Fluctuations in supply and demand significantly influence the outcomes of commercial real estate investments, particularly in terms of net operating income, profitability, and yield. The hospitality sector, in particular, is swift to experience the effects of these shifts.

Unlike property types such as offices or retail, which typically rely on medium to long-term leases for steady income, hotels exhibit a distinct pattern. They lack lengthy lease agreements, and their transient customer base isn't tied to extended commitments. This unique trait grants hotels the advantage of daily rent adjustments in response to demand surges and economic improvements. Consequently, hotels can rapidly elevate room rates according to market conditions. Notably, value-add strategies in hotels can yield quicker results through repositioning initiatives or capital enhancements compared to other real estate assets.

In this discourse, we will present an overview of the hotel asset class, delineate essential performance metrics, address recent shifts in its application, and conclude with insights into leveraging this information for prudent investment choices.

Insight into the Asset Class

Hotels are characterized by the services and amenities they offer, along with their operating brand or "flag" like Hilton, Marriott, and Holiday Inn. Within our framework at RealRaise, three primary hotel categories emerge:

Limited-Service: A tier below full-service, these hotels still provide meeting facilities, fitness centres, and pools, ensuring more predictable operations. Double Tree by Hilton and Holiday Inn Express are prominent representatives.

Budget: Catering to essential needs, these hotels may offer minimal services, focusing on affordability. Travelodge, Ibis and Starwood’s Aloft belong to this category.

Extended Stay: Tailored for extended stays, these accommodations cater to business travellers, relocating families, and individuals requiring temporary housing. They often feature discounts for longer stays and home-like conveniences like self-serve laundry and kitchens.

In this discourse, we will present an overview of the hotel asset class, delineate essential performance metrics, address recent shifts in its application, and conclude with insights into leveraging this information for prudent investment choices.

Key Performance Metrics

Distinct metrics gauge hotel performance and growth, centering on average daily rates (ADR) and revenue per available room (RevPar). These benchmarks aid performance assessment through historical data and comparisons with similar-sized, characterized, and situated peers.

Understanding the hotel's January RevPar at $76.50 becomes valuable when compared with past months or competing hotels. This comparison lends insight into the hotel's performance and competitiveness over a defined period.

ADR: Calculated by dividing room revenue by rooms sold, ADR reflects the average room rate for sold rooms within a specific period.

ADR = Room Revenue / Rooms Sold

RevPar: This metric divides total guest room revenue by the total number of available rooms. RevPar accounts for unoccupied rooms, while ADR only reflects the average rate of sold rooms.

RevPar = Occupancy Rate x ADR

Example: Assuming a hotel with 100 rooms earned $237,150 in room revenue during January from 2,325 room nights, ADR for January becomes:

ADR = $237,150 / 2,325 = $102

Given the rooms sold (2,325) and the total room count (100 rooms x 31 days or 3,100), occupancy can be deduced:

Occupancy = rooms sold / total possible rooms sold = 2,325 / (100 rooms x 31 days or 3,100) = 75%

With ADR and occupancy established, RevPar can be calculated:

RevPar = $102 x 75% = $76.50

Understanding the hotel's January RevPar at $76.50 becomes valuable when compared with past months or competing hotels. This comparison lends insight into the hotel's performance and competitiveness over a defined period.

Drivers of Demand

Historically, two core customer groups—tourism and business travellers—foster hotel room demand. Local markets introduce specific demand drivers like colleges, events, and attractions. Tourism often peaks during weekends or high seasons.

Business travel typically bolsters occupancy from Sunday through Thursday. Hotels equipped with meeting spaces may attract business travellers, while proximity to convention centres enhances appeal. Furthermore, hotels near airports or major highways offer convenience to guests.

Demand drivers evolve with metropolitan growth. Portland, OR, witnessed soaring hotel rates as the city expanded economically and demographically. A thriving culinary scene and favourable sales tax regime amplified hotel demand. This market dynamic underscores how swiftly hotels can capitalize on growth, making them an attractive investment option.

In essence, supply and demand dynamics in the hospitality sector shape hotel investments, creating opportunities for investors to harness market trends effectively.