Price Per Key in Commercial Real Estate
In hotel construction and acquisition, price per key is a metric that compares the amount of money spent on building or acquiring the hotel with the number of rooms, or keys, in the hotel.
Apply for a loan in minutes and get multiple quotes today → Get Quotes
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.
Related Questions
What is the definition of price per key in commercial real estate?
Price Per Key in Commercial Real Estate 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 = 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.
What factors influence the price per key in commercial real estate?
The price per key in commercial real estate is influenced by a variety of factors, including the location of the property, the quality of the hotel, the amenities offered, and the overall demand for hotel rooms in the area. Additionally, the price per key can be affected by the hotel's RevPAR and ADR, as well as the cost of construction or acquisition.
For example, if a hotel is located in a desirable area with high demand for hotel rooms, the price per key may be higher than similar properties in less desirable areas. Similarly, if the hotel offers high-end amenities and services, the price per key may be higher than similar properties with fewer amenities.
Ultimately, lenders and investors use price per key to determine the viability of a potential investment and any associated lending risk. By comparing the price per key to similar hospitality properties in the area, lenders and investors can get a better understanding of the potential return on investment.
How is the price per key in commercial real estate calculated?
The price per key in commercial real estate is calculated using the following 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
Source: www.commercialrealestate.loans/commercial-real-estate-glossary/price-per-key
What are the advantages of using price per key in commercial real estate?
The advantages of using price per key in commercial real estate are that it allows lenders and investors to compare the development or acquisition cost to the number of rooms in the hotel. It is also used alongside other important hotel financial metrics like RevPAR (revenue per available room) and ADR (average daily rate). This metric helps lenders and investors determine the viability of a potential investment and any associated lending risk. It can also help identify underpriced properties that may be a potentially lucrative investment opportunity.
What are the disadvantages of using price per key in commercial real estate?
The main disadvantage of using price per key in commercial real estate is that it does not take into account the quality of the hotel. For example, two hotels may have the same price per key, but one may be of higher quality than the other. This means that the higher quality hotel may be more profitable, but the price per key metric would not reflect this. Additionally, price per key does not take into account the location of the hotel, which can have a significant impact on the hotel's profitability.
What are the most common mistakes made when using price per key in commercial real estate?
The most common mistakes made when using price per key in commercial real estate are not taking into account the quality of the asset and not considering the location. Quality of the asset is important because lower-quality hospitality assets generally have a lower price per key than five-star resorts. Location is also important because it can affect the price per key. For example, a hotel in a desirable location may have a higher price per key than a hotel in a less desirable location.
Source: www.commercialrealestate.loans/commercial-real-estate-glossary/price-per-key