Chapter 11 Forces Shaping the Hotel Business
FORCES SHAPING THE HOTEL BUSINESS n How hotels get built n Where the money comes from n The hotel business cycle n The role of real estate in the business n Asset management
THE ECONOMICS OF THE HOTEL BUSINESS When hotels are in the planning stages, developers must consider: n Available financing (can be difficult) n Lifespan of the hotel (30– 40 years) n Length of construction phase (<1 year to >3 years) n How supply and demand will change over time
THE ECONOMICS OF THE HOTEL BUSINESS n Not all hotels that are planned are actually built n Only 25 percent of all hotels that were planned (between 1994 and 2002) were actually built n One primary reasons that hotels do not get built is due to lack of financing n Hotels are a capital intensive business and can cost hundreds of millions of dollars to build
THE ECONOMICS OF THE HOTEL BUSINESS n HVS conducts a Hotel Development Cost Survey each year to determine the construction costs of different types of hotels: n Budget/Economy hotels – $53, 000 per room n Full service hotels – $166, 000 per room n Luxury hotels – $516, 000 per room n 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 n Hotel construction times can range from about one year to close to three years n As a result, markets can change during this construction period and new hotel constructions can occur n Also, complications can occur such as environmental concerns, historic regulations, and development issues n Example: Vieux Carre Commission
CONSTRUCTION TIMES n Economy hotels – 407 days n Midscale without F & B – 479 days n Midscale with F & B – 553 days n Upscale – 655 days n Upper Scale – 994 days n All hotels – 578 days
HOTEL CYCLES AND FINANCIAL PERFORMANCE n The hotel business moves in cycles as a result of the economy, supply and demand n The economy is affected by interest rates, consumer prices, trade, consumer confidence, etc. n Supply is the number of hotel rooms available
HOTEL CYCLES AND FINANCIAL PERFORMANCE n Supply rarely equals demand n Hotels overbuilt in the 1980 s n Experienced a recession in the 1990 s n Experienced September 11 th n Experienced a 20 % drop in profits in 2001 and a 10% drop in profits in 2002 n Now, the industry is just beginning to recover
OCCUPANCY RATES n 1999 – 63. 1 % n 2000 – 63. 7 % n 2001 – 60. 3 % n 2002 – 59. 1% (lowest in 31 years) n 2003 – 59. 2 % n 2004 – 61. 3 % n 2005 – 63. 1 % n 2006 – 64. 4 % (projected)
HOTELS AS REAL ESTATE n The hotel industry is often seen as being two separate industries: (1) Sale of rooms; and (2) Real estate n Often times, one company will own the building and another will manage it for them (for example, Host Marriott) n Investors are often attracted to hotels as a real estate investment
SECURITIZATION n Securitization refers to the influx of funds from various sources (debt or equity) n For many years, the money that was used to build hotels was borrowed from banks and insurance companies n 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. n The financial decision involves deciding who will own and develop the property, how money will be raised, and interest rates and inflation n Real estate concerns itself with the prospects for increased valuation
DIMESIONS OF THE HOTEL INVESTMENT DECISION n Operations concerns who will actually manage the hotel: the owner or a management group. n Management groups (such as Marriott) will often enter into long term contracts based on a management fee to be received n Fees may be based on sales or operating profit
ASSET MANAGEMENT n Hotels represent assets to its owners – in the form of land, building, contents and profit streams n Some owners will hire asset managers who specialize in hotels to monitor the evaluation of the management of the hotel n They are often used by owners of more upscale properties
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