Hotel Online  Special Report

Some Long-term Trends that Might Be Adverse
to the Future of the Hotel Industry

CANADIAN LODGING OUTLOOK
April 2006


The Canadian Lodging Outlook is a joint monthly publication 
of Smith Travel Research and HVS International, 
Vancouver and Toronto, Canada
.
Reprint - By Steve Rushmore, CRE, MAI, CHA

Sunny Times, But Clouds On Horizon

Looking around the world, with only a few exceptions, it appears the hotel industry is doing very well. Global travel is up, particularly from some of the emerging markets such as India and China. The general feeling at most of the hotel investment conferences around the world is one of restrained euphoria. While this recent upswing in revenue and profitability may warm the hearts of owners, operators and investors, I am a little concerned about some long-term trends that might be adverse to the future of the industry. Let me describe a few.

Brand Consolidation

Over the last 15 years many of the brands have been consolidated under one company. Westin and Sheraton are part of Starwood; Ritz-Carlton and Ramada have merged with Marriott International; and Embassy Suites and Doubletree now operate under the Hilton flag.

Consolidation produces economies of scale for the brand and huge conflicts for the hotel owner. Every time a hotel either opens in a market or changes flags to one of the major hotel brands, the potential for adverse competitive impact emerges.  How would you feel if you own a Sheraton and Starwood decides to open a Westin across the street from you?

Many chains will justify their brand expansion by first commissioning a consultant to assess the adverse impact, but those of us in the research business know these studies are highly subjective and probably inaccurate. The only way owners will be protected from brand overexpansion is to negotiate an exclusive territory prior to acquiring a brand. There might be several defined territories for each brand within a company with numerous brands.

Amenity Creep

The hotel industry has always embraced what is termed “amenity creep.” This is the unbridled desire of owners and operators to constantly add new amenities to remain competitive with other similar hotels in the surrounding market. Free breakfast, Internet, spas, flat panel televisions, new beds, curved shower bars and designer soaps are examples of amenities that did not exist 25 years ago, but are here today because one hotel in a market decided to try them and every other hotel followed.  It should be remembered that most hotel amenities quickly become hotel necessities. Before creating a new amenity that currently does not exist within your market, do a cost-benefit study and competitive analysis to determine whether the expense is worth the cost and whether your competitors will follow quickly and eliminate your competitive advantage.

Labor Issues

When the hotel industry does well hotel employees want more money and benefits.  In the United States hoteliers are bracing for major labor unrest as the unions are organizing their workers for a major showdown. Unlike many industries, hotels have huge capital investments in land and buildings producing tremendous fixed costs. The resulting lower operating margin makes it difficult to generate profits unless all costs are held in control.  Yes, in good times, hotels can be cash machines, but in bad times the negative operating leverage goes against the owner.  The ideal solution is for hotel employees to reap the benefits when times are good, but they should also be willing to either reduce their compensation or be more flexible with their work rules when times are tough.

Condo-Hotel Rip-Offs

One of the best new ideas to sweep the lodging industry is combining a residential component with a hotel. The resulting synergies of offering hotel services to the residential apartments and having residential apartments available as hotel room overflow benefits both the hotel and residential owner. Unfortunately, the term describing this form of mixed-use development has become a “condo-hotel.” It is unfortunate because the “condo-hotel” term is also used to describe a marketing scheme where individual hotel rooms are sold to buyers who are primarily looking for a vehicle to provide a return on their invested capital.

While the developers of these projects do not market their condos as “investments” because to do so in the United States requires all types of governmental registrations, there are very few good reasons why someone would want to own a hotel room in a location they have little desire to occupy. The main problem with this type of “condo-hotel” is that the prices these units are sold for often exceed their economic value. For example, if a hotel is going to operate at an average rate of US$150, then the rule of thumb is that this hotel is worth about US$150,000 per room. If the condo developer actually sold this hotel room at US$150,000, then the buyer would be getting a fair deal.

Unfortunately, many unscrupulous developers are marking up the individual condo selling prices 50% to 100% so the buyers have no chance to making an adequate return. I recommend the brands carefully evaluate the economics behind these types of condo-hotels before issuing either a franchise or taking on a management contract. I predict these are litigations waiting to happen.

While there are clouds on the horizon, I do not foresee a violent storm across the hotel industry. Although these concerns can adversely impact future hotel profitability and have resulting ramifications on hotel values, most can be mitigated through simple adjustments to how we do business.  I would like to hear from my readers if there are any other major concerns that you might have about the future of the hotel industry. Drop me an e-mail at srushmore@hvsinternational.com, and I will include them in future columns.

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CANADIAN LODGING OUTLOOK
HVS INTERNATIONAL - CANADA
April  2006

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CANADIAN LODGING OUTLOOK
HVS INTERNATIONAL - CANADA
April  2006 YTD

.© Smith Travel Research, 2005. Reproduction or quotation in whole or in part without permission is forbidden. *INS - Insufficient Data

-
Contact:
Selina Lai
HVS International – Canada
2120 Queen St. East, Suite 202
Toronto, ON M42 1E2
(416) 686-2260, ext 21
(416) 686-2264 FAX
slai@hvsinternational.com
www.hvsinternational.com

