The market is at the heart of whether your hotel investment is successful. Because it is so crucial, hotel owners do their own personal investigation into the market. In addition, they often engage consultants to do market studies. Lenders also have the market investigated as part of the appraisal.
Some owners get into the market assessment personally in depth. Other owners rely almost exclusively on studying historical information on the hotel, findings from brokers and independent third-party experts, and a property tour. A worksheet (template) for you to do your own market assessment is available at Fortuna’s Table.
Market Assessment
Market analysis gathers information about neighborhood and citywide market dynamics, particularly demand and supply in the hotel sector. The analysis you do personally is an evaluation of your hotel’s potential position in that market. It helps you better understand your prospective business and its risks and opportunities. It clarifies what makes you different from the competition and helps you plan how to set up your hotel for success.
When you are doing due diligence to purchase an existing hotel, you should have access to extensive historical data. Highlights and key indicators including KPIs and financials should be in the broker’s package while you are evaluating possible hotel acquisitions. Once you are under contract, you will have a due diligence period during which you can access and study in-depth information through the broker or seller.
When you evaluate a hotel project, you get your own feet on the ground, talk to businesspeople in the area, visit local government offices, check-out the attractions and walk through the area hotels. You will also study information available through the broker or from property management. As you explore the opportunity, in addition to information commonly reviewed you may ask for other reports to address particular concerns or questions. Information available while you are considering the opportunity typically includes:
- Broker’s sales package
- KPIs: STAR and other third-party reports comparing the hotel’s performance to its competitors
- PIP (brand’s Product Improvement Plan)
- Guest reviews including brand reports and channel reports (Expedia, TripAdvisor, etc.)
- Brand inspection reports
- Historic financial statements
Once the hotel is under contract or you are a serious contender for the acquisition, you gain access to the broker’s data room or can ask for additional information from the seller (if there is not a broker involved). This may include:
- Capital budgets (anticipated necessary capital improvements and information on capital investments made in the past)
- More detailed reports on historic financial performance including the segmentation of the hotel’s business
- Marketing reports
- Property Management System (PMS) reports from the hotel’s reservation and front desk systems
- Accounts Payable, Accounts Receivable (past due accounts), violation and warning records from governments
When you consider investing your own money and recommending the investment to others, you will want to be confident in your knowledge about the hotels and the market. When you feel strongly that you have the right hotel project in the right market, you bring in an expert consultant to do a study and test your ideas.
Market Studies
A hotel market study is an evaluation of the potential for a hotel, whether it’s an existing property or a future development. Market studies are done by specialized consultants. Information about highly regarded consultants is at www.ISHC.org and you can also get referrals from your lender, brand representative and others. Components of the study are:
- Site analysis: evaluates access to demand generators and transportation, ingress and egress to the site itself, amenities like restaurants nearby, and other features of the location. It addresses the site as it relates to its market. (Factors like size and elevation are covered in a survey while soil and building factors can be covered in engineering studies; this is part of technical due diligence you may require in addition to the market study).
- Economic analysis: researches factors in the local economy that indicate the market’s potential. This includes traffic counts, airlift, population and demographics, employment statistics, economic development anticipated, major employers, special events, tourism drivers, projected growth or decline and other variables.
- Hotel supply: compares your prospective hotel to its competitors so you can understand your property’s strengths and weaknesses. It compares pricing, facilities, location, age, quality, marketing and other attributes. In addition to your visual assessment when you walk through the competition, you and your consultant will see STAR reports, which compare Key Performance Indicators (KPIs) for your hotel’s room revenue to its competitive (comp) set, and you can read TripAdvisor reviews among others. A comp set is a group of hotels that compete with your property for business and is selected with the purpose of benchmarking your performance against the competition. Supply analysis also studies new supply – potential future competitors that may dilute your market opportunity.
- Hotel demand: evaluates sources of potential demand for your hotel such as businesses, visitor attractions, institutions and other features that bring potential guests to the area. A demand analysis assesses generators in the market currently, potential losses and gains of demand generators, and prospects for the future.
- Projections for the market: put demand, supply and other factors into a spreadsheet to analyze. The analysis takes a backward look at demand generated in the market by segment (commercial travel, leisure travel, group travel, etc.) and estimates future demand by segment. Doing formal projections helps identify overly optimistic or pessimistic assumptions about the opportunity for the market surrounding your hotel.
- Occupancy and average daily rate (ADR) projections for your hotel: put your hotel into the market projection analysis to give you an estimate of how your property might perform in terms of occupancy and average rate – the hotel’s potential penetration compared to other hotels in the market. Because many hotels have operating similarities, these KPIs (occupancy and ADR) enable a knowledgeable consultant to give you a good indication of the prospects for your hotel.
When indications for your hotel are positive, and you are ready, the consultant will prepare a written market study. If indications are negative, you may tell the consultant to stop before the report is written so you can save money. The consulting agreement can specify that your consultant will tell you as early in the process as possible if there is a problem.
Feasibility Studies
A hotel project is feasible when it is projected to generate enough income to cover its costs including mortgage payments plus a profit margin that makes the undertaking worth your time and risk (return on investment). So, a market study becomes a feasibility study when you have your consultant add financial projections and show projected debt service coverage (net income divided by mortgage payments). Commonly, prospective owners have consultants do the market study, which provides a forecast of the hotel’s potential revenue, typically over five years. The consultant may or may not provide the full financial projection which includes operating expenses and forecasts profit. The prospective owner may also work with their team (management company, accountant, mortgage broker, etc.) to do the full financial projection and feasibility calculations.
Marketing Plan and Marketing Reports
A market study is not a marketing plan. A marketing plan includes a specific assessment of prospective customers, position of competitors vis a vis your hotel, and – importantly – an action plan. The marketing plan is a document the sales department prepares and uses to target and book business for the hotel. If you are evaluating a possible purchase, the seller may share their marketing plan with you. However, if they are concerned about you sharing the information with competitors, for instance, they may keep the marketing plan confidential.
Hotels have brand marketing reports from the franchise/brand marketing system including reports on customer mix, booking patterns, guest satisfaction, key accounts, demographics, length of stay, seasonal business patterns and more. Once you are under contract, some of these may be available to you in response to specific questions (it’s appropriate and smart to ask).
