Sustainable, profitable, competitive – the five cornerstones of a successful hotel project

“Hotel development is a diverse and challenging process that requires careful planning, flexibility and the ability to adapt to changing circumstances. However, by considering certain factors, hotel projects not only survive challenges but also succeed and produce value in the long term,” writes Pontos’ Investment Director, Real Estate Päivi Tomula.

Hotel development is one of the most fascinating areas in real estate development. Recent changes in the operating environment, such as geopolitical tensions, have impacted the hotel market significantly – just when we emerged from the pandemic period, which left hotels completely empty.

In the last years, I have had the privilege to be involved in several notable hotel development projects: as Chair of the Board of Directors at AVIA Real Estate, I was part of developing Finland’s largest hotel at Helsinki Airport, which was opened according to plan in summer 2024. I have also been involved in Pontos’ hotel projects in Ombria Algarve, Portugal and Viru Hotel, Tallinn.

What does success require? I list five central factors below.

Market segmentation is a basic requirement for success

Hotel development starts with defining target audiences and evaluating long-term travel trends in the location in question. The goal is to identify potential market niches and respond to changing travel trends, such as the recent shift towards more homely accommodation alternatives, combining leisure and business travel, increased remote work and the growth of luxury travel. Hotel customers increasingly seek personal service in their different travel needs, which is highlighted in their choices.

Crises – such as the pandemic and geopolitical changes – have emphasized the need for a more flexible and predictive market strategy. For example, the predicted growth of luxury travel in Finland, particularly the metropolitan area, has been under scrutiny with traveler profiles changing due to the reduced number of Asian and Russian travelers. Operating models and the organization need to be flexible enough, so they can adapt to pressure towards changing demand and segmentation. This makes scenario work an important tool in forecasting and decision making.

Evaluating market potential requires the ability to predict the types of products that will be in demand in the long term. Those operators that can turn change into a competitive advantage have the greatest potential. For example, those hotels that quickly utilized the growth in domestic travel succeeded better than others during the pandemic. Change situations set apart those that can adapt and innovate.

Choosing the operator and brand is critical

Once an initial market segmentation has been completed, it is time to choose an operator and brand, which is often the most important decision in the project – collaboration agreements can often last decades.

Market segmentation and searching for an operator are carried out simultaneously, and one’s vision for market segmentation is synchronized with the views of operator candidates.

The best results are achieved when the operator has experience from the target market or an ability to analyze its potential. The more firmly the operator believes in the target’s potential, the more willing they are to negotiate attractive terms. Good sales channels and loyalty programs support the beginning of a new hotel, and their meaning is highlighted in new concepts. A shared belief in the hotel’s potential for success is the strongest foundation for cooperation.
Because collaboration is long term, arrangements must take economic fluctuation into account. The early stage may require flexibility, and scenario work helps to prepare for exceptional situations. In rental models, having a combination of fixed minimum rent and turnover rent distributes risk and rewards both parties for success. Management agreements between the investor and operator, which have lately become more common, can be built to utilize the strengths of both parties and act as the basis for defining clear responsibilities, requirements and operating models.

Attention should be paid to the agreement structure, and risk management viewpoints considered. If financially challenging situations are not covered in planning, an exceptional situation can in a worst-case scenario lead to the collaboration not continuing according to plan. In this case, changing relevant parties during the agreement period can become a timely issue, which inevitably causes changes and challenges for everyone. If the operator does well, so does the investor.

Financing is crucial – from beginning to end

Financiers play a crucial part during all stages of a hotel project, particularly in the early stage when the project is funded and if market circumstances see changes. Financiers make a close evaluation of the market, operator and financial starting points. They evaluate the operator’s operations with particular care, as cashflow is solely dependent on them.

Forecasts, predictive planning in agreements and good and open collaboration with financiers is important in change situations, where flexibility on both sides is a must.

Recently, interest rates have dropped, and traditional debt financing is also growing in the hotel market – the popularity of alternative financiers is correspondingly going down. Despite this, acquiring debt financing for hotel development projects is still not easy, and hotel developers should be prepared to use significant amounts of their own capital.

Areas of increasing demand, such as holiday destinations in Southern Europe and popular European urban destinations, continue to attract interest. At the same time, sustainability continues to increasingly impact financing decisions, and alternative financing models have also become more widespread.

The pandemic and geopolitical changes have left their mark on the financing market: risk tolerance has lowered, and loan terms have become stricter. This has forced developers to enhance their preparation and risk endurance – possibly strengthening the entire industry in the long run.

Construction schedules must be made carefully

Hotel development projects are long term and have multiple stages. Changes in the operating environment, supply delays, unfavorable weather conditions, lack of personnel, authority approval and the increase in material prices may, however, cause delays. The importance of careful scheduling and preparation are highlighted.

Recent crises, such as difficulties in supply and limitations on personnel mobility during the pandemic, have impacted schedules. More attention should be paid on supply chains and increased contingency planning.

The seasonality of hotels means makes the timing of their opening critical. This is a factor specific to hotels, highlighting the importance of having a schedule and sticking to it. Seasonality also impacts the need for personnel, especially in new operations and destinations.

The biggest mistakes in hotel projects are often made before construction if there is insufficient planning, and commercial viewpoints are considered too late. Choosing the implementation method, market situation and timing are crucial for success. The early stage of the project matters most, and investing in that brings the most cost efficiency. Success requires an ability to react, honest self-reflection and open collaboration. The design of hotel projects involves designers from different parties, and coordinating their work is key to the project’s success. Especially in reconstruction, it is important to consider the environment and third parties. In hotel projects, the developer is closer to the end user than in many other projects, which emphasizes the importance of the customer experience during the construction stage.

Sustainability must begin from design

Hotel development projects can improve their investment value with sustainable solutions. Sustainable operating ways attract environmentally conscious travelers and improve financial results in the long term, which adds to the hotel property’s attractiveness. Sustainability has also become more pronounced from the financing viewpoint, as financiers offer better terms for sustainable projects.

Investing in sustainability from the start of the project is important, as changes are difficult to implement later. Choices made at the construction stage around energy efficiency, water saving and renewable energy, for example, can reduce the hotel’s operational environmental load. However, considering sustainability matters in the design stage and selection of operator, as this engages the parties into sustainable operating ways. Sustainability not only optimizes costs but also paves the way for a future-proof hotel.

Although hotel development as a whole involves multiple stages, it is wonderful and rewarding to see the vision that started with plans and calculations being realized, coming alive and taking off. Strategic thinking, a deep understanding of the market, the ability to predict trends, careful background research and predicting risks enable a successful implementation of visions, even in challenging operating environments. The improved outlook for hotels supports this work aiming to provide people with spectacular accommodation experiences.