The Financial Impact of Hotel Renovations

April 28, 2017

If you were in any doubt about whether hotel refurbishments can have a short- and long-term positive impact on the hotel's revenue, profits and asset value, this well-written piece by Laurel A. Keller and John Burke of Hotel & Leisure Advisors helps crystallise the high levels of gains that can be made. Even replacing key items of furniture in the bedrooms and elsewhere in the hotel can help towards this outcome... 

from Laurel A. Keller and John Burke of Hotel & Leisure Advisors, courtesy of hospitalitynet.org

http://www.hospitalitynet.org/news/4079832.html

 

The Financial Impact of Hotel Renovations

By Laurel A. Keller , Vice President of Hotel & Leisure Advisors and John Burke, Senior Associate at Hotel & Leisure Advisors

 

The story is a familiar one. A hotel that formerly outperformed its competitive set is now struggling to maintain market position. Rate and occupancy penetration indexes are headed in the wrong direction, and online reviews regularly contain comments such as "needs a refresh" or "feels dated."

 

Even if the hotel's brand hasn't issued a mandatory property-improvement plan, completing a renovation may be financially worthwhile.

 

Signs your hotel needs a renovation

While several factors need to be considered prior to planning a renovation, the following are signs that it may be time:

  • Declining penetration index (capture rate of available roomnights) vs. the hotels in your STR competitive set;

  • competitors are upgrading their facilities;

  • declining profitability (net operating income is decreasing as a percentage of revenue);

  • negative reviews via sources like TripAdvisor (based on property condition – not service); and

  • brand mandates due to failed inspections, new design features, franchise agreement renewal, or a change in ownership (each of which may require completion of a PIP).

Impact on a sample focused-service hotel

Since renovation directly affects a hotel's marketability, functionality, profitability, perception and value, this issue has significant implications for hotel executives, owners and operators. To illustrate this point, Hotel & Leisure Advisors quantified financial impact on a sample hotel for a six-year period that included three years prior to renovation, the year in which the renovation occurred and the two years after the completed renovation.

 

In our analysis, we used data for an actual focused-service hotel with roughly 3,000 square feet of meeting and event space and between 150 and 200 guestrooms. The hotel is in an urban area, is affiliated with a national franchise and is well-established in its market. The property underwent a $9-million property-wide renovation between November 2014 and April 2015. The following tables show the hotel's performance metrics before, during and after the renovation.

 

From 2011 through 2013, the sample hotel recorded declining occupancy levels. The hotel was tired and had yet to undergo a major renovation since opening in 2000.

 

Prior to the renovation, the hotel's average rate index was inching upward. It plateaued in 2014 at 107.9% of fair market share. The hotel's RevPAR Index reached its lowest point in 2015—the year the renovation took place—which was expected due to some guests choosing to temporarily avoid the hotel and rooms being out of order. In the year following the renovation, both indexes jumped to levels above the range recorded since 2011.

 

 

Due mainly to a post-renovation increase in rooms revenue, the hotel improved its net operating income as a percentage of total revenue by 14.5% from 2014 to 2016. Another contributing factor to the revenue boost was the addition of a new revenue center. As part of the renovation project, this hotel transformed a nonrevenue-generating portion of its lobby into a full-service bar, which has a high profit margin.

We recommend hoteliers consider monetizing underutilized portions of their property if possible. Rooftop bars are enjoying a surge in popularity and are just one example of a way to manufacture revenue. Dovetailing a new amenity with the renovation's planning, design and construction can be a cost-effective way to add a revenue center.