September 12, 2016
The Hotel Data Conference was held last week in Nashville TN, hosted by STR (formerly Smith Travel Research) and Hotel News Now. As reported by HNN Newswire, STR and Tourism Economics forecast a slowdown of growth for the lodging industry.
Supply growth outpacing demand growth is certainly an indicator of the looming supply growth impact on existing hotels, or even on new hotels that are part of the new supply. Leaders in the hotel industry at the Hotel Data conference noted their concerns about new supply.
I, personally, don't think anyone in the hotel industry expects hotel developers to maintain such an altruistic view that they would consider what is best for the industry and the local hoteliers before beginning a hotel project. However, I would expect developers to protect their own investment by having a feasibility study done prior to launching into a hotel development project. Yet, there have been many hotels built without a feasibility study. Some have been fortunate, others have not. While predicting the future is dicey, never the less, having a feasibility study done, and researching all of the facts available as much as possible before beginning a new hotel project, is only prudent.
Feasibility Study expert Ed Xanders, of Interim Hospitality Consultants, has this simple rule of thumb that relies on occupancy of the local comp set as reported in a STR report:
40% occupancy: hotels are losing money
50% occupancy: break even
60% occupancy: making money, you can buy a new car!
70% occupancy: profitable, you can buy a new car for your spouse!
80% occupancy: time to build another hotel in the market
Ed Xanders notes that these occupancy percentage guidelines have to be tempered by the pipeline of new hotels coming in the local market under construction or in planning ahead of your project. That, and judging changes in demand, and selection of the comp set requires deep experience, which is why developers use Interim Hospitality Consultants, or another feasibility study expert prior to beginning a new project. Ed and I also discussed the fact that new hotels of strong brands certainly do take market share from older hotels, and therein lies the judgement call of whether a new hotel will be able to drive 80% occupancy in a market that is doing 62%.
If compiling a feasibility study that can reliably be used to guide one's decision on development of a new hotel is challenging, judging the impact of a new hotel on existing hotels is even more challenging.
Appraiser's I've spoken with have given up doing impact studies. ‘Risky business that is sure to have someone unhappy with your results’ is what they say. While quantifying the impact of new hotels on the revenue of existing hotels is a difficult guess, that impact is felt in almost all cases unless the demand increase locally offsets the increased supply. That has been happening in the last few years in many larger markets as the economy and travel increased. However, if 'A rising tide lifts all boats', then it could also be said that the tide going out will lower all boats. And when the tide goes out, all the new boats in the market may sink the old boats.
I know I have stretched this analogy, but if you are worried about the impact of new hotels coming in your local market, consider all of your options now, before the tide changes! Get all of the available information to help make a decision to hold or exit. Some of that information will be a hotel sale comparable report. To get a free hotel sale comparable report, and review your hotels potential sale value, contact one of MBA Hotel Brokers experienced hotel brokers.
If you are interested in having a feasibility study done, you can check out Ed Xander's company website for Interim Hotel Consultants at: http://www.interimhospitality.com/feasibilitystudies.html
'Till Next Time,
Photo: Hotel Data Conference by Kerry Woo Photography
Photo: Hilton Starts Development on 10 Tru Hotels by Hotel Management News Room