Hotel Remarks 11/19/97 : LUSENET : Economic Round Table of San Francisco : One Thread

You asked me for a summary of the "off the cuff" information which I threw at the ERT members on November 28th.

I noted that hotel real estate enjoys the inflation hedge advantage with the ability to daily adjust its various room rates. I offered my formula that the average daily rate ("ADR") need only equate to 1/1,000 of the total real estate investment (at 65% occupancy with appropriate operating expenses) for "rental income" to yield approximately 10%.

I had two purposes explaining this formula to indicate:

A. that front desk clerks late in the day can often be negotiated to a fraction of the "rack rate" to achieve occupancy on that otherwise vacant room.

B. that currently the investment community, ignoring the 1/1,000 formula and motivated by commission, is doing the same damage to the hotel industry as to office buildings in the 1980's.

Example and Irony: one of the multitudes of new public hotel REITs has just acquired the largest of 200 hotel management companies created by saving and loans to operate their hotels foreclosed int he 1980's - (i.e., where hotel investors as well as office building investor - clients had lost their equity based on unrealistically projected rental rates).

I believe these are some hotel items I spoke about. If better prepared I could have described many changes in the industry, the new hotel types, mega-mergers, unique operational problems, etc.

-- Harold Moose (, December 09, 1997

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