Do hotels lose profit with age?
 
Do hotels lose profit with age?
25 JUNE 2014 7:54 AM

As hotels get older, are they more susceptible to declining profits? STR Analytics analyzes the data.

 
BROOMFIELD, Colorado—In 2013, we saw hotel industry profits in the United States surge closer to all-time highs, based on data collected by STR Analytics' annual HOST Almanac. (STR Analytics is a sister company of Hotel News Now.) The almanac breaks down profitability by full-service and limited-service hotels, by class level, geographic region, and location type. 
 
But what about age? As hotels get older, are they more susceptible to declining profits? 
 
To find out, we took the participants in this year's study and categorized them first by class. After that, the hotels were filtered by the following age groups:
  • 0-5 years old;
  • 6-15 years old;
  • 16-25 years old; and
  • 25 years or older.
A couple of caveats, first. For the luxury class, we removed resort hotels because there were a disproportionate amount of these properties in one of the age groupings, and the large utilities expense associated with these asset types were skewing the results. Second, there were a different number of hotels in each of the 15 classes and age groupings, but all except three contained at least 50 properties. Finally, the economy and midscale classes were combined due to sufficiency purposes.
 
Overall, it seems clear that hotels do lose profitability as they age, as evidenced below.
 
Source: STR Analytics
 
Looking at house profit (before franchise fees, management fees and fixed expenses) as a percent of total revenue, each class grouping has a lower profit level for its oldest hotels compared to the youngest. Upper-upscale hotels show the least amount of volatility in their profit decline, while upper-midscale hotels experience the greatest net decrease. Luxury hotels reach a profit trough in their sixth through 15th year of operation before creeping back up, while midscale/economy hotels surge in profitability during this same period before plunging back down by the quarter-century mark. 
 
What factors are contributing to this? As a hotel ages, more capital needs to be reinvested into the asset to keep the guests coming back and keep the property operations efficient. Deferred maintenance begets physical obsolescence and waning guest demand, and in this analysis the revenue-per-available-room levels were higher for the newer properties in each class compared to the older. Perhaps the greater indicators of an aging property are seen in its spending (on a per-available-room, or PAR basis) in the maintenance and utilities departments.
 
Source: STR Analytics
 
Source: STR Analytics
 
With one exception, all classes experienced higher operations and maintenance spending for their oldest properties compared to the youngest. The midscale/economy combined class displays increasing maintenance spending, but only after a decrease after the fifth year of operation. 
 
Luxury hotels display fluctuating levels of maintenance spending, perhaps reflecting the positive impact of renovations within the second decade of operation. Similarly, luxury hotels actually experience declining utility spending as they age, perhaps resulting from extensive renovations that include the implementation of newer, energy-efficient technologies. All other classes demonstrate increased utility spending over time, with the most noticeable increases occurring at the quarter-century mark.
 

No Comments

  • Tom June 26, 2014 6:13 AM

    Very interesting analysis. This certainly speaks to short-term holding periods for owners of new construction properties that aren't luxury or upper-upscale.

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