The Lights Are Much Brighter There
 
 
by Patrick Quek, January 1999

For many people, downtown hotels conjure up images of grand ballrooms, formal attire, fancy restaurants, and signature skyline architecture.  Indeed, the restoration of a former “grande dame” has often been the cornerstone of urban revitalization efforts.  Not only do these urban hotels provide an economic stimulus, but they act as a “feel-good” safe haven for locals migrating back downtown after years of patronizing retail and entertainment establishments in the suburbs.

In most cities across the nation, the inventory of downtown hotels serve some basic functions for the local hospitality industry.

  • They accommodate most conventioneers
  • They carry upscale chain affiliations
  • They offer abundant services for corporate travelers
  • They house some of the best restaurants in town
  • They offer the largest catering facilities in town
By performing all these roles, one would think that downtown hotels have a distinct competitive advantage and perform exceptionally well.  A look at recent downtown hotel performance finds this hypothesis to be true; however, it wasn’t always this way.
 
Price Premiums

Historically, downtown hotels have always achieved a premium in room rates over other properties in their respective metropolitan areas.  Through July 1998, hotels located in central business districts are achieving an average daily room rate (ADR) 14.8 percent greater than the average for the entire market.  The main reason for this is the “upscale” market orientation of most downtown properties, as well as the need to charge higher prices due to greater development costs.  The higher development costs are attributable to the deluxe, full-service nature of most downtown hotels, as well as the increased cost of land and high-rise construction.
 

Central Business District vs 
Citywide Hotel Performance
Average Daily Room Rates
(through 7/31/98)
1998
1997
Central Business District
Citywide
Central Business District
Citywide
$123.60
$107.67
$113.95
$100.31
 

Occupancy Constraints

On the other hand, occupancy for downtown hotels has historically been slightly less than the overall market average.  In general, most urban properties are oriented towards accommodating business and convention travelers.  This market orientation carries with it occupancy limitations due to the seasonality of these demand segments.  In addition, most downtown properties are in excess of 400 rooms, therefore making it more difficult to reach capacity.

Helping the recent improvement in downtown hotel occupancy levels has been several factors:

  • The resurgence of many downtown areas nationwide
  • The recent construction or expansion of downtown convention centers
  • Economic growth has improved corporate and convention travel
  • The relative lack of new hotel construction compared to suburban and rural markets
Combining the double-digit premium in room rates with increasing levels of occupancy, downtown hotels have been some of the most profitable performers in the business.  In the hotel industry, it is a given that revenue growth driven primarily by increases in room rates (as opposed to occupancy) yields a greater percentage of bottom-line dollars.
 
 
Central Business District vs 
Citywide Hotel Performance
Hotel Occupancy
(through 7/31/98)
1998 1997
Central Business District
Citywide
Central Business District
Citywide
74.0% 73.5% 74.1% 74.2%
 

Future Prosperity?

The recent levels of strong urban hotel performance have not gone unnoticed by hotel developers.  While market performance measurements of occupancy and ADR have been observed since 1995, it has not been until 1997 and 1998 that the profits have approached levels sufficient to cover development costs.  Currently, most urban markets now have at least one major hotel renovation, if not a new construction project, underway.

In light of this new competition, it was expected that downtown hotels would start to see the downward trend in occupancy and slowdown in ADR growth that had been experienced in the suburban and rural markets.  However, the recent run of the bears on Wall Street has frozen development capital.  Consequently, we’ve already seen the postponement and cancellation of new urban hotel development projects that just a few months ago were considered “done deals”.  As long as the development capital for the larger downtown urban hotel projects remains scarce, and the national economy does not go into a full-fledged recession, you can expect to see relatively strong growth in profits continue for downtown hotels.

When looking at downtown hotels in the future, you may notice that the lights do seem to be much brighter there.  The reason?  All the occupied rooms.
 
 

Full-Service Hotel Profits*
By Location
(dollars per available room)
Airport $9,272
Central Business District $12,665
Resort $9,712
Suburban $10,328
Highway $6,031
    *Note: Income before capital reserve, rent, debt service, income taxes, depreciation, and amortization.
    Source: PKF Consulting

Patrick Quek is president and CEO of PKF Consulting, an international hospitality consulting firm headquartered in San Francisco.

 
* * *
 
For additional information contact 
Robert Mandelbaum at the firm:
email rmandel@pkfc.com
PKF Consulting
3391 Peachtree Road
Suite 420
Atlanta, GA  30326
phone  (404) 842-1150
fax  (404) 842-1165
 
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