What Is Price Per Key in Commercial Real Estate?
In hotel construction and acquisition, price per key is a metric that compares the development or acquisition cost to the number of rooms — often referred to as keys — in the hotel. To determine the price per key, simply use the formula below.
Price Per Key Formula
Price Per Key = Total Construction or Acquisition Cost ÷ Total Rooms (Keys)
For example, if a hotel costs $25 million to build or acquire and has 250 guestrooms, the price per key would be $100,000, as calculated below.
Price Per Key = $25 million ÷ 250 = $100,000
Once you have your price per key, your analysis can begin. There’s no objectively good or bad price per key — just like property values in general, context is important. Lower-quality hospitality assets generally have a lower price per key than five-star resorts, of course, but it isn’t solely depending on building quality. Location plays a major factor, as well.
How Lenders and Investors Use Price Per Key
Both lenders and investors use price per key to determine the viability of a potential investment and any associated lending risk. This metric is used alongside other important hotel financial metrics like RevPAR (revenue per available room) and average daily rate, or ADR. In general, price per key is compared to similar hospitality properties in the area.
As an example, consider two hotels that are very similar in terms of ADR and RevPAR. If one hotel’s price per key is considerably higher than the other, it may be overpriced. However, if the hotel's price per key is lower than similar properties with a comparable ADR and RevPAR, it could be underpriced — and therefore, a potentially lucrative investment opportunity.