Mr. Mandelbaum

Hotel Market Reports

Measuring Business Interrupted by Hurricane Katrina

By Robert Mandelbaum, Director of Research Information Services, CBRE Hotels' Americas Research

Gather Your Historical Data

What is frequently overlooked in the immediate turmoil is the need to secure important data and documents. This information is especially vital for those owners that wish to recover lost business income from their insurance company. While the actual filing of claims and negotiations may not occur until a year or two after the horrific event, several pieces of data and documents need to be gathered in the short-term in order to achieve a favorable settlement later on.

After working with our clients to recoup business interruption benefits from their insurance companies, we have found certain data and documents to be extremely useful in our calculations of lost revenues and profits. The following is a partial list of reports (effective the day of the catastrophic event) that should be gathered and preserved by management.

The Lost Business Calculation

Once the historical performance data is gathered from the documents listed above, the next step is to estimate how the hotel would have performed if the catastrophic event had not occurred. To prepare this forecast, we utilize budget, marketing plan, reservation, and group booking information contained in the secured documents. In addition, we rely on the most recent forecast developed prior to the catastrophic event for the subject property's MSA.

Using the MSA forecast as a baseline for future supply, demand, and revenue conditions within the market for the projection period, we then estimate the market penetration of the subject property based on historical correlations to MSA performance. This provides us with estimates of the potential rooms revenue the subject property would have earned had the catastrophic event not occurred. From these estimates of rooms revenue, we then prepare projections of net income using historical financial statements from the subject property, as well as data from our firm's Trends in the Hotel Industry database.

The calculation of lost business is derived from the difference between the performance of the subject property estimated under the "no catastrophic event" scenario, and the data from the actual performance of the hotel during the projection period. Estimates can be made for lost room nights, revenue, and net income.

Objectivity Is Key

A key to the lost business calculation is the ability to provide an objective estimate of the "no catastrophic event" scenario. The foundations of this estimate are the actual advanced booking data from the subject hotel and the MSA forecast. Since the MSA forecast was developed prior to the catastrophic event, it can be viewed as the prevailing outlook for future market conditions as of the day of the event.

In conjunction with Torto Wheaton Research, PKF Hospitality Research prepares econometric forecasts of hotel supply, demand, occupancy, ADR, and RevPAR for 53 major markets across the nation. The forecast reports are entitled Hotel Outlook. Each Hotel Outlook report contains forecast performance data for both full-service and limited-service hotels in a given market. The forecasts are made for a six-year period, and are updated every three months. The Hotel Outlook econometric model is based on data from economy.com, Smith Travel Research, Torto Wheaton Research, and PKF Hospitality Research. An accuracy analysis conducted in early 2005 proved the Hotel Outlook forecasts to be 99.9 percent accurate.

Hypothetical Lost Revenue For New Orleans

To depict how lost business can be calculated, we have prepared a hypothetical lost rooms revenue calculation for the full-service hotels in the New Orleans MSA. It is very important to note that this example is intended solely to demonstrate our lost business methodology. The two recovery scenarios outlined below do not necessarily represent our firm's opinion on the future performance of the New Orleans full-service hotel market.

The Fall 2005 Hotel Outlook forecast for the New Orleans MSA full-service hotel market was developed on August 18, 2005, a full 11 days before Hurricane Katrina hit the coast of Louisiana. The Fall 2005 forecast projected a 65.8 percent increase in the rooms revenue collected by New Orleans full-service hotels from year-end 2004 to 2014. The bases for this forecast were a 27.6 percent increase in supply, a 25.4 percent increase in demand, and a 32.2 percent jump in room rates. In aggregate, the full-service hotels of New Orleans were forecast to generate an additional $526.3 million in rooms revenue from 2004 to 2014.

With the "what would have been" scenario developed based on the Hotel Outlook forecast, we then put together two hypothetical recovery scenarios for the New Orleans full-service hotel market. One scenario is based on a slower and weaker recovery pattern. The other assumes a quicker and stronger recovery.

The following bullet statements state the assumptions made for the two hypothetical recovery scenarios:

Slow / Weak Recovery

Actual room revenue data was used for the operating period January 1, 2005 through August 28, 2005. Based on the preceding supply assumptions, we assumed demand and ADR growth rates for each year from 2006 through 2014. The net result was a calculation of rooms revenue collected for each year from 2006 through 2014 under each scenario. Chart A compares the annual rooms revenue growth from the Fall 2005 Hotel Outlook forecast to the rooms revenue generated under the two hypothetical recovery scenarios.

By subtracting the rooms revenue of the recovery scenarios from the rooms revenue of the Hotel Outlook forecast, we are able to calculate the revenue deficits (Chart B). As would be expected, the revenue deficits are greater under the slow / weak scenario, especially during the initial years of the projection period.

