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HM101- Ch11

HM101- Ch11






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    HM101- Ch11 HM101- Ch11 Presentation Transcript

    • Forces Shaping the Hotel Business Chapter 11 Copyright © 2010 by John Wiley & Sons, Inc. All Rights Reserved
    • 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 • 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
    • 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 • Supply and profits increased in following years • Supply went down again in 2008 due to the global recession
    • OCCUPANCY RATES—U.S. 2001 – 65.4% 2002 – 64.3% 2003 – 65.2% 2004 – 69.4% 2005 – 71.4% 2006 – 72.3% 2007 – 70.8% 2008 – 70.0%
    • 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 • Asset managers are most-often used by owners of more upscale properties