EB5 Investors Magazine - Page 23

Hotel valuation experts have developed a method to determine market demand in a local market that can be used for EB-5 financing. Hotel consultants such as PKF and HVS have developed standards for determining what they consider the natural optimum average occupancy rate for each local market, which we will call the “optimum occupancy rate.” The optimum occupancy rate refers to the percentage of occupancy that will maximize the profitability of the hotel, based on the market conditions in that local market rate. If the average occupancy is 80 percent but the optimum occupancy rate is 70 percent, hotel consultants conclude that there is a demand for hotel rooms that is not being met, because more people are staying in existing hotels in the market than the rate that would allow maximum profitability for all hotels in the market. This article explains how hotel consultants set the optimum occupancy rate for each local market, and why an average occupancy rate in excess of the optimum occupancy rate indicates a demand for additional hotels. “For new hotel projects that use EB-5 financing, it is necessary to show that the new hotel is not merely taking jobs from existing hotels in the area, but actually creating new jobs.” Why does the mix of demand make a difference in setting the optimum occupancy rate? Hotels will typically be most profitable during the times that they have the highest occupancy, since they can charge higher rates during those times. Therefore, one of the keys to maximizing hotel profitability is having enough rooms to serve guest demand during the peak occupancy periods. If a hotel does not have enough rooms to meet demand during the peak occupancy period, it is losing its highest revenue earning nights. When considering a local hotel market, if all of the local hotels are full during the peak occupancy periods, then the local market is effectively turning away guests for lack of rooms, and losing revenues that could be generated both in the hotel and outside the hotel at restaurants, shops and attractions. Therefore, the optimum occupancy rate is set in order to maximize the availability of rooms during the peak seasons, without running at a loss during the off-peak seasons. How do hotels maximize revenues during peak periods, but not lose money during off-peak periods? Hotels are generally designed to break even on operating expenses at a 50 percent occupancy rate. Therefore, if a hotel can operate at a 50 percent occupancy rate during non-peak periods, and operate at a 75 to 90 percent occupancy rate during the peak periods, the hotel should be able to optimize its profitability. The optimum occupancy rate for a local hotel market is determined by the mix of demand in that market. In markets where demand varies substantially based on seasonal factors, such as ski areas, there will be a wide difference between occupancy rates during the high season versus the low season. In areas where hotel demand is largely based on business travel, occupancy rates will be higher on weekdays than weekends, and the opposite will be true where demand is based on leisure travel. In areas where there is wide difference between occupancy rates during high periods and low periods, the optimum occupancy rate will typically be set at 70 percent. Where the difference between occupancy rates during high and low periods is less, the optimum occupancy rate will often be set at a higher percentage. For example, in San Francisco and Los Angeles, optimum occupancy rates are typically set at between 72 and 78 percent. In Houston, the optimum occupancy rate is about 70 percent. In New York City, where hotels are in high demand virtually all year, the optimum occupancy rate is about 80 percent. In Las Vegas, where gambling and other attractions seek to fill their venues with guests, the optimum occupancy rate is about 90 percent. In contrast, the average hotel occupancy rate in the United States is about 63 percent annually. How is the optimum occupancy rate established for each local market? In preparing a feasibility study for a new hotel, the hotel consultant will begin by compiling data on the existing hotel room inventory in a given market, using the industry standard data gathered by Smith Travel Research, Inc. and its international affiliate, STR Global (collectively, “STR”) to analyze the historical occupancy rates and room rates of the ex