Niche properties

New Wave Investments

Hotels with indoor waterparks are making a splash in drive-to markets.

In 1994, resort pioneer Stan Anderson expanded his Wisconsin Dells, Wis.–based Polynesian Resort to include an indoor waterpark. Wisconsin lenders were willing to fund the development because they had been financing outdoor waterparks for years. Despite the steep construction costs, the project was a success, and soon hotels with indoor waterparks were viewed as even better hospitality investments than their outdoor counterparts.

Indoor waterpark hotels and resorts create weatherproof vacations and capture year-round revenues. In 2004, these resorts achieved higher occupancies and revenues than any other lodging investment. While the Midwest leads this trend — of the 62 U.S. hotels with indoor waterparks, 28 are in Wisconsin and 14 are in Minnesota — these drive-to resorts are becoming popular in several U.S. markets. The Northeastern and western regions have the next highest concentration of parks. By the end of this year, the number of parks will grow to 92 and will include more than 16,000 hotel rooms, a fourfold increase in the last five years.

Like other niche properties, hotels with indoor waterparks are unique development and investment opportunities that may provide greater returns than more traditional properties. Carefully examining these investments is the first step toward understanding the rewards and risks associated with indoor waterparks. Analyzing costs, development trends, demand, financing, and profitability can help commercial real estate professionals determine if these opportunities make sense in their markets.

Who's Investing and How

A few specialized developers and family-run operators kicked off the indoor waterpark development trend, and now individual investors are gaining entry into the market by purchasing hotel-condominium units at these properties. In many instances, baby boomers are putting money into these higher-performing investments instead of the stock market. Beyond making money, individual investors like the idea of owning a place within a resort setting where they can spend time with their families.

Currently most indoor waterpark resorts offer condominium units for sale because it provides additional pre-construction revenue. While waterparks generate substantially higher incomes than ordinary lodging, they also are more expensive to build. A successful resort requires a large initial investment — indoor waterparks can cost as much as $300 per square foot to build, not including hotel construction costs. As a result, many indoor waterpark resorts cost between $40 million and $55 million, excluding land costs. Even with favorable financial terms, the sticker shock of these projects deters many investors. For that reason, pre-selling hotel suites to individuals as wholly owned condominium units offers benefits to both the resort’s developer and the condominium buyers.

The Condo Advantage

Currently, 11 percent of all indoor waterpark projects in the pipeline have a condominium component, and successful waterpark resorts are using this strategy. For instance, several Wisconsin Dells properties, including Kalahari Resort & Convention Center, Wilderness Hotel & Golf Resort, Great Wolf Lodge, and Chula Vista Resort, have developed condominium guest rooms that were pre-sold prior to construction.

The advantages to the developer are twofold. First, revenue generated from the condominium sales prior to construction reduces the project’s equity requirement and helps to secure a construction loan faster. Second, the developer benefits from splitting the revenue with individual condominium owners when units are rented out as hotel rooms.

Along with buying a condominium investment, unit owners gain access to the resort’s amenities — restaurants, bars, spas, golf courses, and recreation-entertainment facilities, including the waterpark. For example, in the Midwest, the attraction is similar to buying a vacation cabin on a lake; however the condominium investment requires little maintenance, provides year-round instead of seasonal use and possibly a better investment return, and offers additional income opportunities if the owner decides to rent the unit as a hotel room.

Condominium owners do not have to place their units in the hotel’s rental pool. They can opt not to rent their units or they also can choose an outside agency to handle the unit rental. However, research indicates that most condominium buyers choose to place their units in a resort’s rental pool.

Analyzing Costs

U.S. upscale resort projects cost from $66,400 to $323,500 per available room to build, with the average cost being $172,000 PAR. For a 300-room resort, that’s an average project cost of $51.6 million.

The additional costs associated with building an indoor waterpark as part of a hotel or resort vary. Low-end projects can cost around $167 psf to build, while heavily themed parks with state-of-the-art features such as sound, lights, and animation can run in excess of $400 psf, including furniture, fixtures, and equipment. Costs vary depending on the size, price tier, and entertainment value that the developer wants to achieve.

There is a direct relationship between the number of hotel guest rooms and the size of indoor waterpark the operation can support. The waterpark sizing multiplier accelerates with the number of hotel rooms. For example, while a 100-room hotel can support a 10,000-sf indoor waterpark, a hotel or resort with 200 or more rooms can support about 200 sf of waterpark per guest room. Therefore, a 300-room hotel or resort can support a 60,000-sf waterpark. A hotel developer considering the addition of a 60,000-sf indoor waterpark can expect to add about $18 million to the total project costs.

Calculating ROI

Despite steep development costs, hotels with indoor waterparks can be lucrative investments. A survey comparing total project costs with the amount of cash generated revealed that upscale waterpark resorts’ revenue more than offset building and operating costs. Due to higher occupancies, waterpark premiums, and higher food and beverage spending, these resorts generated a cash-on-cost return ranging from 14 percent to 24 percent compared to returns of 10 percent to 12 percent for comparable properties without waterparks.

Overall, research indicates that hotels with indoor waterparks achieve higher occupancies, higher room rates, and higher room revenues than traditional hotels. Still, investors who are considering this niche property should conduct thorough market analysis and due diligence to arrive at an independent decision about a project’s viability. It’s critical to analyze the developer’s feasibility report; study the prospectus, public offering, and planning documents; review the financial projections; and understand the source, use, and distribution of funds.

Hotels with indoor waterparks are gaining popularity among hospitality investors and consumers alike. As these projects continue to expand into new markets, commercial real estate professionals should carefully analyze the associated costs, benefits, and risks to determine if hotel waterparks are a good investment for them.

Jeff Coy and Bill Haralson

Jeff Coy and Bill Haralson created Hotel Waterpark Research & Consulting to collect and report industry data. Coy is president of JLC Hospitality Consulting in Rochester, Minn., and Haralson is president of William L. Haralson & Associates in Dallas. Contact Coy at (507) 261-7474 or Contact Haralson at (972) 231-7444 or


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