Hotels and Motels: A Guide to Market Analysis, Investment Analysis, and Valuations

by Stephen Rushmore, MAI
Published by the Appraisal Institute, Chicago, 1992

Reviewed by Stephen Traub, ASA

Copyright © 1994 Property Valuation Advisors, Newburyport, MA

[Bookcover] DO YOU KNOW SOMEONE who might get caught sneaking around motels late at night? You may have an alibi for them! Tell them to say they are working! Working? Who would believe that?

According to Rushmore, the author of Hotels and Motels, it is plausible. One of the best ways to verify occupancy rates at highway motels is to count the cars in the parking lot. It is only effective, however, if done during the wee hours of the night. At that time, there is a one-to-one relationship, between the number of cars and the number of occupied rooms. So -- with their best straight face -- just tell them to say, "Hey, I'm working; yeah, that's it -- I'm working!"

Nevertheless, the true mission of Hotels and Motels is not to help the "lost and stupid" out of tight situations, it is, however, "to help [you] become familiar with the techniques currently used in performing hotel-motel market analysis, investment analysis and valuations." The author wants to "expand [your] existing knowledge ... by presenting a logical procedure for gathering and processing data to ... develop forecasts ... and estimate value."

In the Beginning ...

Rushmore traces the history of the lodging industry. The first record of innkeeping traces back to 2,000 B.C. Inns were prevalent throughout Greece, Italy, Egypt and Asia. During the rise of the Roman Empire, travel for pleasure began as both leisure time and well-engineered roads became prevalent.

During the eighteenth century came the English Inn, a result of the Industrial Revolution. Its American counterpart was the colonial inn, which sprang up along stage coach roads and in seaport towns. Massachusetts recognized the importance of inns to statewide commerce and passed a law penalizing any town that didn't provide this convenience.

During the 1920s occupancy rates of lodging facilities reached 85%. The Depression, however, caused nearly 80% of these facilities to go into foreclosure. By the 1940's the industry began to recover. World War II created unprecedented demand and occupancy rates reached 90%.

During the 1950s auto travel replaced rail. Rail dependent lodging suffered, while highway motels sprang up along nearly every highway. During the decade, the supply of motel rooms increased from 600,000 to 1.5 million.

Nation-wide chains developed. As these motor lodges added more amenities, however, they began to lose their price appeal. During the late 1960s, in reaction, a resurgence of "budget motels" developed.

Rushmore's moral is that throughout history, there have been boom and bust periods, largely at the hands of changing desires and a volatile money supply. Obsolescence can be rapid. Ease of money tends to create excessive boom periods, while tight money often creates near depression-like conditions in the industry. During these down periods, unless sellers are forced to dispose of their properties, The author advises that they hold on until demand recovers.

"Appraisers should, therefore," suggests Rushmore, "consider the cyclical nature of hotel net income in making their projections, showing the recovery that most investors realize is inevitable." He explains, "Distressed hotels have traditionally been valued ahead to a time when recovery is expected. Using the actual income of a distressed property would probably understate its market value because most sellers would wait for recovery to occur unless they were forced to make an immediate sale."

What's next?

Some forces will benefit certain segments of the lodging industry, while others pose problems.

Who benefits from globalization and the weak dollar? Key gateway cities! Boston for one! Key gateway cities provide entry to a significant number of foreign tourists. Other "gateway" cities include Miami, Orlando, D.C. and L.A.

[Worn Suitcase]

Have Facts, Will Travel

You've heard of the Consumer Price Index (CPI); there is also a Travel Price Index (TPI). From 1980-90 the TPI increased 5.3% per year. The lodging component of the TPI increased 7.2%. During the same period, the CPI only increased 4.6% per year.

In 1990 the U.S. had about three million rooms. Locally in my neck of the woods, New Hampshire had about 14,000 rooms, Maine 16,700 and Mass. 56,000. In the book you will find these same statistics available for all states. The average room in the U.S. cost about $58, in NH $59, in ME $59 and in MA $85. Nationally, chains, which became prominent during the 1950s, represented 35% of all lodging facilities in 1970; by 1990 that percentage doubled.

According to the author, the benefits of chain affiliation are an instant recognizable identity and image, a referral and reservation system, and co-op advertising rates. On the negative side, there is less control, fees of two to eight percent of gross income and often long (10-25 year) lock-ins.

What are they worth?

Rushmore discusses the limitations of determining the bottom line using the cost and sales approaches, while favoring the income approach to determine value. He provides formulas for developing demand forecasts for a market area. Then he shows you how to hone in on a particular facility's potential market share. From this market share forecast, you then can develop a stabilized income estimate.

Expenses also are examined. The relationships between occupancy levels and expense items (i.e., insurance, cleaning, management, etc.) are analyzed as well. Cap rates, interest rates and investor yield rate requirements also are covered. Lastly, Rushmore provides techniques to separate real property value from personal property and business value. One thing is certain about this book: you'll see more tables in it, than you will in a Las Vegas hotel casino.

Does the author accomplish his goals? Yes! In addition to clear explanations of the lodging valuation process, you will also get significant amounts of relatively recent financial and statistical data relevant to the hospitality industry.

Although this book contains "roomfuls" of accurate, useful, and concise information, its look and feel were disappointing, however. There were a number of muddy photographs, "typos" and -- although you can't judge a book by it -- a less than inspired cover. Still, it's what's inside that counts. So, if you are involved in the valuation of lodging real estate, I would recommend you "check-in" to this one.

The book above is available on-line at Amazon Books.

Stephen Traub, ASA, the reviewer, is chief commercial appraiser for Property Valuation Advisors, 63 Hill St., Newburyport, MA 01950. He is a certified general appraiser in NH, ME and MA.

To contact the author of this review, e-mail to: [Mailbox] or contact him at the address above, or call 978-462-4347.

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