Multiplier Effect

Recent research indicates that hotel purchasers often consider a property's room revenues to be a better indicator of a hotel's market value than its bottom-line net operating income. From that research, a question that naturally arises is: how do hotel investors link room revenues to a price they're willing to pay to purchase a property? The answer is that they usually use a room revenue multiplier, or RRM. The RRM is generally multiplied by the previous 12-months' room revenues to arrive at an estimated value of a hotel, as such:

RRM x Room Revenues = Hotel Value.

Similarly, to calculate an RRM, the hotel value would be divided by the room revenues, like this:

Hotel Value / Room Revenues = RRM.

What is a typical RRM? Most RRMs range between 3.0 and 4.0. I've seen some hotels sell at lower RRMs. These properties are usually older midscale hotels with rather traditional food and beverage operations. Also, I've seen some hotels sell for higher RRMs: typically newer or recently renovated luxury hotels. Based on the Penn State Index database, the average RRM for hotel sale transactions in 2006 was 3.2.

For example, the value of an average hotel with $1 million in room revenues over the past 12 months would be calculated as 3.2 × $1,000,000 = $3,200,000.

Now, on to the Penn State Index of U.S. Hotel Values, which uses econometric modeling to project average U.S. hotel values per guest room for the six hotel types tracked by Smith Travel Research. The Index projects that overall hotel values are expected to increase by 8.7 percent this year.

Hotel values are expected to be aided by continuing increases in average daily rates, but curtailed somewhat by slight decreases in occupancy rates. Factors that should positively affect hotel values include relatively liberal debt/equity markets, anticipated gains in employee productivity and growth in disposable income. On the other hand, relatively high oil/energy prices, increases in personal/property tax rates, and increases in salaries/wages/unions, are limiting increases in hotel values.

Though the expected 2007 increases in hotel values are less than in recent years, all hotel types are expected to achieve value increases. Luxury hotels are expected to register the largest dollar increases in value, increasing by approximately $27,000 per guest room, while economy hotels are expected to experience the largest percentage increases in value this year with an 11.1 percent increase this year. Value increases are expected to be slightly lower in 2008 and 2009.

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 or 814-863-8984.

Reprints and Licensing
© 2014 Penton Media Inc.

Acceptable Use Policy
blog comments powered by Disqus

Most Recent

More Recent Articles

Career Center

Quick Job Search
Enter Keyword(s):
Enter a City:

Select a State:

Select a Category:
Franchise Fact File Top Brands
Brand Company Basics Top Management Companies
Owners & Operators Industry Consultants
Industry Associations Industry Events
Design Firms Purchasing Companies
Top Ownership Groups

Click here to view all of the Lodging Hospitality Photo Galleries

Accor Best Western
Carlson Rezidor Choice
Hilton Hyatt
IHG La Quinta
Marriott Starwood
Vantage Wyndham

Free Product Information
News and Trends for the Hotel, Motel, and Hospitality Markets.

Lodging Hospitality eReport
Lodging Hospitality electronic newsletters are FREE to requested subscribers.

Lodging Hospitality Resource Center
The Lodging Hospitality Resource Center is the ultimate resource to find products and services to build, equip, and renovate hotels, motels and resorts.

Subscribe / Renew
Visit our subscription center to subscribe or renew your subscription to Lodging Hospitality.

Visit our webinars page to view all our upcoming and on demand webinars.

Visit our White Papers page to view all our current White Papers.