Given the assumptions made for this demonstration, a quick / strong recovery scenario would result in a total rooms revenue deficit of approximately $1.8 billion over the 10 year projection period (Chart C). On the other hand, a slower and weaker recover would generate a rooms revenue deficit of $3.0 billion.

The Bottom Line Really Counts

It is important to note that the preceding example portrayed the methodology used to calculate lost revenue. For most business interruption insurance claims, it is the lost net income that would be estimated. As mentioned before, the translation of revenues to profits can be done based on the historical performance of the subject property, as well as industry wide financial benchmarks.

Receiving your business interruption insurance benefits never fully alleviates the emotional damage and pain caused by a catastrophic event. However, the funds do go a long way to help preserve "the business."

Robert Mandelbaum is the Director of Research Information Services for CBRE Hotels’ Americas Research. He is based in the firm’s Atlanta office, where he is in charge of Research Information Services. Research Information Services produces the annual Trends® in the Hotel Industry statistical report, along with customized financial and operational analyses for client projectsMr. Mandelbaum began his hospitality industry career with Holiday Inns, Inc. in Memphis, Tennessee. He started his career with the firm in 1983 in the Memphis office of Pannell Kerr Forster, where he conducted market and financial feasibility studies and operational analyses for hotel, restaurant, club, and conference center clients. Prior to moving to Atlanta in November 1997, he also worked in PKF’s San Francisco office. Mr. Mandelbaum can be contacted at 404-8902-3959 or robert.mandelbaum@cbre.com Please visit http://www.cbre.com for more information. Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
General Search:

NOVEMBER: Architecture & Design: Authentic, Interactive and Immersive

Brian Obie

When people arrive at a hotel they have usually traveled a long distance. They are typically tired and stressed to some degree or another depending on how easy or difficult the journey. When they finally come into our driveway and understand this is where they should be – with the valet right there ready to greet them – they get the sense that they can finally relax. There’s a huge sense of relief. They now can begin their business trip or holiday with the family knowing they will be rested and renewed. READ MORE

Rob Uhrin

When you think of the word resort, what comes to mind? Upscale amenities such as white sandy beaches, luxury pools, first class dining and entertainment and the ultimate spa experience to name a few. The word “resort” probably does not conjure up images of urban cityscapes, or streets filled with busy pedestrians in business suits. There is a new class of resorts coming to the fore in the hospitality industry right now called urban resorts. This article will explore this new type of transformational city design and how to achieve it. READ MORE

Vince  Stroop

In a time when experiences are moments-long and shared over Instagram by many users, it is hard to top the surprise factor when it comes to creating a new destination. Nor should we, as hotel designers, try. With the pace of changing trends that is being communicated to us by branding agencies, designing the next new thing can be tempting. But I am not sure that’s what guests genuinely seek. And judging from the rise of Airbnb, I may be right on my guess that guests want memorable, meaningful experiences, not more selfies. READ MORE

Michael Tall

An urban resort is a property that connects guests to the unique and vibrant elements within a city and outside the hotel. The hotel itself acts as a concierge service, forming a direct link between the local community and those guests who crave localized and authentic excursions. With no signs of slowing down, the urban resort trend is here to stay, and hoteliers can successfully capitalize on this growing segment by keeping the guest experience in mind. At its core, an urban resort is a respite from daily life, offering guests the freedom to choose between relaxed disconnection or active participation within the local community. READ MORE

Coming Up In The December Online Hotel Business Review

Feature Focus
Hotel Law: Issues & Events
There is not a single area of a hotel’s operation that isn’t touched by some aspect of the law. Hotels and management companies employ an army of lawyers to advise and, if necessary, litigate issues which arise in the course of conducting their business. These lawyers typically specialize in specific areas of the law – real estate, construction, development, leasing, liability, franchising, food & beverage, human resources, environmental, insurance, taxes and more. In addition, issues and events can occur within the industry that have a major impact on the whole, and can spur further legal activity. One event which is certain to cause repercussions is Marriott International’s acquisition of Starwood Hotels and Resorts Worldwide. This newly combined company is now the largest hotel company in the world, encompassing 30 hotel brands, 5,500 hotels under management, and 1.1 million hotel rooms worldwide. In the hospitality industry, scale is particularly important – the most profitable companies are those with the most rooms in the most locations. As a result, this mega- transaction is likely to provoke an increase in Mergers & Acquisitions industry-wide. Many experts believe other larger hotel companies will now join forces with smaller operators to avoid being outpaced in the market. Companies that had not previously considered consolidation are now more likely to do so. Another legal issue facing the industry is the regulation of alternative lodging companies such as Airbnb and other firms that offer private, short-term rentals. Cities like San Francisco, Los Angeles and Santa Monica are at the forefront of efforts to legalize and control short-term rentals. However, those cities are finding it’s much easier to adopt regulations on short-term rentals than it is to actually enforce them. The December issue of Hotel Business Review will examine these and other critical issues pertaining to hotel law and how some companies are adapting to them.