Hotels with fewer frills may be lodging industry's darlings in 2003

July 09, 2002

As flashy, upscale hotel properties from the "Decade of Greed" in the 1980s slide into obsolescence, and post-Sept. 11 changes in hotel occupancy trends run their course, midscale hotels without food and beverage services--the rising darlings of the U.S. lodging industry since the more austere 1990s--will become more valuable per room than their full-service sister operations, predicts a study from Penn State and HVS International.

Midscale hotels with food and beverage services, such as Best Western and Ramada, are experiencing an unusual boost in activity post-Sept. 11 as affluent lodgers temporarily scale back from more upscale hotels, such as Embassy Suites and Residence Inn. However, as usage patterns creep back to normal, and their fortunes decline, these briefly popular midscale hotels will look less attractive to potential buyers by next year, says John W. O'Neill, assistant professor in Penn State's School of Hotel, Restaurant and Recreation Management.

"This will leave midscale hotels that don't offer food and beverage service--for instance, Comfort Inns & Suites and Holiday Inn Express--the riper picks for investment," O'Neill notes. "As a group, these properties are newer than their full-service counterparts, in part because they are less expensive to build. In fact, dropping food and beverage services is emerging as the 'ideal' hotel improvement in many lodging markets in a time when, by and large, the full-service hotels are suffering from functional decrepitude and designs that are increasingly out-of-date."

O'Neill and Anne R. Lloyd-Jones, senior vice president at the hotel consulting firm HVS International, predict sales prices of hotels based on a database that O'Neill developed on 245 hotel properties for which complete operating information is available--occupancy percentage, average daily room rate, net operating income, capitalization rate and room-revenue multiplier, as well as sale price, sale date, opening date and number of guest rooms. Their predictions for 2002 and 2003 and a description of the database appeared in a recent issue of the Cornell Hotel and Restaurant Administration Quarterly. They are currently at work on an update to the study, also for CHRA Quarterly.

According to the projections, midscale hotels without food and beverage services will increase in average value per room from $52,303 to $55,174--or by 5.5 percent--from 2002 to 2003. At the same time, midscale hotels with food and beverage services will tumble in average value per room by an equal percentage, from $53,413 to $50,472.

"Investors often do not attribute much value to food and beverage outlets, particularly if those amenities are not seen as generating a profit, as is often the case," Lloyd-Jones says. "We find it ironic that hotels that are less expensive to build are seen as being more valuable than those that are more expensive to build."

The midscale-with-food and beverage segment is the only one for which the researchers predict a value decrease in 2003 compared to 2002. Thus, owners of midmarket properties who are considering selling may be well advised to sell in 2002, they say.

O'Neill and Lloyd-Jones' model indicates that the average U.S. hotel was worth 3.6 percent less at the end of 2001 than it was in 2000 ($71,313 per room at the end of 2001 versus $73,978 per room at the end of 2000). Based on forecasts developed prior to Sept. 11, the model indicates that in the absence of the attacks, the average hotel would have instead been worth 5 percent more at the end of 2001 than it was at the end of 2000 ($77,673 per room in 2001 versus $73,978 per room in 2000). That calculation shows a net loss in mean value of $6,360, or 8.6 percent, due to the events of Sept. 11.

Looking ahead to 2003, the model indicates that the average U.S. hotel will lose a net $11,050 in value per room by the end of 2003 as a result of Sept. 11, though most of that loss had already occurred in 2001.

"While hotels are expected to continue to lose ground compared to 'what would have been' through 2003, at this moment, it appears that 2001 is the only year in which U.S. hotel values would experience an overall year-to-year decrease," O'Neill says. "We expect valuation to increase by 1.3 percent in 2002, and our model predicts an overall value increase of 5.8 percent in 2003."

Penn State

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