Bosses at the Marsden Grotto on the Coast Road say they are on schedule to open the first six bedrooms to guests by late summer.
That will be followed by a further four rooms being completed by Christmas or early in the new year, ending the second and final phase of the project.
Throughout the development, the Grotto’s ground floor restaurant and bar have remained open for business.
Owner Terry Maughan, 50, said work had progressed well since builders moved in to clear and start to refit the previously vacant first floor in February.
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He said: “Although we don’t have an exact date, we expect to complete phase one of the development by the end of the summer.
“Phase two, which comprises of the final four rooms, should be open by the end of the year or early in 2019.
“This is a fantastic project and I’m confident that the hotel part of the Grotto will become hugely popular and a premier destination.”
And he added: “We are in a great location for people looking for somewhere a little different to stay.
“I also want to reassure customers that the bar and restaurant will remain open throughout all development work.”
Mr Maughan bought the Grotto last Easter and submitted plans to transform the previously unused upper level into hotel rooms soon after.
Planning permission was given by South Tyneside Council despite initial concerns about the possible impact of building work at the environmentally sensitive location.
The Grotto sits within the Durham Coast Special Area of Conservation and the Durham Coast Site of Special Scientific Interest.
It is also close to designated sites of importance, including the Northumberland Coast Special Area of Protection, the Leas, Marsden Lime Kilns, and Lizard Lane Cutting.
Mr Maughan runs the Grotto, which is built into the cliff face, through his Northumberland Castle and Country Lodgings Ltd company.
It also operates The Sun Hotel at Warkworth and the Manor House Hotel on Holy Island, both Northumberland.