In most places (I deal in select service properties, no food or beverage except a complimentary breakfast, little to no meeting space, similar to a Hampton Inn if your first priority is ‘nice’, or a Red Roof Inn if the most important thing to you is ‘adequate but cheap’), 60 to 80 rooms is optimal.
You may go slightly smaller. (We’re actually planning a few 46-room properties in smaller towns where there is no existing Class A property, and we’re okay that the demand is there. For example, one of those places is one of those mid-state North Carolina furniture manufacturing towns with a population of maybe 3000 and a spunky, aggressive and somewhat muscular local business community; where the nearest Class A hotels are thirty miles away — and where our preferred mattress provider has its headquarters and factory located. The need there, as perceived by that business community, is so great that our mattress guy there faithfully assured me, if you put a new hotel here, we will give you any mattresses you want at our cost. I don’t have the bucks for it, so I’m looking for a partner, but I think taking him up on it might just work.)
But anything less than 40–50 rooms is a ‘mom-and-pop’. Your fixed costs aren’t going to get but so low, but your ability to achieve volume and be but just so profitable is going to be more and more limited, as you decrease in size. You’ll have to put as much effort into it, but the potential returns are smaller.
You might go bigger if
- you include conference facilities, and have the sales organization in place to keep them booked pretty consistently, or
- you’re in an underbuilt area with high land costs, or high barriers to entry.
When I first started in this business, in the 1980’s, 120–160 rooms was the norm. When someone built a new hotel, that was the size that they built them because that’s what everyone else had and people thought, that’s the way it’s done. What it got us was hotels with fifty percent occupancy most of the time, and overleveraged owners who struggled to keep up the mortgage payments if the property didn’t perform as well as they’d hoped.
More recently, hotel revenue management has developed into more of a science and less about guesswork, and one new term from that field that we’ve added to our vocabulary is ‘unconstrained demand’. This is the total number of people who are going to be in your town that night who are going to need a hotel room. (Our cloud-based revenue management system knows how to calculate and even predict it based on historical data for your town. It can even break it up by market segments and tell you how many of those you might get to stay at your Holiday Inn Express, and who’s more likely to end up at the Econo Lodge.)
Unconstrained demand is what we go by. Good marketing people on your staff can help you capture a larger share of it. If you invest in a property with good sized meeting and banquet space (there’s an opportunity there: those types of properties are aging out faster than replacements are being built for them) and have the sales and marketing staff to do it, you can even increase it in some towns.
If you can only rent fifty rooms most nights, you’d be stupid to build a 150-room property. You’re going to have increased debt and have to make the mortgage payment on the extra hundred rooms, and supply them with utilities, and maintain them, but they’re going to sit there empty and you’re not going to make any money on them.
Or, if you’re really stupid (it’s not polite to notice it, but some people in this business are), you’re going to lower your rates hoping to stimulate demand for the rooms, maybe renting them to the wrong kind of people, and ending up lowering the value of all of your rooms. And either way, I’ll sooner or later see your property on Ten-X.com (Hmmm, nice property, not that old, it’s got another thirty to forty years’ life left in it if the neighborhood around it doesn’t go bad in 10–20 years, good price, well below replacement costs . . . but it’s got 153 rooms, it’s in a town where I know the market’s kind of soft and I can rent maybe 40–60 rooms at maybe $80 a night . . . If I buy it and suck the renovation costs, what would I do with all the extra rooms? And even if the ownership group will let me, I hate to do it with a property that new . . .)
But you studied math in grade school, and you’re a smarter person than that. You’d know that a sixty room property that rents fifty rooms a night can maintain 83% occupancy consistently (for this type of hotel, developed, planned, built and furnished properly; 60% give or take is usually the magic number, the breakeven point), cost half as much to build, carry only half as much debt, and can be run by fewer people.
If you expect your market to grow over time, or if you have big annual events in your town or a seasonal tourist market that causes demand to spike, you might go with eighty rooms (fifty rooms a night most nights for an eighty-room property is still 62% occupancy, even if you don’t rent the extra rooms at a higher than average rate on the big nights, and you’ll at least pay the bills.)
By contrast, if you can rent a couple of hundred rooms a night, have at it, go even bigger than 150 rooms.
Bigger is not always better, though. Shouldn’t you build 72 rooms rather than 60 rooms if you have the space? Well, you can if you want . . . but most every night, those extra twelve rooms are going to be the last twelve rooms you rent. Are you sure you want them?
If you’re in a seasonal market, or have surge demand every month give or take, maybe you do . . .
But you must have some halfway accurate way to anticipate demand. You can predict it with some accuracy by obtaining the STR reports for the town in which you hope to build.
You can get a sense of it, if not quite predict it, by jumping onto TripAdvisor and looking at the rates for Hampton Inns from location to location. (Hampton Inns are a pretty good index because Hampton Inns are built and run much the same, have pretty much the same amenities and decor, and come pretty much one way. Whether you pay $400 per night at a Hampton Inn in San Francisco or $79 per night for a room at a Hampton Inn in Podunk, you’re going to have much the same room, the same breakfast, the same experience, and the same “100% Satisfaction Guarantee” if you find any imperfections in any of the above that are worth complaining about.) The market rates, and how they differ from place to place, are a function of the law of supply and demand.
No one is going to charge less than people are willing to pay. But if they need the money, and can’t get a hundred bucks out of the guy, they’ll let him have it for eighty if the commodity would otherwise go to waste and that’s all they can get out of him. Or less, if that’s all they can get. For hotel rooms, that rate can get pretty low as long as you can stay close to that 60% threshold and break even, and don’t abuse the privilege (you still have your costs to think about, so for us, we can go maybe as low as $75). Or at least not lose too much money. It’s a balancing act.
It’s why, for that type of property, the rate at the nearest Hampton Inn is the first thing I look at. And if I go fewer than sixty, or more than eighty (or sometimes, more than sixty) rooms, I need to see a reason why that I’m okay with.
Another possible indicator is business activity: most Class A, select service hotels rely primarily upon business travelers after all. We’ve developed our own software (actually, adapted some existing shareware) to track that. Ever hear the old saying, “follow the money”? No, there’s a better way. Follow the activity. People — even large numbers of them acting as a loosely-knit group — don’t get together in one spot and do things unless there’s something in it for them. Follow the money, and by the time you get there, the money will all belong to someone else. Follow the activity, and the money will eventually show up, and when it does, you’ll be there waiting for your share of it. Either that, or the money won’t show up, but if you’re there, you can notice that quickly if you know what to look for, and get out before you have too much invested.
That’s why I think that making the hotel dreams of our mattress-manufacturing friends come true with a new 46-room hotel in our backwoods, high-country furniture capital might just work . . .
Originally appeared on Quora
No comments:
Post a Comment