Also See Hotel Feasibility/Market Demand/Valuations and Appraisals /Betsy MacDonald and Steve Rushmore / Canadian Lodging Outlook - March 2006 Year-to-Date
When Will The Bubble Burst? / Stephen Rushmore / Canadian Lodging Outlook - January 2006 Year-to-Date
Low Cap Rates Drive Gains in Hotel Values / Suzanne R. Mellen / Canadian Lodging Outlook - December 2005 Year-to-Date
Now Is The Time to Buy New Orleans Hotel / Stephen Rushmore / Canadian Lodging Outlook - September 2005 Year-to-Date
What Does a Hotel Franchise Cost? / Stephen Rushmore / Canadian Lodging Outlook - August 2005 Year-to-Date
Basic Concepts of Co-Branding, With Examples from the Hospitality Industry Could Co-branding Improve Your Bottomline? / Peggy Yip / Canadian Lodging Outlook - July 2005 Year-to-Date
Brand Equity: Raising the Flag / Theodore Noseworthy / Canadian Lodging Outlook - April 2005 Year-to-Date
Timeshare Cash-Flow Modeling and Market Feasibility / Canadian Lodging Outlook - March 2005 Year-to-Date
Low Interest Rates and High Demand for Hotel Assets Fuels Value Gains / Canadian Lodging Outlook - February 2005 Year-to-Date
A Crash Course In Cap Rates / Canadian Lodging Outlook - January 2005 Year-to-Date
2004 Canadian Hotel Transaction Survey / Canadian Lodging Outlook - November 2004 Year-to-Date
HVS International Hotel Development Cost Survey 2004 / Canadian Lodging Outlook - September 2004 Year-to-Date
Defining a Hotelier; The Hotel Professional Has Gone Through a Major Transition Over the Past 20 Years / Mark Keith / Canadian Lodging Outlook - August 2004 Year-to-Date
Hotel Investments; The Magic, Curse Of Leverage / Canadian Lodging Outlook - July 2004 Year-to-Date / September 2004
June Results Are In And.......We’re Back! / Canadian Lodging Outlook - June 2004 Year-to-Date / Aug 2004
Hotel Life Expectancy / Canadian Lodging Outlook - March 2004 Year-to-Date / May 2004
European Hotel Transactions 2003 - Country Analysis / Canadian Lodging Outlook - February 2004 Year-to-Date / April 2004
2003 an Unbelievably Strong Year for US Hotel Sales / Canadian Lodging Outlook - December 2003 Year-to-Date / February 2004
2003 Canadian Hotel Transaction Survey / Canadian Lodging Outlook / January 2004
2002 Canadian Hotel Transaction Survey / Canadian Lodging Outlook / Feb 2003
How To Get The Best Sales Price; Positioning Your Hotel for Sell / Stephen Rushmore / Canadian Lodging Outlook - July 2003 YTD / September 2003
Lodging Market Impact of Hosting Olympic Winter Games; Will Salt Lake City Experience Apply to Vancouver and Whistler? / Canadian Lodging Outlook - June 2003 YTD / August 2003
Year-to-date Occupancy through April is 50.4% for all of Canada / Canadian Lodging Outlook - April 2003 YTD / June 2003
SARS and Its Impact on Tourism in Toronto / Canadian Lodging Outlook - March 2003 YTD / May 2003
Hotel Values in Europe - Current Trends / Canadian Lodging Outlook - December 2002 Year-to-Date / Feb 2003
2002 Canadian Hotel Transaction Survey / Canadian Lodging Outlook / Feb 2003
Performance Clauses Essential In Hotel Management Contract / Stephen Rushmore / Canadian Lodging Outlook / Dec 2002
Separating the Hotel Looker From the Hotel Buyer / Stephen Rushmore / Canadian Lodging Outlook / Sept 2002
Making The Ideal Hotel Investment / Stephen Rushmore / Canadian Lodging Outlook / Aug 2002
Reporting In at Six Months..../ Canadian Lodging Outlook / July 2002
The Global Approach To Hotel Valuations / Canadian Lodging Outlook / June 2002
Hotel Insurance Premiums on the Rise? / Canadian Lodging Outlook / May 2002 
Hotel Development Cost Can Determine Feasibility / Canadian Lodging Outlook / May 2002 
Hotel Internet Distribution Channels / January 2002 Month-to-Date Results / Canadian Lodging Outlook / April 2002 
2001 Was a Great Year If You Were in Edmonton! / December 2001 Year-to-Date Results / Canadian Lodging Outlook / Feb 2002 
2001 Canadian Hotel Sales / Canadian Lodging Outlook / Jan 2002 
The Effect on Capitalization Rates and Discount Factors After September 11 / Canadian Lodging Outlook / Dec 2001 
So How Bad Was September for Canadian Hotels.. Pretty Bad! / Nov 2001
So How Bad Was September for Canadian Hotels.. Pretty Bad! / The Canadian Lodging Outlook / September 2001 
Have Hotel Values in Canada Declined Since September 11th? You Bet They Have / The Canadian Lodging Outlook / August 2001 
The Popularity of Boutique Hotels / The Canadian Lodging Outlook / July 2001 
Rising Energy Costs Cause Concern in the Lodging Industry / The Canadian Lodging Outlook / June 2001 
Niagara Falls: With Supply Comes Demand / The Canadian Lodging Outlook / May 2001
Does Supply Generate Demand? / The Canadian Lodging Outlook / May 2001 
Optimism With a Hint of Caution, As Analysts Predict a Softer Year for the Canadian Hotel Industry / Mar 2001 
Limited-Service Growth in Canada - Where’s it Going? / The Canadian Lodging Outlook / January 2001 
HVS Canada in Review - Year End 2000 / The Canadian Lodging Outlook / March 2001 
Canadian Lodging Outlook / May 2000 Year to Date Statistics / HVS International - Canada / July 2000 
The Rule of Thumb Method...Does It Still Hold Weight? / Elaine Sahlins - HVS / Oct 2000
What’s Hot and What’s Not in Western Canadian Hotel Markets / Mar 2000


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