How Asset Light strategies turned hotel real estate into a commodity
Combining 10,772 lodging transactions in the U.S. from 1980 to 2008 with data from the Bureau of Economic Analysis (BEA) our study shows that hotels with highly standardized physical characteristics are more easily sold and command a price premium relative to those hotels that are more different, or nonconforming. Our findings mean that lodging real estate has become a commodity with well-established standards and norms.
The outcome of our article "The discount effect of non-normative physical characteristics on the price lodging properties", published in the International Journal of Hospitality Management, is that lodging properties that deviate from a settled norm are less liquid than those closer to that standard, and thus sell at a discount. We believe that this norm is the result of the standardization of the business, one of the consequences of the asset light strategies pursued over the last decades.
In our study, we combined transaction data from HVS - which included the date of transaction, the price paid and any adjustments to the price, and all physical, locational and scale characteristics - with the county-level real per capita disposable income and employment figures from the BEA. The data also included all types of ownership transactions and accounted for the chain affiliation at the time of the sale. As for the physical attributes of lodging properties we examined the number of rooms, the number of F&B outlets, and the square footage of meeting space.
We tested whether the deviations from the norm on three characteristics (i.e. the number of rooms, the number of F&B outlets and the square footage of meeting space) are significant determinants of the price discounts for the 10,772 transactions. The results showed that hotels with either too many or too few rooms relative to the norm were sold at a discount to fair market value. As a key driver of operating performance, room count was the dominant attribute of the norm.
The same principle also applied to the number of F&B outlets and meeting space: when the hotel property offered too many or too few F&B outlets or meeting space relative to the norm of their segment, they suffered a price discount. On the contrary, when hotel properties possessed physical characteristics close to the norm of their segment, they commanded a price premium. In short, sellers of hotel properties with physical characteristics close to the norm benefited from a price premium at the sale, thus reinforcing the norm within the industry.
The attributes of the norm of lodging properties varied across segments. These differences were not gradual though. Specifically, the study showed that the Upscale segment was the most standardized scale. In this segment, the norm was of 229 rooms, 1 F&B outlet, and 4,820 SQF of meeting space. Any hotel that presented different attributes than this norm had been sold at a discount in the last two decades. In the Midscale segment, hotel rooms determined the norm along with meeting space. Particularly, Midscale hotels with meeting space were traded at a discount as the norm for this segment was to have no meeting space. Finally, room count was the sole dimension of the norm for properties at the extreme of the segmentation scale (i.e. Economy and Luxury properties).
While seemingly similar, the results for the Luxury and Economy scales bear different meanings. Luxury hotels present less standardized physical characteristics as they tolerate more differences when it comes to offering F&B outlets and meeting space. Luxury properties are often advertised as "exceptional" properties with unique features, and rarely promote standards other than for service level. The number of rooms remains, however, a key driver of operating performance and thus determines the norm in this segment. As for hotel properties in the Economy scale, the fact that only one attribute out of the three mattered does not mean that Economy hotels are less standardized than Midscale and Upscale properties. It means that the minimum required for hotels to meet the Midscale and Upscale level includes more components than for Economy hotels.
In essence, the asset light strategies pursued by hotel operators in the industry over the past decades, and supported by investors and owners, has standardized the business and led to the emergence of a norm of hotel properties that defines its selling price. More atypical assets are more difficult to sell as they are expected to either stay longer on the market or sell below market value. These nonconforming properties are thus penalized by a discount on their selling price, reflecting how hotel properties have become a commodity.
Hotel operators and brand managers should develop brand standards around the norm in terms of room count, F&B outlets, and meeting space in order to attract real estate investors that seek easily redeployable assets. But this compliance can lead to negative long term consequences that should also be considered. While adhering to the norm might enhance the liquidity of the property, it can equally reduce the differentiation potential of hotel operators and brand managers and ultimately, their margins. Thus, as operators pursue asset light strategies, we should start pondering the long term implications for the industry and its players.
The Ecole hôtelière de Lausanne (EHL) offers university-level
studies to talented and ambitious students who are aiming for top careers in the
international hospitality industry. In addition to this international recognition, EHL
constantly broadens the scope of its three academic programmes by integrating market
trends and new technologies. Since it was founded in 1893, EHL has educated more
than 25,000 hospitality industry executives. The worldwide network of alumni represents
an invaluable asset for every member of the EHL community. Today, there are over
1,800 students, from almost 90 countries, enjoying the unique and enriching
environment of the Ecole hôtelière de Lausanne. For further information:
www.ehl.edu
“With 30 years of experience in hospitality
management, ESSEC offers a leading MBA program that can be completed in one or two
years. Recognized worldwide and taught by the industry’s most cutting-edge
professionals and professors, our MBA prepares future managers for high-level
operational responsibilities in all tourism and hospitality sectors, including hotel and
restaurant management, catering, amusement parks, retirement homes, consulting and
related activities. Demanding, thorough and taught exclusively in English, this MBA will
add a whole new dimension to your career. Click here to visit ESSEC's website.
About ESSEC Business School
Founded in 1907, ESSEC is one of the world's top management schools and holds the "triple crown" accreditation from EQUIS, AACSB and AMBA. With 6,660 students; a faculty comprised of 163 full-time professors, 19 of which are emeritus professors, in France and Singapore, recognized for both the quality and influence of their research; a wide range of management training programs; partnerships with the world's best universities; and a network of 60,000 alumni, ESSEC continues to foster a tradition of academic excellence and a spirit of openness in the fields of economics, social sciences and innovation. In 2005, ESSEC opened a campus in Asia, ESSEC Asia-Pacific. ESSEC's operations in Asia Pacific, strategically located in Singapore, present the perfect foothold for ESSEC to be part of the vibrant growth in Asia and to bring its expertise to the expanding region. Additionally, in 2017 ESSEC opened a new campus in Rabat, Morocco, ESSEC Africa. ESSEC's international expansion allows students and professors to study and understand the economic forces at work in the different regions of the world. For any additional information, please visit www.essec.edu.
