The Hotel Industry

2009 State of the Region Booklet:Layout 1 9/3/09 10:59 AM Page 45
The Hotel Industry

---

2009 State of the Region Booklet:Layout 1 9/3/09 10:59 AM Page 46
THE HOTEL INDUSTRY IN HAMPTON ROADS
A hotel isn’t like a home, but it’s better than being a house guest.
– William Feather (American business author, d. 1981)
Real estate professionals often divide the commercial real estate market into five sub-markets: (1) Multifamily Housing, (2) Office Space, (3) Industrial Space, (4)
Retail Space and (5) Hotels and Casinos. In this chapter, we focus on the hotel market, which is in a state of flux because of economic recession.
There are two primary ways to analyze the health of the hotel industry. The first
pancy rate, the average daily revenue it receives per occupancy (ADR) and the
is to undertake a macro-level examination of revenue trends for the industry as a
revenue it generates per available room (REVPAR).
whole. Graph 1 does so by displaying the historical trend of total hotel revenue
in Hampton Roads from 1988 to 2008. One can see that regional
A hotel’s occupancy rate is straightforward – the ratio of room nights rented to
hotel revenue more than doubled, from $355 million in 1988
the number of rentable room nights it has available. ADR is the average room
to $718 million in 2007, a healthy upward surge of 102 per-
rate collected by a hotel. REVPAR combines these two measures and is the ratio
cent. However, hotel revenue declined in 2008 to $680 million
of hotel revenue received during a specified period of time to the total number
(-5.3 percent), due to increased gasoline prices observed
of room nights available to rent during the same period. It is the preferred
during the first eight months of 2008, slightly higher average
measure of the economic performance of a hotel.
room rates and the economic recession that took firm hold in
If two comparable hotels have the same REVPAR, then the hotel with a lower
fall 2008.
occupancy rate usually is viewed as having a better performance. There are
The hotel industry in Hampton Roads has been getting larger, at least in terms of
two reasons for this. First, the operating costs of a hotel will be less for the hotel
the number of rooms available for rental. Between 1988 and 2007, the
with the lower occupancy rate. Such a hotel doesn’t have to incur as many costs
number of hotel rooms in our region increased by 25.4 percent (see Graph 2).
in order to attain a given REVPAR. Second, many hoteliers believe it is easier to
Further, in 2008, the number of rooms grew by another 1,000 to a total of
drive up their revenue by paying for additional advertising and marketing that
38,000.
results in greater occupancy than it is for them to augment revenue by raising
prices. If competitors do not increase their room rates at the same time, then a
The second major way to analyze the economics of the hotel industry is to take
single hotel that increases its room rates likely will encounter problems.
a micro-level approach and focus upon individual hotels. This approach usually
looks at measures of single-hotel performance, such as a hotel’s room occu-
46
THE STATE OF THE REGION HAMPTON ROADS 2009

---

2009 State of the Region Booklet:Layout 1 9/3/09 10:59 AM Page 47
GRAPH 1
TOTAL HOTEL REVENUE IN HAMPTON ROADS, 1988 TO 2008
Sources: Smith Travel Research Trend Report, May 6, 2009, and the Old Dominion University Economic Forecasting Project
THE HOTEL INDUSTRY
47

---

2009 State of the Region Booklet:Layout 1 9/3/09 10:59 AM Page 48
GRAPH 2
NUMBER OF HOTEL ROOMS IN HAMPTON ROADS, 1988 TO 2008
Sources: Smith Travel Research Trend Report, May 6, 2009, and the Old Dominion University Economic Forecasting Project
48
THE STATE OF THE REGION HAMPTON ROADS 2009

---

2009 State of the Region Booklet:Layout 1 9/3/09 10:59 AM Page 49
Graphs 3 through 5 record the occupancy rates, ADR and REVPAR for hotels in
Hampton Roads between 1988 and 2008. Hotel occupancy rates
(Graph 3) have fluctuated between 55 percent and 63 percent
over the past two decades, with the average occupancy rate
being 59 percent. Nevertheless, in 2008, occupancy rates fell
to a much lower level, 55.1 percent. The villains appear to be higher
gasoline prices, slightly higher average room rates, deteriorating economic con-
ditions and the addition of 1,000 hotel rooms in the region.
Graphs 4 and 5, respectively, show ADR and REVPAR between 1988 and
2008. Note that ADR (average room revenue) increased in all but three years
during that time, and even increased slightly in 2008. As Graph 4 illustrates,
ADR increased 64 percent during this two-decade time period. However,
REVPAR (revenue earned per available room) has been much more variable and
declined in about one-third of those years. The REVPAR for the typical hotel in
the region took a steep fall in 2008, primarily due to the decline in occupancy
that we noted above (see Graph 5).
The Old Dominion University Forecasting Team projects a
decline of 2.2 percent in total hotel revenue in Hampton Roads
in 2009. This will be compounded by the fact that yet an addi-
tional 877 hotel rooms could potentially open in Hampton
Roads in 2009. Needless to say, this does not bode well for the
profitability of the hotel industry in the region because a
smaller revenue pie will be divided among a larger number of
rooms and operators. We expect REVPAR to decline further, to
about $47 in 2009, a level not seen since 2002.
THE HOTEL INDUSTRY
49

