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 |