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  The Rule of Thumb Method...
Does It Still Hold Weight?

CANADIAN LODGING OUTLOOK 
HVS INTERNATIONAL - CANADA 
August 2000 Year-to-Date
by Elaine Sahlins - HVS San Francisco

One of the best-known adages of hotel development analysis is the often quoted, yet often disputed, “Rule of Thumb Method” of determining feasibility. 1The simple measure of one dollar of room revenue supporting $1,000 of hotel value is regarded as the cost naive benchmark for determining feasibility for a hotel development or acquisition, but it is still utilized. The inverse of this method is set forth as a means of setting room rate. Described in the 1997 Hotel Investment Handbook, the theory is illustrated as follows: 
 

Table 1
Total Hotel Property  $26,780,000
Number of Hotel Rooms Available  300
Value Per Room  89,267
Required Room Rate  89.27
Source: 1997 Hotel Investment Handbook

Of course, in these days of sophisticated spreadsheet modeling of hotel investment cashflows and underwriting, the “rule of thumb” method is full of flaws. It does not consider occupancy, other sources of revenue, or expenses, and it assumes a stabilized operation. Despite these obvious shortcomings, the “rule of thumb” method does come up from time to time. Its persistent presence begs the question: Does the “rule of thumb” still hold weight in today’s market? In order to answer, the operating performance of sample hotel brands was ascertained. The December 1999 issue of Hotel and Motel Management provided much of the data that was used in our analysis. The eDirectory of Franchising Fees listed 1998 average rate and annual occupancy for many of the major franchised brands as well as typical development costs for the brands’ properties. The Development costs were adjusted to include an estimated land component of 15% of the published construction cost. The averages for each brand derived from the data are illustrated in the Table 2, which lists the average rates and occupancies from the eDirectory. This data was used to calculate RevPAR. When the construction costs from the eDirectory represented a range, the average was derived. A 15% land cost was then calculated based on the average construction cost. Next, the “rule of thumb” analysis was applied, which involved dividing the average rate by the total cost, then multiplying by 1,000. Clearly, there is no discernable trend for any particular property type (limited-service, full-service, or extended-stay), or for any market position (mid-rate, luxury, economy). However, the data does show that the weighted average of $1.04 of average rate to $1.00 of development cost is surprisingly close to the “rule of thumb”. While this may not be a precise test of feasibility, it is a general benchmark that survives the test of time, inflation, and hotel development cycles.
 

Table 2 (Source: eDirectory, Hotel & Motel Management, December 1999)
. 1998 ADR 1998 OCC 1998 RevPAR Construction Cost Low End Construction Cost High End Average Construction Cost Land Cost Total Hypothetical Cost Cost to ADR
Knights Inns $36.41 48.2% $17.54 $27,789 $56,300 $42,045 $6,307 $48,351 $0.75
Clubhouse 68.72 67.5 46.39 78,000 109,000 93,500 14,025 107,525 0.64
Homegate Suites 46.57 54.0 25.15 40,000 55,000 47,500 7,125 54,625 0.85
Days Inn 50.14 54.9 27.51 30,158 61,672 45,915 6,887 52,802 0.95
Crowne Plaza 100.20 68.3 68.44 100,000 120,000 110,000 16,500 126,500 0.79
Howard Johnson 54.62 54.5 29.78 30,045 61,571 45,808 6,871 52,679 1.04
Ramada 57.28 52.4 30.04 30,044 61,570 45,807 6,871 52,678 1.09
Travelodge 48.82 56.2 27.41 28,699 53,575 41,137 6,171 47,308 1.03
Embassy Suites 120.93 72.2 87.31 94,510 163,375 128,943 19,341 148,284 0.82
ParkPlaza Hotels 98.00 73.5 72.03 100,000 100,000 100,000 15,000 115,000 0.85
AmeriSuites 81.09 65.8 53.36 50,000 90,000 70,000 10,500 80,500 1.01
Hampton Inn 67.83 68.9 46.73 53,107 64,655 58,881 8,832 67,713 1.00
Holiday Inn 73.70 65.5 48.27 60,000 60,000 60,000 9,000 69,000 1.07
Holiday Inn Exp. 63.00 64.0 40.325 50,000 50,000 50,000 7,500 57,500 1.10
Wellesley Inn 61.13 70.8 43.28 40,000 65,000 52,500 7,875 60,375 1.01
Super 8 Motels 43.99 60.8 26.76 25,885 37,672 31,779 4,767 36,545 1.20
Hilton Garden Inn 91.02 64.3 58.53 65,000 65,000 65,000 9,750 74,750 1.22
Microtel Inns 40.00 70.0 28.00 25,000 35,000 30,000 4,500 34,500 1.16
AmercInn 58.00 62.0 35.96 38,000 38,000 38,000 5,700 43,700 1.33
Motel 6 38.56 63.0 24.29 25,000 25,500 25,500 3,825 29,325 1.31
Fairfield Inn 58.00 73.1 42.40 37,000 48,000 42,500 6,375 48,875 1.19
Wingate Inns 67.70 67.9 45.96 44,694 45,624 45,159 6,774 51,933 1.30
Hawthorn Suites 85.00 75.0 63.75 50,000 70,000 60,000 9,000 69,000 1.23
Sierra Suites 63.57 72.9 46.34 42,000 42,000 42,000 6,300 48,300 1.32
Courtyard Marriott 84.00 81.0 68.04 52,533 64,211 58,372 8,756 67,128 1.25
Residence Inn 95.00 84.1 79.90 60,821 73,826 67,324 10,099 77,422 1.23
Red Roof Inns 48.00 73.0 35.04 25,000 34,000 29,500 4,425 33,925 1.41
Summerfield Sts. 118.90 79.9 95.00 71,000 71,000 71,000 10,650 81,650 1.46
Average $68.58 66.6% $46.91 $57,077 $65,639 $1.04

