What Is a Hotel Feasibility Study?
A hotel feasibility study has to include a full market study plus the financials, because its job is to test one specific hotel concept on one specific site and answer a single question: can this hotel earn enough to justify what it costs to build, buy, or reposition? That combined report is what developers hand to brands, operators, lenders, and investors.
Since Majestic Hospitality Group opened in 2008, our team has run feasibility and site analysis on everything from ground-up resorts to established properties looking to expand, including the market study for Andaz Costa Rica at Peninsula Papagayo. The format barely changes from deal to deal, so what we watch is how honest the numbers are. (A study that only tells an owner what they want to hear is a brochure, and lenders can tell.)
How Is a Hotel Market Study Different From a Feasibility Study?
The two get mixed up all the time. A market study answers the question “what should we build here?” by looking at the market, the site, and the competition, then recommending a concept. A feasibility study starts with a proposed concept, tests it against that market, and adds the financial projections a lender needs to see.
Because a feasibility study includes the market work, the two are often done back to back, and when they are there’s usually no need to redo the market and competitive analysis. If the market study is more than a year old, it’s worth refreshing before any financials get built on top of it.
| Component | Where It Happens |
|---|---|
| Market area analysis | Market study |
| Site evaluation | Market study |
| Competitive supply | Market study |
| Demand segmentation | Market study |
| Facility recommendation (rooms, meeting space, food and beverage) | Market study (the feasibility study may suggest tweaks) |
| Brand and management selection | Both |
| Occupancy, ADR, and RevPAR projections | Feasibility study |
| Operating statement and investment analysis | Feasibility study |
What Does the Market Study Cover?
Market Area Analysis
We always start with demand, meaning who’s going to stay here and where they’re coming from. That means the biggest employers, airport traffic, and tourism numbers, along with anything new on the way, like a convention center expansion. If the demand drivers are thin, nothing later in the report can fix that.
Site Evaluation
We walk the site and look at it the way a guest would, starting with how you get there off the highway, what’s next door, and how far it is to whatever people are traveling to see. A good market won’t rescue a site guests have trouble finding, and this is usually where we turn up the problems nobody mentioned in the pitch.
Competitive Supply
Next is the competitive set, usually five to 10 hotels a traveler would weigh against yours. We look at each one’s size, rate, and occupancy, and we track what’s in the pipeline, because a hotel going up across the street changes the math before you’ve even opened.
Demand Segmentation
We never treat demand as one number. It gets split into corporate, leisure, and group business (some markets add airline crews), because each segment grows at its own pace and pays a different rate.
Facility Recommendation
With the market mapped, the market study recommends how many rooms to build, how much meeting space you need, and which restaurants and bars will earn their square footage. Brand and management selection usually starts here too, since the right flag depends on everything found so far, and it gets another look in the feasibility study. Plenty of developers change their plans at this stage, which is why we push clients to get here before anything is designed.
What Does a Hotel Feasibility Study Include Beyond the Market Work?
Occupancy and Rate Projections
The feasibility study projects occupancy, average daily rate (ADR), and RevPAR year by year until the hotel stabilizes, usually in its third or fourth year. Those numbers come from a penetration analysis, our estimate of how much of each segment the new hotel can win from the competitors around it.
Operating Statement and Investment Analysis
The projections feed a full operating statement, usually in USALI format (the Uniform System of Accounts for the Lodging Industry) so lenders, brands, and investors can line it up against other deals. It works down through departmental results, overhead, and fees and reserves to net operating income.
From there we build a five- to 10-year projection and an investment analysis showing value at stabilization, debt service coverage, and return on equity. The lenders we work with go straight to the coverage ratio and the assumptions behind it, so we put those assumptions in the body of the report where anyone can find them. We also show what happens if rates come in 10% low, construction runs over, or the opening slips a year, because a hotel that only pencils in the best case is a hard one to finance.
Should You Start With a Market Study or a Feasibility Study?
Start with the market study, before the hotel has been designed. Most owners call us after they’ve found land and before they’ve sat down with a lender, and that timing leaves room to shape the concept around what the market will support.
Plenty of developers would rather skip straight to feasibility with a concept they’ve already drawn up. That’s where projects run into trouble, because a hotel that was never built around the market often fails the test, and reworking a finished design costs far more than designing to the market from the start. We walk every client through the process up front for that reason.
The hardest case is a project already under construction that suddenly needs a feasibility study for its bank or investors. The study can still be done, but by then there’s very little room left to adjust the plan.
Feasibility is one part of what we do at Majestic, next to market assessment, financial projections, and brand and management selection, and the full list is on our services page.
Hotel Feasibility Study FAQs
It includes everything in a market study (market area, site, competitive supply, demand segmentation, and facility recommendation) plus occupancy, ADR, and RevPAR projections, an operating statement, and an investment analysis.
No. A market study recommends what to build on a site. A hotel feasibility study tests a specific concept against the market and adds the financial projections, so it’s a market study plus the financials.
It’s the order we recommend. Starting with the market study means the concept is built around real demand, which makes it far more likely to pass the feasibility test.
If it’s more than a year old, it is usually wise to refresh the market and competitive analysis before the financials are built.
Developers share the combined report with brands, management companies, lenders, and investors when they’re seeking approvals or financing.
If you’re at that stage, we’re glad to talk through what your study should cover (and what your lender will expect to see in it). Reach out to the team here.
