Hospitality development has always been a bit riskier typology and high-stakes endeavor, but the past year has underscored just how volatile the economics of design and construction have become.
According to The Beck Group’s Summer 2025 Cost Report, the drivers of higher costs are neither singular nor short-term. Stubbornly high interest rates, inflation, tariffs on key construction materials like steel, aluminum and certain copper products, and shifting demand patterns are delivering a set of challenges for ground-up and renovation projects.
Additionally, increased risk, consolidation of large capital, and scarcity of equity deployment are other factors that are converging, compounding, and reshaping the way owners, developers, and designers must approach these new projects.
The Beck report found higher construction costs this past summer compared with the firm’s 2024 Summer report.
For example, last summer’s report showed construction costs for new five-star hotel buildings increased about twice as quickly as the general inflation rate for new non-residential buildings. At the same time, four-star new builds only increased about 1.5 times the general non-residential construction inflation rate.
Another industry report showed higher commercial building development costs eroding hotel revenue. According to an American Hotel and Lodging Association report released earlier this year, the rising cost of hotel properties outpaced revenue growth in 2024.
Key Factors Driving Costs Higher
Labor remains a relatively persistent pressure point. Skilled trades are in short supply, and wages continue to climb, particularly in unionized and gateway markets such as New York, Chicago, and Los Angeles. Materials add a second layer of complexity. While core commodities like steel and lumber have cooled somewhat, specialized hospitality finishes such as glass, millwork, imported stone, and especially furniture, fixtures, and equipment (FF&E) remain elevated due to lingering supply chain constraints and shipping premiums.
Regulation has also entered the equation. Stricter energy codes and ESG mandates, while positive for long-term performance, are adding upfront design and system requirements that increase baseline costs. And in dense urban centers, where labor pools are tight, logistics are challenging, and permitting is complex, these pressures multiply.
Geographic location is also often cited as a critical factor impacting hotel development costs. High-density urban centers, such as New York City, Chicago, Los Angeles, and Miami have significantly higher land costs than other major U.S. cities.
These challenges create uncertainty that impacts projects in the planning stage, often resulting in hotel owners and developers parked on the sidelines until a clearer, more favorable picture of stability emerges.
However, a wait-and-see attitude is hardly a panacea in avoiding higher development costs. It could take years for interest rates and inflation to trend to more suitable levels that spur development. Additionally, construction costs rarely undergo significant price declines, so waiting for lower costs to put a shovel in the ground can be elusive.
New Builds vs. Renovations: The Cost Paradox
A common question among hotel owners is whether it’s more cost-effective to renovate or build new. The answer: it depends (I know, but bear with me here). Renovations often hide expensive surprises, such as structural issues, asbestos, ADA compliance gaps, and outdated systems that demand full retrofits. These hidden premiums can push per-key costs above ground-up construction.
Meanwhile, new builds come with their own realities. Land acquisition, entitlement hurdles, and absolute size often make them more expensive in total, even if the per-unit costs are more predictable. Owners also tend to underestimate the disruption costs of renovations – keeping a property operational during construction or phasing work in occupied buildings can add significant premiums in both cost and schedule.
Strategies for Smarter Spending
The most sophisticated owners are finding ways to stay ahead of these challenges. Early collaboration is emerging as one of the most effective tools – bringing design, construction, and procurement teams together at the start allows for real-time option testing, lifecycle cost modeling, and less risk of redesign down the road.
Another strategy is packaging scope. Aligning FF&E procurement and construction contracts not only reduces markups but also compresses timelines. Owners are also learning to direct spend where it truly drives value: guest-facing experiences such as lobbies, restaurants, and entertainment venues, while exercising discipline in non-revenue-generating areas like back-of-house.
Taking a Design-Build Approach
When planning a hospitality project, it would be prudent to use design-build delivery. This approach offers many benefits over traditional methods used for commercial projects like hotels.
One of the most significant advantages of the design-build model over traditional building approaches is the high level of communication and collaboration that eliminates silos between teams. As a result, design-build helps avoid scheduling delays, creates cost savings, offers greater quality control and high-quality standards, and minimizes potential work disputes between design and construction teams. A collaborative and unified design-build project team can avoid the shortcomings of traditional approaches and is estimated to save a substantial amount of money and several months from the project schedule.
