business, this is one of the key questions any Owner has to make. There are caveats that come along with both sides. Jeff Good, President of Good Hospitality Services, recently was part of an owner's roundtable that dove into this very question.
When it comes to buying or building, the two main factors to consider are Market & Location. Do you build in a city, like Chicago, with the hundreds of already established hotels? Or do you build in suburan area where you might have to spend extra money to develop the land around it?
In 2014, STR Analytics based a study on what the average cost of building verses buying came out to.
To Buy a hotel in 2014, it would cost, on average, $219,000 a key.
To Build a hotel in 2014, it would cost $186,000 a key.
So the easy bet would be to build a new hotel. However, this is where Jeff and other owners have done their homework and found the answer isn't so straight forward. Impact Fees have changed the nature of just building a new hotel. These fees, usually government or city related, have inflated the rate at which you can build a new hotel. As you go through the process, they just seem to add on, add on, add on. So when you're sitting here looking at your development budgets, it's, You didn't have that figured out. You didn't have that figured out. It becomes a bit more cumbersome. He also added, I think that's the way of the future. I think you're going to see more and more of that.
One other big factor on whether to build or buy, is do you want to pay a premium to buy? Most people don't ever want to pay more then what something is worth, but there is a factor most people forget. If you pony up a little bit extra right now and buy the hotel for a premium, you start making money back on it tomorrow, compared to waiting 2 or 3 years while constructing a new hotel.
Needless to say, the answer is not a definitive one, but with owners like Jeff Good and others constantly out on the forefront, the question may one day be answered.