Valuing Hotels: The Competitive Quotient And The Art Component

While industrial, office and even retail appraisers can access tangible data using lease contracts to determine a property’s value, hotel appraising includes a lot more moving parts, and a deeper knowledge of your competition.

“When a hotel changes hands it’s seamless. Guests don’t notice,” Colliers International hospitality practice leader Bryan Younge told Bisnow. “You don’t have the ability to analyze a contract because leases in hotels only last hours. You need to analyze the flow in intricacies of what’s going on.”

Younge said this task takes more than document review, it requires pounding the pavement, talking to general managers at surrounding hotels in the market and analyzing the decisions management has made over the years. “There is an art component in hotel valuation that’s very unique,” he said.

To better determine hotel value, Colliers' national hospitality and leisure specialty group developed the “competitive quotient,” a formulaic method the firm uses to determine competitiveness among hotels in the same market.

Understanding the Competition

The first step to understanding competition is ridding yourself of the idea that all similarly themed hotels are 100% competitors. Younge told us it's a common error to assume that if other hotels' room rates fall within the same price range or offer the same amenities they are 100% competitors.

Younge said it’s important to note the four segment types for hotels — commercial, group, leisure and extended stay.

“Each segment is very unique with respect to price sensitivity, how long guests stay, what part of the week they’re there and how much money they spend on the site,” Younge said. From there, appraisals should take into account the hotel’s market segments, operating strategies, price sensitivities, amenities and facility needs — all of which cannot be done without doing on-site interviews for the subject hotel and competing hotels in the area.

The Competitive Quotient

Determining which properties exactly are your competitors is where the competitive quotient comes in to play — the greater the overlap, the higher the competitive quotient, and the more you must consider those hotels' valuations in your own.

This formula takes into account number of available rooms, average yearly ADR (Average Daily Rate), service orientation and segmentation overlap to determine two things: the competitive quotient percentage and whether the surrounding hotels in that market are primary or secondary competitors. Properties with a 70% competitive quotient or higher are primary competitors — which is not only imperative for accurately valuing a property, but becomes important for market trend projections and can eventually lead to more cash flow.

“It’s dangerous not to have a very good understanding of the market or operating strategies of a hotel,” Younge said. “If you don’t, you run into the risk of improperly appraising.”