You're driving down a street and you notice two hotels. Both appearneat, clean and orderly. One has exterior corridors, a flat roof that revealsthe air-conditioning fan units, an out-of-date Tudor-style brick exterior,a plain, square swimming pool, and a small guestroom converted to a fitnessroom. The other has interior corridors, a front desk providing entrancesecurity, a mansard roof that conceals the air-conditioning equipment,art deco exterior decor, a free-form swimming pool with water falls andslide, and a well-designed health club. It shouldn't surprise you thatthe modern hotel captures more than its fair share of occupancy and operatesat a higher Average Daily Rate than the older property.
Revenue loss stemming from out-of-date appearance and inferior facilitiesis functional obsolescence. Hotel appraisers recognize that obsolescencereduces income potential and value.
The life cycle of most hotels is characterized by rapid growth in occupancyand net income during the first five to 10 years. Then a hotel stabilizes,and net income remains fairly level from eight to 15 years after opening.
"Hoteliers may be able to do something aboutfunctional
obsolescence. But external obsolescence -thesocial and economic context of a hotel - is beyond a hotelier's control."
After that, net income begins to decline as the property nears the endof its economic life and its income-generating capability decreases.
Studies show that a hotel's economic life averages about 40 years, butthe standard deviation is, believe it or not, 20 years. That means therisk of hotel investing is related to not knowing whether the economicbenefits will last up to 60 years or end in 20.
Various factors affect the economic life of a lodging facility. Functionalobsolescence can be key to hotel value decline.
In the above example, it's likely that the first hotel is 15 years oldand in its decline, while the second is brand-new. It's also possible thatboth hotels are 15 years old, but the second just underwent a major renovation.
Functional obsolescence is curable. Most hotels have a continuousprogram of furniture replacement and decor updating to keep functionalobsolescence in check during a facility's initial years. But the firsthotel hasn't undergone the massive renovation generally required betweenthe 15th and 20th years.
Thousands of older hotels are in the declining phase of their life cycles.Those with food locations and sound structures are prime candidates forthe type of massive overhaul that will add years to their life. Other willeventually lose their national affiliation, deteriorate in appearance andgo out of business.
External obsolescence is a loss in income and value resulting from outsidefactors. Examples include population shifts and declining neighborhoods,changes in traffic patterns, economic adversity among local businessesand hotel room oversupply. Unlike functional obsolescence, external obsolescenceis generally incurable because a hotel owner has no control over it.