1 Stephen Rushmore, Dana Michael Ciraldo, and John Tarras, Hotel Investment Handbook
(Boston: Warren, Gorham & Lamont, 1997)
 
 

CANADIAN LODGING OUTLOOK
HVS INTERNATIONAL - CANADA
August 2000
Year-to-Date
# of Rooms
OCC %
OCC %
Avg Room Rate
Avg Room Rate
RevPAR
RevPAR
Room Supply % change
Room Demand % change
   
2000
1999
2000
1999
2000
1999
Nova Scotia Area 1,345 64.0% 67.4% $78.24 $74.28 $50.07 $50.06 0.0% -5.0%
Halifax, NS 2,281 71.4% 74.8% $116.40 $105.34 $83.11 $78.79 0.1% -4.4%
Montreal, QC 13,487 69.3% 69.5% $128.61 $118.83 $89.13 $82.59 0.6% 0.2%
QuebecCity, QC 3,585 70.6% 69.0% $124.69 $116.88 $88.03 $80.65 0.4% 2.7%
Quebec Area 3,663 56.1% 59.3% $81.60 $74.31 $45.78 $44.07 0.0% -5.3%
Toronto Downtown 12,284 71.3% 74.8% $160.69 $150.83 $114.57 $112.82 2.3% -2.5%
Toronto North/East 6,308 68.8% 71.0% $106.83 $98.20 $73.50 $69.72 0.0% -3.2%
Toronto Airport/West 8,556 75.7% 75.5% $114.66 $107.10 $86.80 $80.86 0.5% 0.7%
Ottawa, ON 9,260 70.1% 69.4% $112.60 $102.01 $78.93 $70.79 5.6% 6.7%
Ontario East 7,948 61.9% 64.4% $87.24 $82.23 $54.00 $52.96 2.9% -0.9%
Niagara Falls, ON 5,186 61.8% 63.7% $121.03 $116.65 $74.80 $74.31 4.7% 1.6%
Ontario Southwest 5,318 61.5% 62.1% $92.22 $85.77 $56.72 $53.26 0.6% -0.3%
Ontario North 2,390 62.9% 64.3% $93.16 $86.78 $58.60 $55.80 0.0% -2.1%
Ontario Central 3,452 62.1% 65.6% $89.71 $83.99 $55.71 $55.10 0.3% -4.9%
Winnipeg, MB 3,180 65.4% 73.5% $87.17 $90.36 $57.01 $66.41 1.7% -9.5%
Regina/Saskatoon, SK 3,832 66.2% 67.4% $77.92 $75.77 $51.58 $51.07 0.8% -0.9%
Calgary, AB 7,374 67.1% 70.2% $116.89 $112.64 $78.43 $79.07 6.4% 1.8%
Edmonton, AB 4,918 62.0% 63.0% $83.90 $81.23 $52.02 $51.17 0.6% -1.1%
Alberta Area 5,062 62.8% 60.1% $82.32 $80.63 $51.70 $48.46 2.8% 7.5%
Mountain Regions, AB 2,860 77.5% 81.3% $204.36 $185.65 $158.38 $150.93 -0.4% -5.1%
Vancouver, BC 10,966 66.6% 70.4% $137.98 $141.03 $91.89 $99.29 8.5% 2.7%
British Columbia Area 4,552 55.7% 55.5% $78.95 $78.50 $43.98 $43.57 1.1% 1.5%
Victoria, BC 2,765 64.9% 69.5% $120.58 $115.94 $78.26 $80.58 -0.6% -7.2%

Provinces

Alberta 20,313 66.2% 67.6% $114.76 $111.49 $75.97 $75.37 2.6% 0.4%
British Columbia 21,225 63.8% 66.0% $131.48 $129.49 $83.88 $85.46 3.1% -0.4%
Manitoba 3,383 65.3% 73.2% $86.32 $89.06 $56.37 $65.19 1.3% -9.6%
New Brunswick 2,636 67.9% 70.5% $85.15 $82.34 $57.82 $58.05 0.2% -3.6%
Newfoundland 1,466 66.5% 69.7% $94.20 $91.52 $62.64 $63.79 0.2% -4.3%
Nova Scotia 3,626 68.7% 71.8% $103.33 $93.93 $70.99 $67.44 0.0% -4.3%
Northwest Territories INS INS INS INS INS INS INS INS INS
Ontario 60,264 67.9% 69.4% $116.82 $108.61 $79.32 $75.38 2.0% -0.2%
Prince Edward Island 803 54.8% 54.3% $97.31 $91.37 $53.33 $49.61 0.0% 0.9%
Quebec 21,173 67.0% 67.6% $120.46 $111.21 $80.71 $75.18 0.3% -0.6%
Saskatchewan 5,115 61.5% 64.3% $73.58 $70.99 $45.25 $45.65 1.5% -2.9%
Yukon Territory 787 55.5% 48.4% $82.92 $82.62 $46.02 $39.99 0.0% 14.7%
Canada 138,780 63.7% 64.7% $99.79 $94.50 $63.57 $61.14 1.7% 0.0%

The Canadian Lodging Report Outlook is a joint monthly publication of Smith Travel Research and HVS Intenational, Vancouver and Toronto, Canada

###
Contact:

Kimberley Tyls
HVS International
4235 Prospect Road
North Vancouver, BC V7N 3L6
(604) 988-9743, ext. 21
KTyls@hvsinternational.com
www.hvsinternational.com

Also See What’s Hot and What’s Not in Eastern Canadian Hotel Markets / The Canadian Lodging Outlook / Sept 2000 
Canadian Lodging Outlook / May 2000 Year to Date Statistics / HVS International - Canada / July 2000 


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