In August 1878 the land known today as the Te Aroha Hot Springs Reserve was made a public reserve under the Public Domains Act on December 1882. The consent of local Maori and in particular the Morgan family to Government plans for the establishment of such a reserve was of critical importance and it was through their generosity in giving up the land that the Domain became what it is today.

The possibility of a 'sanatorium' being developed at Te Aroha had been envisaged as early as the 1870s, as regular excursions were conducted from Thames to Te Aroha by boat during this time so that visitors could take advantage of the hot springs. In February 1880 a regular boat service with the Mem Sahib was begun between Paeroa and Te Aroha while the Vivid ran between Thames and Paeroa, and in November that year a coach service was established between Hamilton and Te Aroha.

The construction of the first permanent Bath Houses began in 1883. By this time the hot springs were becoming well known as a tourist resort. The railway from Hamilton to Te Aroha was opened in March 1886 completing the link from Auckland and greatly increasing its accessibility and popularity for visitors.

The town of Te Aroha was developing rapidly at this time and it was visitors to the hot pools that were bringing prosperity to be town rather than the profits of local gold mining. In August 1885 the initial landscape development began including manicured lawns, provision for croquet, lawn tennis and racket courts, and tree planting. Further springs were being opened and the paths were beginning to be constructed linking the new features.

Apart from the pleasures and benefits of the hot springs and the Domain itself, visitors enjoyed visits to the mines, to the Waiorongomai battery, walks to the top of Mount Te Aroha and trips up the river to picnic spots. By now there were three large hotels, The Palace, the Te Aroha and the Hot Springs and two boarding houses, altogether providing accommodation for 500 visitors. In the year ended 31 March 1887, 28,553 baths were taken at Te Aroha. By way of comparison, Rotorua had 4,878 taken over the same period.

The spa helped protect Te Aroha from the effects of the long depression of the late 1880s and early 1890s. By the 1890s Te Aroha had become the most popular Spa in the country. In 1889 the railway link from Thames to Te Aroha was completed giving visitors from Auckland two travel options to the spa: by rail through Hamilton, or by boat from Auckland to Thames and from there by rail.