Defining Segments

After my November column (pgs. 40-42), I received a number of questions regarding what types of hotels are included in each category (luxury, upper upscale, upscale, midscale with food & beverage, midscale without food & beverage, and economy) of the Penn State Index of Hotel Values. The Penn State Index follows the definitions of hotel segments used by Smith Travel Research. The table below provides some examples of hotel brands included in each segment.

Some changes in categorizations of hotel brands have occurred in the past year or so. For example, luxury hotel brands such as Fairmont, Four Seasons and Ritz-Carlton were previously categorized as upper upscale. More recently, these brands have been categorized as luxury due to the extremely high average daily rates they achieve.

The other table presents the latest edition of the Penn State Index and indicates that hotel values increased for the second year in a row in 2005 (hotel values declined for three years in a row from 2001 through 2003). Current signals indicate that in 2006, the U.S. economy and hotel values will continue to be strong.

According to Macroeconomic Advisors, the average price of oil will peak at about $54 per barrel in 2006, much lower than the 2005 peak, so travel should not be significantly dampened by fuel prices this year. The Federal Reserve is expected to increase interest rates to 4.75 percent in 2006, representing a neutral monetary policy that neither overly promotes nor inhibits economic growth. Economic growth (gross domestic product) is expected to average about four percent in 2006, as it did in 2005. The U.S. dollar is forecast to increase (trade weighted index of the foreign-exchange value) by about one percent in 2006 after a three-percent decline in 2005. Inflation (consumer price index) is forecast to remain at roughly three percent, as it was in 2005.

In short, the Penn State Index projects that overall hotel values should increase by 8.5 percent this year — following a very strong 10.6-percent value increase in 2005. All hotel types are expected to achieve value increases in 2006. Luxury hotels, such as Ritz-Carlton and InterContinental, are expected to register the largest dollar increases in value (increasing by approximately $26,000 per guest-room), while midscale hotels without food and beverage operations such as Hampton Inns and Wingate Inns, and economy hotels such as Best Inns and Travelodge, are expected to see the largest percentage increases in value this year with an 11.6-percent increase.


John W. O'Neill, MAI, CHE, Ph.D., is a professor in the School of Hospitality Management at The Pennsylvania State University and a licensed real estate appraiser. He previously held unit-level, regional-level, and corporate-level management positions with Hyatt and Marriott. He can be reached at jwo3@psu.edu or 814-863-8984.

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