by Jason Price, EVP, HEBS Digital
April 15, 2019
The hotel industry was an early adopter in embracing energy conservation and other earth friendly practices. However, sizable capital investments like HVAC upgrades, energy generation, or smart materials in renovations exceeds the short-term revenue models for today’s hotel investor. As of now, what a hotel can do has been done – switch to LED light bulbs, key entry-driven lighting, and reduced turnover of towels and linens. Although these efforts generate cost savings and matter to the environment, the investments are limited compared to what is being committed in residential and in new construction particularly in office buildings.
Today’s hotel investor is focused on controlling costs. Labor cost is the highest (42%) followed by the operating cost (35%) comprised of energy, maintenance, and materials. Both Cornell Hotel Sustainability Benchmarking Index which is the largest global collaborative annual sustainability benchmarking effort, and EnergyStar, the consumer facing ratings agency managed by the EPA, publishes annual energy surveys for the hotel industry. The hospitality industry spends $3.7 billion a year on energy. Electricity use accounts for 60-70 percent of the utility costs of a typical hotel. As much as 75% of the cost is associated with room and water temperature controls. The energy cost on a per room basis is approximately $2,300 or nearly $500,000 annually for a typical 200-room hotel.
As a cost comparison, in the business of marketing a hotel room, a comparable hotel through third-party channels at a 70% occupancy rate and a 50% contribution rate with an ADR of $200 would total $1.4 million, or nearly three times more to sell rooms through an OTA than the cost of energy for all the rooms. Reducing the hotel’s carbon footprint is important but financially falls far below the cost of distribution and owner’s priority scale. To maximize profits the hotel needs to invest in driving the lowest cost of sale through direct channels and not the OTAs.
So, is the hotel investor correct in not taking on such sizable energy investment upgrades? Does energy efficiency in hotels even matter given the high cost in a more immediate need of selling room nights, its primary source of hotel revenue? Will altruistic, eco-friendly, hotel investors be the answer? Unlikely. There has to be financial and policy sensibility to motivate the hotel owner to change.
Maybe it is time to examine the behavior of a new car purchaser. Most new car buyers weigh the purchasing decision in part on the future resale value of the car. If tomorrow's consumer does not want to own a gas driven car then buying one today for a future resale would be a costly mistake. The same may apply to the future home buyer. The fear of a limited market would motivate any homeowner to make the required upgrades in order to have the widest appeal. This same principle logically applies to hotel owners, and a combination of policy, incentives, and the investment community with a low desire to buy an energy-inefficient or non-resilient asset will make the difference.
To spur some of these actions require innovative and creative financial solutions and smart policies. We cannot think along the lines of a universal carbon tax but rather sensible sector specific policies to protect and incentivize hotel investors. A carbon tax has nothing to do with building energy efficiency especially with the people who design and build these buildings don’t pay the electric bills. Tightening building codes will prompt developers to build efficient buildings. Check out the work of Hotel Owners of Tomorrow who are raising awareness in early stages of the hotel project life cycle.
Any investment in a costly upgrade like for HVAC (heating, ventilation, and air conditioning) should be supported by low interest, interest free, rebates, or financed through green bonds. Conversely bring back government subsidies on the purchase of systems with a SEER rating for efficiency higher than 16. A shared risk between buyer and seller on such upgrades could be another approach. Baked into the final purchase price is a shared pool to split the cost for the purchase which could be tax deductible.
There is no shortage of creativity when there is a profit motive. Any low interest or interest free loan backed by the government (state and federal) can help mitigate the costly impact. This method worked well for solar and EV purchases, now take it a step further. Maybe roof top solar on a hotel garage or carport will become standard if the payback can be significantly shortened. If energy resiliency is the issue then what role could a microgrid play in the hotel asset especially if the energy generation is greener. What future hotel investor would not want to buy a hotel with a far reduced or zero utility bill or a resiliency plan in place? What other novel financial mechanisms can be applied so that every hotel can be part of a distributed energy future?
The biggest impact in considering energy-related matters applies primarily to new builds but should also be applied to the 60,000 hotels currently operating in the United States. Motivate energy efficient hotels as the most desirable for the investment community. With thoughtful pro- investment tax incentives for hotel owners, smart building codes for developers, and introduce sensible reforms to motivate change, energy-inefficient hotels will become far less desirable as more with efficiency and resiliency come to market. I think we can all live better with that.