A beginner's guide to building a hotel
The importance of asking the right questions when starting a new project
New York, USA, June 23, 2020
“Why would someone stay here? Why would anyone want to stay here?”
During my years of professional experience in lodging development and financial analysis, that is the first question I ask myself when evaluating a hotel. Despite its apparent innocence and simplicity, this is a question that demands a complex series of answers, which in turn drive the analysis and, ultimately, my decision on whether to go ahead with the project. Over the years, I have also discovered that a similar fundamental question helps me analyze and understand any major class of real estate development.
I learned to ask that question at university when I was a student of Prof. Rodolfo «Rudy» Casparius (1919 - 2017). He was an iconic Mexican hotelier with decades of experience, and always had interesting stories to share during his lectures. One of those stories that I remember vividly was from when he was among a select group of Mexican hoteliers invited by INFRATUR, today FONATUR, to assess the feasibility to develop Cancun. Rudy, along with a few other carefully selected industry representatives, were taken to what was a remote and isolated coconut plantation at the far end of the country's Caribbean coast.
They were told about the plans for the area only when they arrived, the story goes: “Here we are going to create a world-class tourist destination. Go figure it out!”
The members of the group looked at each other puzzled: “¿Está loco? ¿Quién se quedaría aquí? ¿Quién querría quedarse aquí?” (Is he crazy? Who would stay here? Who would want to stay here?) Approximately 50 years later, there is Cancun, a world-class tourist destination.
When you begin to answer that simple question, you begin to understand everything that must happen for the answer to be correct. Continuing with Cancun as an example, the answer, then and now, must consider some basic components.
The purpose of the trip is the first component of the answer. For Cancun, it may have started as "someone looking to vacation in a safe destination, with beautiful beaches, exotic but not too much, remote but not too much." Today that purpose has certainly evolved and includes international air access, five-star dining and entertainment options, state-of-the-art meeting and convention venues, and many more features. When I evaluate a site anywhere in the world for a development, I imagine what the probable purposes of a trip to that specific location would be: today, one year from now, five years from now, ten years from now.
Intimately linked to the purpose of the trip is the general profile of the traveler. Someone looking for a quiet beach vacation is different from someone looking for a wild beach vacation. Similarly, someone who wants a break will have different needs and requirements than someone whose purpose is to make business connections or to attend a knowledge-exchange experience. The purchasing power linked to each activity will also help me establish their needs, and be able to address them accordingly.
Each traveler will have an expectation of how much to spend during the trip. Along with profile, purpose, and personal preferences, each category of guests will tend to behave somewhat predictably. As a project analyst, I anticipate in my mind the demands those future guests will make once that project becomes a reality. I will also examine whether similar demands are already being met in the area I am evaluating, as these will become my eventual competitors. If these services do not currently exist in the market, I will also take note of the risk involved in being a pioneer, wondering "why is no one else doing this?"
Service expectations will dictate the quality of my facilities (simple, moderate, luxury), the amenities to offer (from self-service to personalized attention) and the staffing that will required to fulfill those expectations I have just created. After all that comes understanding the technology that will be necessary to improve on what I have envisioned and proposed.
How much to charge, and how to make it profitable are all contingent on being able to correctly answer that first question. Understanding what you want from a project will result in correct follow-up questions, emanating from the first fundamental question. For Cancun, being a world-class tourist destination at the epicenter of a regional development with long-term potential required that the group of hoteliers initially invited to make it happen think hard about who would eventually want to go there, and why.
Now that you know why you want to go through with this project, you can move on to the easiest parts of building that hotel. That's when you make some initial financial projections, which will inevitably be wrong but are necessary nonetheless. Then you can engage architects, contractors, construction companies, government agencies, managers, vendors, employees, marketing agencies, and everything else that you need to open the doors and receive your first guests. If you have done it well so far, more guests will come.
Tourism is a beautiful yet demanding way of life, thus it is worth the effort to understand why from the very beginning.
Xavier "Xavi" Flores is a hotel and real estate finance executive, and is an advisor at SevenTrain Ventures, an investment and venture development firm focused on technology-driven startups and entrepreneurs. Xavi holds a Bachelor of Tourism Business Administration from the University of Houston, Texas, and an MBA from ESADE Business School in Barcelona, Spain. He is originally from Chetumal, Quintana Roo, and currently resides in New York.