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From the
September/October 2008 issue of:


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Room for Expansion
When does it make sense for a hotel operator to grow the property’s room division?
 
by Dr. James F. Downey
Professor of Hospitality Management
Lynn University
 
Planning on expanding your hotel’s rooms division? There are many questions which you must answer first. Will the expansion prove profitable? Will construction costs be manageable? Will the market respond positively to the expansion?

Unfortunately, one of the most common methods used by lodging owners and operators for justifying the expansion of its rooms division is one which the lodging industry has continued to use for years -- the level of its annual occupancy (AO) over a sustained and measurable period of time. For example, a hotel with an AO of at least 85 percent over two years might rationalize a room expansion project since this level is well above the national annual occupancy average of 63 percent. The hotel might additionally justify the expansion since they operated at or near 100 percent occupancy over this two-year period. Lodging owners and operators who rely solely on this premise to initiate expansions of their rooms divisions will, more often than not, meet with less than successful results.

Luckily, there are some less-than-obvious -- but more-reliable – room-expansion growth categories which may ease the decision-making process when it comes time to considering room division expansion.

Hotel Room Demand Growth
Most hotels generate their room night demand from three major market segments: (1) Commercial and Business Travelers; (2) Conference and Convention Attendees; and (3) Tourist and Transient Travelers.

While each of these three market segments can grow and decline at different rates, it is the largest market segment – commercial and business travel – from which hotels continue to derive a significant share of their accommodations business. These travelers tend to stay by themselves, often for no more than two days per week at a time annually. They also are the most demanding market segment since they frequent a hotel more often than the other two segments and usually have negotiated a contract with the hotel to guarantee rates and preferences.

Five factors have the greatest effect on this segment of the hotel business:
    (1) the commercial leasing vacancy rate;
    (2) the unemployment rate;
    (3) transportation growth;
    (4) retail sales growth; and
    (5) growth in eating and drinking sales.

When the first of these factors -- commercial leasing vacancy rates -- are low, more real estate property is occupied by businesses, thus contributing to the commercial business travelers’ need for overnight accommodations. This has a direct effect on stimulating room demand since businesses must accommodate their executives in local hotels, particularly when they travel by air. Similarly, when rates on the second factor -- unemployment rates -- are low, businesses are at labor capacity, thereby again contributing to the need for these businesses to accommodate their employees. Airline, rail, cruise, limousine and other transportation growth also contribute to lodging demand, if their rates are high. Likewise, increases in retail, eating and drinking sales have positive effects on stimulating room demand since they are all tied together.

Owners and operators would be wise to secure the rates of growth for the commercial and business traveler categories, which could assist with the rooms expansion decision.

The second major segment which may affect your decision to expand your rooms division is conference and convention attendee growth. Attendees at conferences and conventions represent a large share of a lodging operations business – sometimes as much as 40 percent of a hotel’s entire room demand. That demand may grow even more if the community has a separate convention center, driving room-night demand. Information obtained from the convention director’s office could prove invaluable to the hotel operator in determining potential for growth and the need for room expansion. For example, most convention centers maintain statistics on the types of convention held, numbers of attendees, previous hotel stays and lengths of hotel stays.

Tourist and transient travelers constitute the last category of growth for a hotel looking to expand its rooms division. Specifically, there are two categories which contribute to the growth of this market segment: (1) local tourist attraction attendance and (2) local and interstate highway traffic growth. Information pertaining to tourist attraction attendance may be found by contacting a visitors bureau office which maintains attendance records for these tourist attractions. For example, the city of Salem, Massachusetts generates a great deal of tourist traffic at two of their largest attractions: the House of the Seven Gables and the Witch Museum which together represent well over half of all tourists coming to the city annually. While these tourists do not always require overnight accommodations throughout the year, they do stimulate room demand growth during the peak season. Meanwhile, interstate and local highway traffic counts are easily obtained from a traffic engineer’s office at the local or state level. Increases in both would indicate a level of transient activity in and around the hotel which could translate into room demand.

Hotel executives looking to justify room expansion plans would be wise to consider these categories of growth, which may not be as obvious as average annual occupancy and days when their operating at full capacity. The decision to expand is a very expensive, and time-consuming, venture. Considering the factors presented here may help hotel owners and operators to make their room expansion plans go as smoothly as possible.

References: City of Salem, Massachusetts. (2008). Retrieved
April 22, 2008 from www.salem.org.
Freitag, Jan. US Hotel Industry Overview. (2008). Power point presentation., April 10, 2008.
Lynn University



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