---

2009 State of the Region Booklet:Layout 1 9/3/09 11:00 AM Page 50
GRAPH 3
OCCUPANCY RATES OF HOTELS IN HAMPTON ROADS, 1988 TO 2008
Sources: Smith Travel Research Trend Report, May 6, 2009, and the Old Dominion University Economic Forecasting Project
50
THE STATE OF THE REGION HAMPTON ROADS 2009

---

2009 State of the Region Booklet:Layout 1 9/3/09 11:00 AM Page 51
GRAPH 4
AVERAGE DAILY RATE OF HOTELS IN HAMPTON ROADS, 1988 TO 2008
Sources: Smith Travel Research Trend Report, May 6, 2009, and the Old Dominion University Economic Forecasting Project
THE HOTEL INDUSTRY
51

---

2009 State of the Region Booklet:Layout 1 9/3/09 11:00 AM Page 52
GRAPH 5
REVENUE PER AVALIABLE ROOM FOR HOTELS IN HAMPTON ROADS, 1988 TO 2008
Sources: Smith Travel Research Trend Report, May 6, 2009, and the Old Dominion University Economic Forecasting Project
52
THE STATE OF THE REGION HAMPTON ROADS 2009

---

2009 State of the Region Booklet:Layout 1 9/3/09 11:00 AM Page 53
Comparing Hampton Roads
adding additional hotel rooms was concerned. No doubt this spurt has been
tempered by the serious economic problems the city’s major banks have encoun-
to Other Metropolitan Areas
tered over the past year.
In addition, the average occupancy rate of hotel rooms in Hampton Roads was
Let’s accept as a given that the hotel industry in Hampton Roads currently is
lower than the rates of all five of the other metropolitan regions (59 percent
facing significant economic challenges. How are we doing relative to compa-
compared to Charleston’s leading 67 percent).
rable metropolitan areas? Tables 1 and 2 provide information in that regard for
the years 1988 to 2007, and 2007 to 2008, respectively.
REVPAR, an important key to hotel industry health, also lagged in Hampton
Roads and grew only 61.5 percent. The highest growth (139.5 percent)
It is evident from Table 1 that the hotel industry in Hampton
occurred in the Charleston market.
Roads is much larger than any of those in the other five
Atlantic Coast metropolitan areas drawn for comparison. In
fact, the hotel industry in our region
is 52 percent greater than its next
largest competitor, Jacksonville, in
TABLE 1
terms of total annual hotel revenue
COMPARING AVERAGE HOTEL INDUSTRY PERFORMANCE:
earned. From 1988 through 2007, our
HAMPTON ROADS AND OTHER METROPOLITAN AREAS, 1988-2007
average annual hotel revenues totaled
$491.8 million, more than double those
Hampton Jacksonville, Charlotte, Raleigh,
Charleston, Richmond,
Measure

generated in Richmond.
Roads, VA
FL
NC
NC
SC
VA
During this approximate two-decade time
Hotel Industry
$491.8 M
$323.9 M
$311.1 M $282.2 M
$246.2 M
$208.3 M
period, Hampton Roads offered, on average,

Revenue (Average)
33,220 rooms, 42 percent more than the
Hotel Rooms
33,220
19,939
23,466
18,848
12,678
15,821
next largest market in this regard (Charlotte).

