Hotels never get ' stable '
According to one global commercial real estate company, Hotels are dynamic income producing assets that if bought, developed, operated and disposed of at the appropriate time would yield superior returns. Let’s however assume that you are in the hotel business for the long haul. Hotels, like real estate have ‘life cycles’ that reflect a rise and fall in net operating income during a property’s economic life. A new hotel will experience rising occupancy and/or average room rate levels during the first 2 – 5 years of operation.
First, let’s define what the lodging cycle is: it’s how the relationship between supply and demand affects occupancy levels and average rate growth. Typically, hotel operators will say the cycle occurs over a 7- to 10-year basis. New hotels are constructed, and occupancy levels decline as these new hotels are absorbed into the market. Demand then starts catching up to the new hotel supply, performance begins to improve, stability is restored and the cycle starts all over again.
Richard L. Friedman, president and CEO of Carpenter & Company Inc remarked “In the hotel business, there’s no such thing as stabilization. There’s a start-up period, but hotels never get stable, which is (not) a good or a bad thing.”
Given the complexities of running a hotel, in reality they can never stay stable. Unlike real estate, which is a shell structure, hotels carry a vast array of furniture, fixtures and equipment – all of which are inseparably connected to the business of operating a hotel. Furthermore, proper maintenance, timely refurbishment or renovation can positively lengthen the economic life of the hotel. An older, badly maintained hotel will struggle to sell rooms in a competitive landscape, thus eroding its income generating capability.
Hotels are very capital -, labour- and management intensive with relatively high level of fixed costs. Furthermore, hotel operations are highly sensitive to market changes – such as factors of seasonality , frequently shifting supply and demand trends, a constantly fluctuating economy, volatile political upheaval, the possibility of a terrorist attack.– even the changing of a hotel brand. The fluidity with which hotel markets endlessly evolve challenges the concept that a hotel can ever stay “stabilized”.
Furthermore the success of a hotel investment is heavily influenced by a coalition of partners, each of whom have an interest, be it complementary or competing or even both, in the underlying property. Beyond the vested interests of the investors /owners, an additional complexity is the interest of the property management team or brand affiliation.
Ilzaf Keefahs- writes on hospitality related matters that he is passionate about, and likes to share his views with hoteliers and customers alike.
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