In hospitality, as in life, size isn’t always everything. Many investors have also shirked the theory that bigger is better as institutional capital has slowed and traditional lending remains cautious.
Instead, a different kind of hotel project is quietly gaining traction: the small, sub-$20 million development. These projects – often select-service or extended-stay assets – don’t necessarily garner flashy headlines, but they’re fuelling momentum in a market where new construction remains cautious.
Mabelle Perez, associate vice president of hotel investment sales at Matthews Real Estate Investment Services thinks she knows why.
“This shift is very real and strategic,” she says. “Post-Covid, investors and developers have become more risk averse. The rising cost of capital, prolonged entitlement timelines and uncertainty around labor and operational expenses have made full-service and luxury hotel projects harder to pencil.”
By contrast, she notes mid-scale and economy brands offer quicker paths to revenue and often stronger margins, sometimes as high as 45 percent to 55 percent gross operating profits.
“The rise of inflationary pressures and interest rate hikes in 2022 and 2023 made it more attractive to pursue efficient, yield-focused development,” she continues.
Cue the sub-$20 million development.
The case for cost-efficient growth
In this economic era, construction costs remain elevated and financing is harder to come by, which means many full-service developments simply don’t pencil right now.
“Full-service developments tend to require significantly more equity, longer development timelines and carry greater operational complexity,” says Jay Morrow, senior managing director of hospitality at Walker & Dunlop.
HVS’s 2024 U.S. Hotel Development Cost Survey noted the median per-room development cost for full-service hotels was $405,000 in 2023. This was compared to $255,000 for select-service and just $160,000 for midscale extended-stay properties.
That delta – especially when materials and labour costs remain stubbornly high – can mean the difference between a deal getting built or shelved.
“Sub-$20 million hotel developments are gaining strong momentum, outpacing larger full-service projects as developers respond to tighter financing conditions and rising construction costs,” says Mohamed Mohamed, senior associate of capital markets at Greysteel. “The current lending climate has had a huge impact on what kinds of hotel projects are getting done.”
Morrow agrees, clarifying size may still matter today…but not the way it used to.
“Deal size is critical,” he says. “Smaller projects require less capital and can be executed faster, which is essential in a time-sensitive and rate-sensitive market. Underwriting has become more conservative overall, with a stronger emphasis on sponsor experience and execution track record.”
Mohamed has witnessed lenders becoming much more selective with higher interest rates and much tighter underwriting standards.
“Which means capital is flowing toward projects that are lower risk and easier to execute,” he adds.
This has created a big shift toward select-service, extended-stay and economy hotels, which emphasize leaner operating models and quicker ramp-up times. They’re also generally viewed as more recession resilient.
“Projects that are under $20 million or involve conversion are far more likely to secure financing right now since they require less equity and have shorter development timelines,” Mohamed continues. “It’s no longer just about having a great concept – you must have a financially sound, de-risked project that can perform even if the market gets choppy.”
For these reasons, JP Ford, senior vice president and director of business development at Lodging Econometrics expects to see “a healthy pipeline” of projects with 125 units or less in the foreseeable future.
“The reason for this is that these projects are largely financeable,” he explains. “The franchise companies all have one or many more new development prototypes with 125 rooms or less. These developments are easy to run and are typically not associated with complex food and beverage operations.”
Perez notes major chains like Hilton, Marriott and Wyndham are heavily prioritizing their mid-scale and extended-stay brands. She’s seen rapid expansion from Hilton’s Spark and StudioRes brands, and points to Choice Hotels’ WoodSpring Suites and Everhome Suites as especially appealing, thanks to GOP margins often in the 45 to 55 percent range.
“Blackstone and Starwood’s massive acquisition of Extended Stay America in 2021 was an indication of this trend – and the momentum has only grown,” Perez adds.
Capitalizing on a model that is faster, cheaper and easier to build has become such a priority for some that they’re even sweetening the pot to get these projects up and running.
“Many brands are offering key money, credit enhancement and other economic incentives to grow their footprint in these segments, further improving developer economics,” Morrow says. “Lenders and brands alike view these formats as more durable through cycles, especially given their appeal to essential travellers, workforce demand and cost-conscious guests.”
Smaller footprints, stronger cases
Mohamed has seen the most growth concentrated in the upper mid-scale and extended-stay segments. He points to Marriott’s StudioRes, Hyatt Studios and Hilton’s upcoming LivSmart Studios as cost-efficient models that can keep total development budgets under $20 million.
