Forces Shaping the Hotel Business

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Chapter 11

• Forces Shaping the Hotel Business

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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

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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 (3040 years)
• Length of construction phase (lt1 year to gt3
  years)
• How supply and demand will change over time

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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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

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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