Chapter 11
Forces Shaping the Hotel
Business
Copyright © 2010 by John Wiley & Sons, Inc. All Rights Reserved
THE ECONOMICS OF
THE HOTEL BUSINESS
When hotels are in the planning stages,
developers must consider:
• Available financing (can be difficult)
• Lifespan of the hotel (30–40 years)
• Length of construction phase (<1 year to >3
years)
• How supply and demand will change over time
THE ECONOMICS OF
THE HOTEL BUSINESS
• Not all hotels that are planned are actually built
• One primary reasons that hotels do not get
built is due to lack of financing
• Hotels are a capital intensive business and can
cost hundreds of millions of dollars to build
THE ECONOMICS OF
THE HOTEL BUSINESS
HVS conducts a Hotel Development Cost Survey
each year to determine the construction costs of
different types of hotels:
• Budget/Economy hotels – $53,000 per room
• Full service hotels – $166,000 per room
• Luxury hotels – $516,000 per room
CLASS EXERCISE
1. Determine the cost to build a hotel in each
classification based upon economy hotels with
120 rooms, full-service hotels with 300 rooms,
and luxury hotels with 400 rooms
2. Determine the average annual revenue based
on average occupancy rates and average daily
rates
THE ECONOMICS OF
THE HOTEL BUSINESS
• Hotel construction times can range from about
one year to close to three years
• As a result, markets can change during this
construction period and new hotel
constructions can occur
• Also, complications can occur such as
environmental concerns, historic regulations,
and development issues
• Example: Vieux Carre Commission
CONSTRUCTION TIMES
•
•
•
•
•
•
Economy hotels – 407 days
Midscale without F & B – 479 days
Midscale with F & B – 553 days
Upscale – 655 days
Upper Scale – 994 days
All hotels – 578 days
HOTEL CYCLES AND
FINANCIAL PERFORMANCE
• The hotel business moves in cycles as a result of
the economy, supply, and demand
• The economy is affected by interest rates,
consumer prices, trade, consumer confidence,
etc.
• Supply is the number of hotel rooms available
HOTEL CYCLES AND
FINANCIAL PERFORMANCE
•
•
•
•
•
Supply rarely equals demand
Hotels overbuilt in the 1980s
Experienced a recession in the 1990s
Experienced September 11th
Experienced a 20 % drop in profits in 2001 and
a 10% drop in profits in 2002
• Supply and profits increased in following years
• Supply went down again in 2008 due to the
global recession
OCCUPANCY RATES—U.S.
2001 – 65.4%
2002 – 64.3%
2003 – 65.2%
2004 – 69.4%
2005 – 71.4%
2006 – 72.3%
2007 – 70.8%
2008 – 70.0%
HOTELS AS REAL ESTATE
• The hotel industry is often seen as being two
separate industries: (1) Sale of rooms and (2)
Real estate
• Often times, one company will own the
building and another will manage it for them
(for example, Host Marriott)
• Investors are often attracted to hotels as a real
estate investment
SECURITIZATION
• Securitization refers to the influx of funds from
various sources (debt or equity)
• For many years, the money that was used to
build hotels was borrowed from banks and
insurance companies
• Now, much of it comes from “conduit” lenders,
REITs, private investment companies, and
public markets
DIMESIONS OF THE HOTEL
INVESTMENT DECISION
The investment decision has three dimensions (1)
financing; (2) real estate values and; (3)
operations
• The financial decision involves deciding who
will own and develop the property, how money
will be raised, and interest rates and inflation
• Real estate concerns itself with the prospects
for increased valuation
DIMESIONS OF THE HOTEL
INVESTMENT DECISION
• Operations concerns who will actually manage
the hotel: the owner or a management group.
• Management groups (such as Marriott) will
often enter into long-term contracts based on a
management fee to be received
• Fees may be based on sales or operating profit
ASSET MANAGEMENT
• Hotels represent assets to its owners in the
form of land, building, contents, and profit
streams
• Some owners will hire asset managers who
specialize in hotels to monitor the evaluation of
the management of the hotel
• Asset managers are most-often used by owners
of more upscale properties