That trend is reflected on the capital side as well. Walker & Dunlop has successfully capitalized ground-up hotel projects in the mid-scale and economy segments.
“These projects are primarily being driven by the velocity from start to finish, more transparency on cost – given the stick-built nature of the product – and the perceived lower-risk,” Morrow says. “Investors respond to demand trends that favour more affordable accommodations and extended-stay offerings, particularly in secondary and tertiary markets.”
Mohamed notes these markets are often rife with lower-risk opportunities and simpler operating models. He sees particularly strong momentum across the Sunbelt, Midwest and Mountain regions.
“Cities like the Nashville (Tenn.) suburbs, Boise (Idaho), Savannah (Ga.), Greenville (S.C.), and parts of Texas like Waco and Midland are hotbeds for sub-$20 million, select-service and extended-stay projects,” he says. “This is driven by population growth, economic expansion and rising domestic travel.”
He believes developers are further drawn by lower land and construction costs, business-friendly policies and simpler zoning. Standout markets include Columbus, Ohio, which is experiencing a boom in tech and healthcare; Charlotte, N.C., which is growing its banking industry; Boise, known for in-migration and start-ups; and emerging markets like Oklahoma City, Okla., and Tucson, Ariz.
“The rise of remote work and business-leisure travel is also fuelling sustained demand in these spots,” Mohamed notes.
Perez would add Florida to that list, particularly emerging markets along the Gulf Coast. She notes the East Tampa to Bradenton corridor, including Brandon, Palmetto and Sarasota, is becoming a “hotbed” for mid-scale and select-service projects.
“Population growth, logistics expansion and public investment are fuelling demand,” she explains. “Meanwhile, central and inland markets like Lakeland, Ocala and Fort Pierce are also attracting developers due to affordability, strong industrial growth and event-driven tourism.”
Walker & Dunlop is a fan of many of these markets. Morrow notes lenders currently favour location fundamentals that support resilient occupancy, such as suburban nodes, drive-to destinations, and medical or educational hubs. Ford also sees potential in suburban America, highway-type locations and smaller resort towns.
Those looking to deliver quick, cost-effective, no-frills hotels should also consider conversions, Mohamed argues. Spark by Hilton, for example, leverages an innovative conversion model to offer a compelling investment option for owners.
“Hilton’s Spark has expanded to 30-plus locations with another 175 in development – many at a cost of under $30,000 per room,” he says. “These smaller, scalable projects are proving especially attractive in secondary and tertiary markets, where investors seek lower-risk opportunities with simpler operations. Conversions are playing a major role in this shift [toward smaller developments].”
Green light, yellow light
Building and operating expenses may be lower in these smaller developments, but that doesn’t mean they’re non-existent. It also doesn’t mean these projects are immune from the real-world threat of rising costs, which is occurring just about everywhere.
“For smaller hotel projects, the biggest risks right now are rising insurance costs, labour shortages, and increasing land and construction costs,” Mohamed says. “Even though these projects are more streamlined, things like insurance hikes or staffing challenges can quickly squeeze margins.”
While these risks also apply to larger projects, he clarifies that smaller developments are more sensitive to local market shifts and unexpected spikes in operating costs.
“The risk types are similar, but the impact can hit harder on a smaller scale,” Mohamed adds.
Perez notes that overestimating demand in saturated or slow-to-recover markets can create challenges. Financing risk is another concern, especially if interest rates rise again or the sponsor lacks a strong track record. That’s why she recommends locking in Guaranteed Maximum Price (GMP) contracts early and working with experienced general contractors who understand the nuances of hospitality development.
She further advises syndicating equity across smaller investor groups to reduce individual exposure, as well as conducting detailed feasibility studies using STR data and local economic indicators before acquiring a site.
Oh, and partnerships. Perez is a big fan of prioritizing those.
“Don’t underestimate the value of local partnerships, especially in tertiary markets,” she explains. “A local partner can help fast track approvals, source labour and reduce costs.”
The same mindset applies when selecting a brand.
“Choose brands with flexibility and support,” Perez continues. “Brands that offer modular options, prototype discounts or strong area demand data will reduce your risk profile.”
Most of all, though, she believes in staying asset light and location smart.
“Keep your capital flexible and only plant flags where the numbers make long-term sense,” she says. “A $15 million WoodSpring Suites near a new Amazon distribution centre will likely outperform a $30 million boutique in a sleepy downtown corridor. The fundamentals still matter: visibility, access, brand and surrounding demand drivers.”