Weighing Buy vs. Build in Dynamic Markets

The decision to develop a new hotel involves a complex evaluation of various factors, including market conditions, population growth, and supply-demand dynamics. Investors must carefully weigh the pros and cons of buying versus building, as well as the financial implications of each option. Bryan Wroten of CoStar delves into the critical considerations hotel owners face when planning new projects, as highlighted by Chantal Wu, Senior Director of Hospitality Market Analytics for CoStar, during the “Chart-Topping Markets For Hotel Development” session at the 2025 Hotel Data Conference.

Buy vs. Build: Key Considerations

When hotel owners contemplate expanding their portfolios, they must decide whether to purchase an existing property or construct a new one. This decision hinges on several factors, including sales price, renovation costs, and closing costs, which typically range from 2% to 3% of the acquisition cost. On the other hand, a development budget must account for land costs, construction expenses, and pre-opening requirements, such as hiring staff and purchasing supplies.

One significant reason for choosing to buy rather than build is the scarcity of affordable land, particularly in international gateway cities. Zoning and entitlement processes in many urban areas can be complex, necessitating the expertise of permitting specialists. Additionally, construction costs are expected to rise, introducing inherent risks to new developments.

Market Trends and Sales Records

Wu’s analysis of 6,000 land sales records from January 2020 through June 2025 reveals that the top markets for hospitality land sales are predominantly within the top 25 U.S. markets, with Las Vegas leading at $580 million. The Inland Empire in California is the only non-top 25 market on the list, owing to its relative affordability compared to nearby regions.

In terms of acreage, the Sun Belt markets dominate, with Houston recording the highest at 18,392 acres. When examining price per acre, California markets feature prominently, with Santa Barbara topping the list at nearly $6.9 million per acre.

Hotel sales from January 2023 through June 2025 also concentrated in top markets, with New York leading at over $5 billion in transactions. Non-coastal markets saw the most deals, with Chicago and Atlanta being notable exceptions among the top 25 markets.

Supply-Demand Dynamics

The interplay between supply and demand is crucial for the development of hotels. From 2019 to 2024, supply growth was not concentrated in the Sun Belt markets and did not align with job or population growth. However, markets like Nashville and Austin continued to thrive, leading in new hotel openings.

The Southeast experienced significant growth in hotel demand, correlating with increases in population and employment. Cities like Savannah and Melbourne benefited from unique demand drivers, such as leisure travel and aerospace sector activity. Despite this, higher demand did not always translate to increased average daily rates, highlighting the importance of sustainable, repeat demand.

Population Growth and Its Impact

Population growth is a crucial factor in determining the location of hotel development. As more people relocate to an area, the demand for lodging accommodations rises. The U.S. Census Bureau attributes population changes to births, deaths, and net migration. During the pandemic, the Sun Belt region experienced the largest population growth, with the Dallas-Fort Worth-Arlington area gaining over 700,000 residents.

However, from July 2023 to July 2024, large non-Sun Belt markets, such as New York, also experienced population growth, driven by international migration. Smaller metros saw significant percentage changes due to their smaller base populations.

Noteworthy Markets for Development

Wu’s analysis identifies five promising markets based on land costs, supply-demand dynamics, and projected growth in revenue per available room. These include Fort Worth-Arlington, Tulsa, Orlando, Columbus, and Salt Lake City/Ogden. Each market offers unique advantages, such as affordable land, diverse demand generators, and limited supply growth.

Discover more at CoStar.