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Hospitality Leadership Through Learning
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Lodging Demand for Urban Hotels in Major Metropolitan Markets

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Vol 3 No 3
By:  Linda Canina Ph.D. and Steven A. Carvell Ph.D.

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Executive Summary: Hotel demand in large urban markets does respond to changes in income, but that demand is relatively inelastic, according to an analysis of 22 top metropolitan areas in the United States. The analysis, made possible through Smith Travel Research, examined room-night demand for 480 individual hotels from 1989 through 2000 and compared that demand to a set of economic measures, including gross domestic product (GDP) and the consumer-confidence index (CCI). Rather than examine aggregate demand against GDP, for instance, the study took the unusual approach of examining the effects of income on each hotel's demand and then aggregated the individual results. The analysis found that every 1-percent increase in GDP was associated with a .44-percent increase in demand at the urban hotels in the 22 large markets-showing that hotel rooms demand is relatively income inelastic.

The study further examined income effects using a novel approach-by separating GDP into personal income and business income. This additional analysis confirmed the income inelasticity of hotel demand but also found that personal income changes have twice as great an effect on hotel demand than do changes in business income. Furthermore, the combined elasticity coefficients for personal income and business income approximate the coefficient for GDP.

The analysis of the effect of consumer confidence provided the first known connection between consumers' future expectations for income. While the effect is relatively small, it is significant-with a .03-percent change in hotel demand for every 1-point change in the CCI.

The study also examined price-related elasticity, examining changes in demand both when a hotel changes its own price (ADR) and the substitution effect that occurs competitors' prices change (market ADR, or MADR).

Separating the study sample according to STR's market segments also yielded further insights about the income elasticity of demand for different hotel price points.

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About Linda Canina Ph.D.

Linda Canina is an associate professor in the School of Hotel Administration's Finance, Accounting, and Real Estate department. There, she teaches undergraduate and graduate courses in corporate finance. Canina also serves as editor of the Cornell Hospitality Quarterly. Her research interests include asset valuation, corporate finance and strategic management. She has expertise in the areas of econometrics, valuation, IPO's, payout policy, mergers and acquisitions, options and the hospitality industry. Canina's current research focuses on strategic decisions and performance, the relationship between purchased resources, human capital and their contributions to performance, the relationship between various liquidity measures and profitability, and measuring the adverse selection component of the bid/ask spread. Her recent publications include: "Agglomeration Effects and Strategic Orientations: Evidence from the U.S. Lodging Industry" in the Academy of Management Journal. Canina's other work has appeared in the Journal of Finance, Review of Financial Studies, Financial Management Journal, the Journal of Hospitality and Tourism Research, and the Cornell Hotel and Restaurant Administration Quarterly. She holds a Ph.D. degree from New York University.

For more information visit http://www.hotelschool.cornell.edu/research/facultybios/faculty.html?id=10

About Steven A. Carvell Ph.D.

Steven Carvell is a professor and associate dean for Academic Affairs at the School of Hotel Administration. He has taught finance courses at the school since 1986. Carvell’s research is directed toward new approaches to hotel valuation and investment decisions. Recent projects have focused on adjusted present value analysis and the valuation of sequential real options within a hotel valuation framework; the valuation of exotic reservation options in hotels; and determining optimal brand standards for hotel companies. Carvell recently finished a major project designed to identify the determinants of hotel demand in the U.S. He is also involved with evaluating the effectiveness of hotel company business strategies, using strategic benchmarking and Economic Value Added analysis. Carvell is the co-author of "In the Shadows of Wall Street," (Prentice-Hall, Inc. Strebel, Paul and Steven Carvell, 1988). publisher, year). He has published ten articles in academic and professional journals including the Financial Analysts Journal and the Harvard Business Review. His work has been featured in the Wall Street Journal, The New York Times, Forbes, Fortune, Institutional Investor and Financial World. Carvell has worked for professional money managers in applied strategy in the equity market and served as a consultant to the Presidential Commission on the 1987 stock market crash. He specializes in new approaches to valuation and risk analysis in feasibility studies, hotel debt capacity models, strategic benchmarking and Economic Value Added Analysis. Professor Carvell has conducted numerous specialized Executive Education seminars for some of the largest hotel companies in the world. Carvell holds a Ph.D. from the State University of New York, Binghamton.

For more information visit http://www.hotelschool.cornell.edu/research/facultybios/faculty.html?id=11