The hospitality sector is mostly associated with the hotel industry, however, many other asset classes fall into this sector, including large scale resorts, spas, timeshares as well as gaming and casinos. Hospitality assets, and in particular hotels, are differentiated by the amount of services offered, price levels, and size. It is important to make note of a key distinction between operators and owners in this sector. Many well-known hotel brand names do not own the building in which the hotel operates, but rather contract their management and brand name to the owner for a fee. Much of the hospitality industry brands are consolidated under a few large corporations. For example, Hilton Hotels owns the Hilton, Hampton Inn, Doubletree, Embassy Suites, and Homewood Suites brands. Each brand is targeted at a different customer with different amenities and price points. The profitability measures for the industry include two key ratios, "revenue per available room," or RevPAR, and "average daily rate," or ADR. RevPAR is calculated by multiplying the number of rooms available times the average room price in dollars, times the occupancy percentage. The occupancy percentage can vary by the length of time you are measuring. Hotels do not maintain constant prices for rooms, therefore, ADR is an important metric as well. Room prices for one location can vary depending on the day of the week, time of year, or can even depend on events and attractions in the surrounding areas.
Information on this page provided courtesy of Cornell University Baker Program in Real Estate
Source: Richard K. Miller & Associates, "Hotels & Resorts 2009". March 25, 2009. http://www.marketresearch.com
Looking to the Future
Much like the retail real estate sector, the hospitality sector thrives on the discretionary spending of travelers for business and for pleasure. As such, it is a leading indicator as to the state of the economy. When the job market is strong and incomes are stable, people tend to travel more due to higher amounts of surplus income. However, when the economy is depressed, the hotel market feels the shock first. Unlike most other commercial asset classes which have income based on long term leases, hotel rooms are essentially leased by the day, which makes income much more variable. Until the economy begins to improve and jobs start to flow back into the system, people will continue to cut back on travel and leisure activities. The hospitality properties that are able to drop prices to competitive rates while still remaining profitable are the ones that will make it through this crisis.