(Average)
Nevertheless, we also can see that the growth
Change in Hotel
102.0%
222.0%
267.8%
260.0%
311.5%
163.1%
in total hotel revenues easily was the smallest
Revenue
in Hampton Roads compared to the other five
Change in Hotel
25.4%
50.3%
95.0%
72.4%
72.3%
47.1%
regions. Between 1988 and 2007, hotel
Rooms

revenues in Hampton Roads grew by 102
REVPAR (Average)
$40.2
$43.1
$35.3
$39.9
$51.2
$35.3
percent, while they increased 312 percent in
Charleston and more than 250 percent in
Change in REVPAR
61.5%
114.8%
89.1%
109.4%
139.5%
79.3%
both Charlotte and Raleigh-Durham-Chapel
Hill.
Occupancy Rate
59.0%
63.6%
59.2%
64.0%
67.0%
60.6%
(Average)
One also can see in Table 1 that the Char-
Sources: Smith Travel Research Trend Report, May 6, 2009, and the Old Dominion University Economic Forecasting Project
lotte metropolitan area led the pack insofar as
THE HOTEL INDUSTRY
53

---

2009 State of the Region Booklet:Layout 1 9/3/09 11:00 AM Page 54
Of course, economic conditions have changed substantially in the past two
Things began to change, however, in 2009. During the first
years. Among other developments, housing markets deteriorated substantially,
three months of 2009, Hampton Roads experienced the
gasoline prices spiked during summer 2008, and the economy plunged into a
smallest declines in hotel revenue, REVPAR and occupancy
recession that now has been dated as beginning in December 2007. All of
rates of any of the regions in our comparison. By way of illustra-
these events adversely affected the hotel industry in Hampton Roads and Table
tion, REVPAR declined 7.6 percent in Hampton Roads, but between 17.1 per-
2 shows how. Regional hotel revenue declined by 5.3 percent in 2008, our
cent and 21.7 percent in the other five regions (see Table 5). It would be a
occupancy rate fell by 8.7 percent and REVPAR decreased by 8.1 percent.
misnomer to label this a recovery for the Hampton Roads hotel industry since all
of our region’s critical numbers are negative. Even so, it is correct to observe
All in all, 2008 was not a good year for the hotel industry in
that hotels in Hampton Roads now are weathering this economic contraction
Hampton Roads. Further, the hotel industry here fared worse than in the
much better than the hotels in comparable metropolitan areas along the Atlantic
other five Atlantic Coast metropolitan areas in our comparisons. In Table 2, one
Coast. Of the other five regions, Charlotte appears to be suffering the most. This
can also see that total hotel revenue, REVPAR and occupancy all declined more
is not surprising, given the demise of Wachovia Bank and the teetering financial
in Hampton Roads in 2008 than in any of the other five metro areas.
circumstances of Bank of America, both of which are headquartered in Char-
That generalization, however, hides some interesting differences during 2008
lotte.
and does not speak to 2009, which has been agreeably different. Let’s see how.
We observed at the beginning of this report that Hampton Roads has been less
The highly publicized crisis in the banking system accelerated dramatically in
severely impacted by this economic recession than most other metropolitan
the public consciousness in September 2008. It’s useful, therefore, to compare
areas in the United States. Indeed, a June 2009 study issued by the Brookings
what happened to the hotel industry prior to Sept. 1 to what occurred after that
Institution Metropolitan Study Program reported that, economically speaking,
date. And, to put this in perspective, let’s compare those time periods in 2008
Hampton Roads had fared 16th best among the 100 largest metropolitan areas
to the identical time periods of 2007.
in the country up to that point. It is apparent that the significant expenditures the
Department of Defense makes within Hampton Roads have cushioned our eco-
Table 3 reveals that in contrast to Hampton Roads, total hotel revenue actually
nomic descent. In years past, some critics have faulted Hampton
increased in three of the other five markets, while REVPAR increased in one of
Roads for a lack of diversification in its economic base. More
these markets. Occupancy rates fell noticeably in all five of the other markets.
than 40 percent of our region’s economy is related to defense
Thus, for the first eight months of 2008, the hotel industry deteriorated more rap-
spending. In the current economic milieu, however, this has
idly in Hampton Roads than in these other regions.
turned out to be an important advantage. We are not as
dependent upon private-sector business travel as other metro-
Table 4 undertakes the same type of analysis, but focuses on the Sept. 1 to
politan areas, and this has diminished the economic damage
Dec. 31 time period. Once again, 2008 is compared to 2007 in Hampton
done to our region’s hotels and motels.
Roads and the other five metropolitan areas. One can see that the differences
between Hampton Roads and the other regions moderated substantially, and in
one case (occupancy rates), Hampton Roads no longer was last.
54
THE STATE OF THE REGION HAMPTON ROADS 2009

---