hm101- ch11

Forces Shaping the Hotel Business

Chapter 11

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


• 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


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


• 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