Skip to main content

Faculty & Research

Hospitality Leadership Through Learning
Faculty & Research

Eight Rules for Competing in Hotel Real Estate Markets

Share

Vol 5 No 13
By: John B. Corgel Ph.D.

author-image

Executive Summary: Data regarding hotel markets' behavior now exist through more than one complete market cycle, as well as through the wide variety of environmental conditions of the past 15 years. Those conditions include two general economic recessions, two wars, an unprecedented set of catastrophic events, and many local situations that affected travel and hotel-market activity. The knowledge gained from studying hotel markets, however, lies scattered in bits and pieces across the landscape of the professional and academic literature. This report consolidates the lessons of hotel markets in the past two decades. Specifically, the report covers developments in our understanding of hotel space markets, equilibrium in hotel markets, cyclical patterns, leads and lags, overbuilding, hotel capitalization rates, the behavior of transacting parties, and debt-financing alternatives.

Here are eight "rules of the road" for negotiating the obstacles to profits and returns that hotel markets present. The "rules" are as follows:

  1. The "tale of two cities" rule explains that changes in rate and occupancy do not automatically translate into changes in property values. Thus, property operators are not exclusively responsible for changes in valuation.
  2. One has to keep the benchmarks handy (including such measurements as market equilibrium).
  3. The cyclical nature of hotel occupancy and rates is well recognized and can aid in predicting performance.
  4. Various time lags affect hotel market cycles. The effects of economic changes on rooms demand can show up in a matter of weeks, for example, but it appears that development plans lag changes in demand by as little as one year for limited-demand properties and as much as two years or more for full-service properties.
  5. Except for the government-induced overbuilding of the 1980s, the hotel industry's development pattern has largely been self-correcting. When demand weakened in 2001, for instance, the supply overhang was not excessive.
  6. Hotel capitalization rates can be subject to large swings (as much as 8 to 12 percent), but cap rates are on balance countercyclical. They are more subject to interest-rate movements than other forms of real estate, and they eventually revert to historic averages.
  7. Notwithstanding any of the other rules, and regardless of what financial markets might show, buyers and sellers can mess things up by behaving in idiosyncratic fashion and will tend to overprice or underprice assets according to their own perceptions.
  8. Although hotel investors seem to prefer to lock in fixed-rate financing, floating interest rates seem better matched to the hotel industry's operating-revenue characteristics.

Given the accumulated information about hotel-market cycles, it seems likely that the industry will not repeat its overbuilding mistake in this or future cycles. In the near future, however, we will be able to observe the nature of a cyclical peak in many markets.

Your Comments Please

If this CHR Report made a positive impact on your management approach or business operations, we welcome your commentary. We would like to post your comments on our website. Please submit your comments to js372@sha.cornell.edu and rohit.verma@cornell.edu.

Download The Report
To view the whole report, please click on the link below

If you have trouble downloading a pdf, and are able to install software on your computer, try upgrading to the latest version of Adobe Acrobat Reader to see if that allows you to read it.

Other Reports or Articles You May Find of Interest