Download CHAPTER 11- FORCES SHAPING THE HOTEL BUSINESS

Chapter 11
Forces Shaping the Hotel Business
FORCES SHAPING THE HOTEL
BUSINESS
 How hotels get built
 Where the money comes from
 The hotel business cycle
 The role of real estate in the business
 Asset management
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
 Only 25 percent of all hotels that were
planned (between 1994 and 2002) were
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
 Source: HVS
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
 Now, the industry is just beginning to recover
OCCUPANCY RATES
 1999 – 63.1 %
 2000 – 63.7 %
 2001 – 60.3 %
 2002 – 59.1% (lowest in 31 years)
 2003 – 59.2 %
 2004 – 61.3 %
 2005 – 63.1 %
 2006 – 64.4 % (projected)
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
 They are often used by owners of more
upscale properties