Preserving Aesthetics Without Breaking the Budget
Cutting costs does not have to mean cutting vision or ambition. Design-build teams are proving that material intelligence – smart sourcing, substitutions, and fabrication – can achieve luxury at scale. Domestically sourced stone, engineered woods, or modular bathroom pods can deliver the same impact as their premium counterparts without the logistical burden.
Technology is also reshaping efficiency. Computational design tools and AI are optimizing layouts, reducing material waste, and streamlining coordination, which translates to measurable savings without eroding the guest experience. The end result if done correctly? Guests never notice where savings were achieved; they only feel where investment was concentrated. That’s the hat trick.
The newly built Populus Hotel in the heart of Denver’s downtown is an example of keeping a hospitality project’s budget intact without impacting a building’s design intent. The Populus, the first carbon-positive hotel in the United States, combined nature-inspired design with eco-conscious hospitality in a city deeply committed to building a sustainable future.
The distinctive design for the 13-story, 265-key room hotel’s façade mimicked the markings or “eyes” of Colorado’s aspen trees. However, the design’s plan to use Glass Fiber Reinforced Concrete and metal panels on the building’s exterior significantly exceeded the budget for this project phase. To overcome this challenge, the project team used repeatable shapes and a lower-cost material that reduced the number of panels from 360 to 95 panels without sacrificing the façade’s complex design. An integrated design-build approach was used to address this problem and other challenges faced by the team.
The Nobu Hotel and Restaurant, located in Atlanta’s affluent Buckhead neighborhood, is another striking example of cost-optimization used in a hospitality project, which designed a five-star hotel on a real-world budget. The Nobu, which touts the highest nightly occupancy of any five-star hotel in Buckhead, is part of Simon Property Group’s ambitious vision to create a modern and vibrant mixed-use destination that includes high-end shopping mall Phipps Plaza, Class A office space, and an anchor building housing a Lifetime fitness center and co-working space.
The design and construction of the luxurious 152-room hotel and the 10,000 SF restaurant, known for its world-renowned Japanese cuisine, utilized advanced building technologies, coupled with a collaborative and innovative design-build method. This approach resulted in keeping the hotel/restaurant, as well as the entire project, to stay on track with budget and schedule.
The Macro-Economic Outlook
The macro environment is another layer of uncertainty. Interest rates remain elevated, limiting the feasibility of some deals as the cost of capital cuts into returns. Inflation, particularly in services, continues to ripple through subcontractor pricing. Tariff policy will eventually shake out, but in the short-term these tariff policies add further unpredictability, especially for projects reliant on imported finishes and FF&E.
These macroeconomic and regulatory factors are key culprits in the postponement or cancellation of various hospitality projects, ranging from luxury hotels and resorts to lower-cost projects.
Looking ahead, cost stabilization may be on the horizon. Supply chains are improving, and certain commodities have leveled off. If interest rates begin to ease in 2026, owners may find more balance between expectations and outcomes.
Another positive factor is a healthy rebound in business and leisure travel from the pandemic’s severe impact on the hospitality industry, which experienced a steep decline in business activity due to government-mandated lockdowns and travel restrictions. According to Transportation Security Administration (TSA) data, the average TSA passenger count so far this year has been on par with 2024, and is ahead of the years from 2019 to 2023.
Still, hospitality development will remain a premium sector – demanding sharper cost discipline, earlier collaboration, and smarter strategies than ever before.
Beyond Cost: Carbon, Resiliency, and Timelessness
While today’s conversation centers on cost escalation, the next horizon is value creation through sustainability and resiliency. Owners and investors are increasingly measuring not just capital expenditure, but operational performance over decades. Projects that aggressively target carbon neutrality, reduce operating expenses through energy-efficient systems, and leverage durable, low-maintenance materials ultimately deliver higher returns.
Design resiliency goes beyond systems: it’s about timelessness. Hotels that avoid trend-driven finishes and instead embrace enduring design principles can maintain brand relevance longer, reduce renovation cycles, and hold stronger resale value. In many ways, zeroing the carbon footprint and designing for resilience aren’t just environmental imperatives – they’re financial strategies that extend asset life, protect NOI, and create a premium experience guests and investors recognize (and return for redelivery).
The cost landscape of 2025 is not defined by a single pressure, but by the interplay of many. For developers, the challenge (and opportunity) lies in navigating this complexity with clarity, creativity, and discipline. Those who master the balance between ambition, efficiency, and sustainability will not only weather this cycle but also set the standard for hospitality’s next generation.
Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com.
