Before We Build It, Does the Hotel Make Sense?
Issue 09 | September 2026
A periodic publication by 3AM Hospitality Consultants.
Before I get too far into a hotel feasibility study, I normally do what I call my paper-napkin calculation. It can literally be on the back of a piece of paper, although after enough years in the business I can do most of it in my head. How many rooms? What occupancy can the market support? What average
rate? What does that give me in revenue? What should flow through to EBITDA? What will the hotel cost to build? What sort of return does that leave the owner? I’m not looking for precision at this point.
I’m asking a much simpler question:
Does this hotel make economic sense?
After many years as a hotel development consultant in the Philippines and the region, I carry a lot of benchmarks in my head. I have a reasonable idea of ADR and occupancy in the main markets. I also know roughly what different categories of hotels should cost to build.
So, when somebody shows me a number that doesn’t look right, I substitute something I think is reasonable and run the calculation again. I’m not trying to prove anybody wrong. I want to know what assumptions I have to believe for the investment to work.
Location Comes First
Before anything goes onto my napkin, I need to believe in the location. For an established market, I want to understand the demand generators. Why are people coming? What’s driving corporate, leisure, group or other business? For a new or emerging destination, access becomes even more important. How are guests going to get there? What airport supports it? What infrastructure exists today, and what is genuinely coming?
Owning a piece of land doesn’t automatically mean you should put a hotel on it. Once I’m comfortable with the location, I look at market demand and the competitive set. Most of the projects I work on are in the 4- or 5-star space. I want to understand where the gaps are and whether the proposed hotel can realistically compete.
Once stabilised, I generally want to believe we can be at least number two in the competitive set. Then I work backwards. How much business do we need to take from the existing hotels? How much organic market growth do we need? What new supply is coming? The more things that must go right, the more cautious I become.
Then I Run the Numbers
The paper-napkin calculation itself is straightforward. Rooms. Occupancy. ADR. Other revenues. Operating costs. EBITDA. Development cost. Owner’s return.
Inflation matters as well. If the hotel opens several years from now, today’s ADR, payroll and construction costs aren’t necessarily the numbers that matter.
Then I look at payback.
Five-year payback? Now you have my attention. I don’t see that very often in hotels. Then my next question is: what assumptions did we use to get there?
If I have to assume an ADR significantly above the market, very high occupancy, aggressive market growth and a development budget I don’t believe, I don’t really have an attractive return.
I have four very optimistic assumptions. A spreadsheet can make almost any hotel work if you’re prepared to keep changing the assumptions. I’d rather use assumptions I can defend and see what return comes out.
Watch the Capital
Hotels are very easy to overbuild. I like nice hotels. I also like owners getting their money back. Those aren’t contradictory.
If we’re building a 5-star hotel and expecting a 5-star rate, then the rooms product and brand experience must support it.
But spending more doesn’t automatically create more value. I’m constantly looking at development cost and asking what we’re getting for it. Does this improve something the guest will value? Does the hotel need it to perform properly? Does it help us achieve the positioning and rate we’re underwriting?
If not, why are we spending the money? The objective isn’t to make the hotel cheap. It’s to remove costs that aren’t creating corresponding value without damaging the product we’re expecting guests to pay for.
You can’t underbuild the hotel and leave the 5-star ADR in the spreadsheet.
The same discipline applies to the brand.
In a very strong location, I may be more comfortable considering our own brand. In a more difficult location, an established brand may bring distribution, recognition and demand that the project needs.
But it comes at a cost. Put the fees, development requirements and operating implications into the napkin and run it again. A hotel brand must earn its keep.
Cash First
EBITDA is useful. I use it. But it’s not the end of the calculation.
Ultimately, I want to understand what the hotel can reasonably return to the owner relative to the capital required to create it.
Then I look at the asset we’ve created. What did it cost us to build, and what would a rational investor pay for the cash flows that hotel should generate?
I sometimes think about it another way:
If we completed the hotel tomorrow and decided to sell it, have we created value or destroyed it?
A hotel can be beautiful. It can be busy. It can even be profitable. And it can still be a poor investment if we spent too much money creating it.
I want the cash economics to work first. I don’t want an optimistic future sale price rescuing a weak hotel investment.
Then Give Me the Feasibility Study
By this point, I already have a view. I’ve looked at the location, demand and competitive set. I’ve sense-checked occupancy and ADR. I have an idea of what the hotel should cost to build. And I’ve run the paper-napkin calculation. Now give me the feasibility study. I use it to validate my initial assumptions and, importantly, tell me where I might be wrong.
The owner also needs a proper study that can support discussions with the bank and other stakeholders.
But the feasibility study should test the investment case, not manufacture one. If its numbers are materially different from mine, that’s fine.
Now we have something to discuss.
Sometimes It Doesn’t Work
I’ve walked away from projects. Sometimes I simply don’t believe the economics. Sometimes I don’t believe the owner is prepared to build the product required to achieve the positioning and rates being assumed.
By that stage, I’ve normally already value-engineered quite a lot of the hotel in my head. I’ve challenged the development cost. I’ve challenged the ADR and occupancy. I’ve looked at the market and what the hotel needs to become once it stabilises.
If it still doesn’t work, changing the spreadsheet doesn’t interest me very much. At some point, the numbers have to meet the real world.
And sometimes the most useful thing you can tell an owner is: Don’t build it.
It’s considerably cheaper to find that out on the back of a napkin than after the first shovel hits the ground.
About the Author
Arthur Gindap is Managing Partner of 3AM Hospitality Consulting and a hotel development consultant advising and partnering with hospitality businesses to build, scale and unlock value across assets and platforms.
He previously led Robinsons Hotels and Resorts, driving portfolio growth and landmark developments including NUSTAR Cebu, Fili Urban Resort and NUSTAR Hotel. His earlier career with The Ascott Limited, Shangri-La and Mandarin Oriental spans multi-market operations, brand development and luxury hospitality.
Art remains actively involved in hospitality consultancies, investments and new ventures, alongside board and governance roles. His approach combines strategic oversight with operational discipline, with a focus on building businesses that create sustainable long-term value.
Considering a Hotel Development?
A feasibility study should do more than demonstrate that a hotel can be built. It should help an owner decide whether it should be built. As hotel development consultants, 3AM Hospitality Consulting works with hotel owners and developers from the earliest stages of a project, testing market demand, positioning, development economics, brand strategy and the assumptions behind the investment case.
If you’re considering a new hotel, resort or hospitality development, contact 3AM Hospitality Consulting before the first shovel hits the ground.
Disclaimer
This article shares general hospitality perspectives. The appropriate brand and operating model depends on each hotel's market, ownership objectives, and circumstances.
