|by Patrick Quek, April 1999
In the March 1999 issue of Lodging, we examined the implications of declining market occupancies. With all the new limited-service hotel construction that has occurred during the past few years, we have seen the occupancies for several markets and sub-markets drop into the low 60s or high 50s. Historically, these occupancy levels were deemed deadly for hotel survivability. However, as our analysis showed, the new economics of limited-service hotel development allows many of the new entrants into this segment to exist at traditionally low levels of performance.
The question left lingering is what the ripple effect will be on the full-service properties. Just as a rising tide buoys all boats, will the receding waters of low market occupancies leave full-service hotels high and dry?
Struggling At The Bottom
As our analysis showed in March, the drop-off in profitability as occupancy levels decline is much greater for full-service hotels than it is for limited-service hotels. While the average profits generated at limited-service hotels achieving an occupancy of less than 60 percent could potentially support the development of some limited-service properties, the same cannot be said for full-service hotels.
That being the case, what is the fate for those people that own a full-service hotel, or plan to build or buy one? To answer this question, we have analyzed the recent (1997) performance of full-service hotels in our Trends in the Hotel Industry database. The analysis covered the market and operational performance of this segment of the industry, sorted by some different and unique categories.
Age of Property
When looking at the performance of full-service hotels by age of the property, a direct correlation between age and performance appears. Across the board, the newer a full-service property is, the better its market and operating results have been.
For the most part, the relatively strong performance of the newer full-service hotels can be attributed to the lessons learned from the past. Better or emerging sites have been purchased for development. New brands or styles have been introduced into markets where they did not previously exist. However, a major reason that cannot be overlooked is the simple fact that most properties built prior to 1980 have inferior sites or are simply reaching the end of their useful lives.
Meeting Space and Market Orientation
For most hotel guests, the surge in new development has given them literally thousands of new options for overnight accommodation. However, for meeting planners, the inventory of hotels with significant meeting space has not changed that significantly from the beginning of the decade.
Given this relative insulation from new competition, it is no surprise that hotels with significant meeting space and experience with serving the group meetings segment are achieving market and operating performance levels well above the average for all full-service hotels. Looking towards the future, this trend of favorable performance should continue, as the financing for large convention hotels is still limited, and the prospects for a significant amount of new properties is low.
Size of Property
In the full-service hotel segment, it does appear that size matters. A lot of the reasons for this superior performance are the same as cited in the discussion of convention hotels. The cost of developing a larger hotel makes it just that much harder for which to find financing, resulting in a limited amount of construction. In addition, the bigger hotels are usually the ones that contain most of the large meeting spaces. Existing large hotels are not likely to see direct competition from similar-size properties in the near future.
Performance Is Only Half The Equation
So far, we've determined that owning and operating a new, large, full-service hotel with lots of meeting space enables you to achieve vastly superior market and operating performance levels. So, if you are the current owner of these properties, you are probably enjoying the time of your life.
Want to join the club? Good luck. Even with the superior
level of market and operating performance, the dollars generated on the
bottom-lines of these new, large, convention - oriented properties are
still insufficient to justify the construction of similar properties economically.
Source: PKF Consulting
Should the business cycle stall, catching occupancies in the stagnant backwaters of the low 60s or high 50s, hotels in the best position to survive will be those located at either end of the spectrum. Most new limited-service hotels can succeed at low occupancies, while large hotels with significant meeting space have a captive audience. Of course, several other macro-economic factors could, and probably will, alter long-term market scenarios. However, for the foreseeable future, the properties most capable of staying afloat no matter the weather are the new breed of owner-operated limited-service hotels and the large, meetings-friendly properties of almost any age.
Patrick Quek is president and CEO of PKF Consulting, an international hospitality consulting firm headquartered in San Francisco.