Hotels and Motels: Valuations and Market Studies

Written by Stephen Rushmore, MAI, and Eric Baum

Published by the Appraisal Institute, 2002

Review by Stephen Traub, ASA

Copyright © 2002 Property Valuation Advisors, Newburyport, MA


This new text updates and expands on the 1992 book Hotels and Motels. The new version aims to "present and explain procedures applied in the preparation of hotel market studies, financial forecasts and investment analysis, and valuations."

This new version emphasizes market analysis (via the use of case studies). Market analysis is based on supply and demand. With lodging facilities, supply refers to the number and type of competitive accommodations located in a defined market area. Demand represents the number of travelers expected to use these facilities.

In the Beginning ...

Like the prior version, Rushmore (and Baum) trace the history of the lodging industry. The first record of innkeeping traces to 2,000 BC. Inns were prevalent throughout Greece, Italy, Egypt and Asia. During the rise of the Roman Empire, travel for pleasure began as 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 stagecoach 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.

The first US hotel was built in NYC in 1794: the 73 room City Hotel. Boston's first hotel was the Exchange Coffee House built in 1806 with 200 rooms.

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

Nationwide chains developed. As they added more amenities, however, they began to lose their price appeal. During the late 1960s, in reaction, a resurgence of "budget motels" were developed with smaller rooms, minimal public space, and no-frills design.

Building boomed in the 1980s with new products such as all-suite hotels and extended stay properties. Some segments were fueled by demand while others were fueled by massive amounts of available capital. Commercial financing became available from savings and loans as a result of deregulation. Most savings and loans had little expertise with lodging properties. Room rate wars broke out because of overbuilding. With the recession in the early 1990s, foreclosures and bankruptcies followed. Workout agencies like the RTC sprang up.

Smoothing the Cycles

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 creates 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.

 Worn Suitcase

"History has shown," says Rushmore, "that during economic downturns hotel values do not fall in the same proportion that their declining incomes do. Appraisers, therefore, can best reflect market behavior by projecting a facility's net income to a stabilized level reflecting renewed market stability and applying the proper discounted cash flow procedure over this time period. 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."

By the mid-1990s, room demand increased and financing became available again. Underwriters, however, became strict and made owners account for appropriate management fees and reserves. Additionally, debt coverage ratio requirements increased to ensure enough operating cash would be available to pay the mortgage even if income fell below forecasts.

Another segment that sprang up was the "hard budget" concept. Amenity creep had turned many budget hotels into mid-rate facilities. Hard budget facilities were basic with smaller rooms and no amenities. The cost to construct these was 10% to 20% less and they could be rented for 20% to 25% less.

Public companies also moved into ownership and management. The most conspicuous, was Starwood, which bought Sheraton, Westin, and HEI Hotels. Moreover, many chains moved into management contracts as opposed to ownership. For example, the Marriott would initially develop a hotel and manage it, but then sell the property yet keep managerial control.

What's Next?

Some forces will benefit segments of the lodging industry, while others pose problems. Globalization will increase demand, particularly in International Centers.

... a Travel Price Index (TPI) also exists.

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.

Have Data, Will Travel

You've heard of the Consumer Price Index (CPI); a Travel Price Index (TPI) also exists. From 1988-98 the TPI increased 4.0% per year. The lodging component of the TPI increased 5.8%. During the same period, the CPI only increased 3.2% per year.

Locally, in my neck of the woods in the year 2000, New Hampshire had about 17,000 rooms, Maine 21,500 and Mass. 64,500. In the book you will find statistics available for all states. In 2000, the average room in the US cost about $85, in NH $75, in ME $72, and in MA $112. 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.


Rushmore and Baum discuss the limitations of determining market value using the cost and sales approaches (and spend little time developing these approaches), while favoring the income approach. In this version, the authors provide more detailed and expansive techniques (via case studies) for developing demand forecasts for a market area. Then they show 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.

Less detail on valuation techniques exists in this book than in the prior version. One thing is still certain: you'll still see more tables in this book, than you'll see in a Vegas hotel casino.

Do the authors accomplish their goals? Mostly. You get significant amounts of more recent financial and statistical data about the hospitality industry as well as clear in-depth procedures to prepare a lodging market study.

Although this book contains "roomfuls" of accurate, useful, and concise information relating to market analysis, the text de-emphasizes valuation techniques -- often referring to the Appraisal Institute's The Appraisal of Real Estate. Still, if you are looking to learn more about performing lodging market studies, I would recommend you "check-in" to this one.

The book above, Hotels and Motels: Valuations and Market Studies, 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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