Hotels are a specialist asset class requiring active and focused oversight. If bought, developed, operated and disposed of at the appropriate time, they can serve as dynamic income producing assets for owners and investors. But the hotel industry is a cyclical industry that closely follows a country’s economic peaks and troughs. A strategic asset management plan, implemented diligently, can create tremendous value for your property and help build and sustain long-term value.
Why long-term asset planning matters
All hotels go through a life cycle of opening, stabilization, peak performance, negative performance, and depletion. Owners and operators need a strong asset plan in order to maximize value, minimize costs, and ensure smooth hotel operations throughout all phases of an asset lifecycle. Building a long term strategy for refurbishment and positioning will help asset owners to plan for uncertain times and ever-changing market dynamics.
Management of a hotel’s long-term assets takes forward-thinking, planning, and consistent attention on a regular schedule. Here are the essential areas to focus your attention and dollars:
1. Carefully match CapEx planning to your market
Renovation and refurbishment are necessary to maintain a hotel’s competitiveness and cachet among target group markets, and upgrades can even provide additional revenue streams. Hotels in competitive locations with high barriers to entry are more likely able to clearly quantify demand, and are good candidates for increased CapEx spending on renovations.
Renovation is necessary in order to:
- Keep up with the competition
- Maintain or increase market share
- Improve the operational efficiency of the hotel
- Extend the useful life of the hotel
- Help increase or maintain the occupancy and rates in the hotel
Hotel CapEx projects to keep on the radar:
- Wi-Fi upgrades
- Landscaping/garden upgrades
- Terrace addition/renovations
- Expansion of exercise facilities
- FF&E to match group market expectations
- Lobby renovations to align with current trends
- Pool remodel/upgrade (or replacement with event rooms or guest rooms if it makes market sense)
- Event room A/V
- Building facade upgrades/expansions
- Replacing guest showers/tubs
- Remodeling guest rooms
Consider capital expenditures carefully before giving them the green light to ensure the projects are sound in concept and effective in execution. Key aspects to evaluate regarding capital expenditures include:
1. How closely the project is tied in with a property’s long-term strategy and its appeal to specific markets.
For example, a lobby bar may be an excellent investment for a hotel with a lot of wedding business and the capacity for more: it might boost wedding bookings while also making each wedding more profitable. On the other hand, for a hotel that sees high demand for its two conference rooms but rarely fills each one to capacity, it would make a lot of strategic sense to transform those two conference rooms into three.
2. Detailed ROI reports related to the project.
Include not just the anticipated cost of the project, anticipated lost revenue during the project, and expected effect on future revenue, but also broader issues like the effect on the property’s position within its comp set and its attractiveness to investors.
3. Where the asset is within the life cycle.
Timing is crucial, as recognizing the need to renovate is just as important as the renovation itself. In order to stay ahead of competition, achieve high operational efficiency and maintain stable demand and strong profitability, a hotel should ideally start renovation planning during its peak performance years. Build your strategic renovation plan when your hotel is approaching peak performance (generally 4-7 years after opening), so that you are ready to execute on the plan when assets begin to deteriorate (years 8-9).
Once you’ve decided that it makes sense to move forward with a proposal, gather a minimum of three bids from contractors with a solid reputation for high-quality, on-time work. This will guide you to the best possible decision for the property and keep you within budget.
After the project is complete, evaluate its effectiveness by tracking before-and-after metrics. Is it delivering the hoped-for revenue or increase in business? A well-utilized hotel CRM can make easy work of comparing the volume of group bookings before and after the conference room renovation.
2. Budget for the long term (and more than 4 percent for CapEx!)
Your CapEx budget is for renovations, additions, and remodeling. Your operating expenses are for repairs and maintenance. Budgeting for both is crucial to preserving a property’s long-term value and minimizing unexpected expenses.
Many capital plans run on a five- or ten-year schedule, but plenty of furniture, fixture, and equipment (FF&E) replacement will fall somewhere in between, and other assets (such as the parking lot or the roof) will last longer. Track the expected useful life of every major asset to determine the optimal timeline for capital projects.
Long-term plans can help avoid wasted work and money. For example, if a lobby overhaul is coming in year six, it may be more cost-effective to hold off replacing lobby furnishings and electronics in year five because it’s possible the new lobby will require redesigned furniture as well. Look for ways to extend the life of the current lobby FF&E and compensate for any trouble spots until the planned outlay.
As for how much to set aside? Repair and maintenance expenses are remaining steady at about 4.1 percent of total revenue, according to the ‘CapEx 2018’ study by the International Society of Hospitality Consultants and the Hospitality Asset Managers Association. But CapEx spending is growing (averaging 7.6 percent of total revenue during the 2013 to 2017 study period) and clarifies that the historic CapEx budget standard of 4 percent is not enough.
3. Proactively handle repairs and maintenance
Budget generously for preventative maintenance and stick to the schedule. Proactive maintenance saves money in the long-term by:
- Reducing labor
- Reducing guest disruption
- Increasing energy efficiency
- Lengthening asset life
For example, maintenance issues like clogged filters and blocked drains can stress a furnace’s heat exchanger—the cause of most furnace failures. But maintaining the system doesn’t merely prevent costly and disruptive breakdown: It also lowers the day-to-day energy cost.
The US Department of Energy says that replacing a dirty air conditioning filter can reduce energy consumption by up to 15 percent. A schedule of preventative HVAC maintenance will include things like inspecting for leaks, cleaning and testing dampers (once a year), inspecting fans, fan belts, bearings and the air intake (twice a year), and of course replacing filters (every one to six months). Ensure efficient maintenance by establishing your schedule within your operational plan
A hotel maintenance schedule requires careful planning: Hotels must continuously operate, and are maintenance intensive. Choose a management system that is easy for your employees to use. Train them thoroughly and check back to ensure they’re incorporating the software into routine operations. This maximizes the life of your systems and minimizes costly surprise repairs.
Hotel repair and maintenance projects to keep on the radar:
- Heating and cooling systems
- Pool upkeep
- Kitchen equipment
- Electrical systems
- Parking lot surface, bumpers, gates
- Portes-cochère (covered entrance for drop-off and valet parking)
- Event room lighting, A/V equipment
- Water heaters
- Laundry facilities
4. Keep up attractiveness to investors
Investors are the key to long-term success. Keeping properties in good repair is essential, of course, but don’t stop there. Maximize all revenue streams—not just rooms, but also F&B and event bookings.
Understand your comp set and what is most important to your customers: Is your customer set elastic on price, or will a few dollars make a big difference? Is your location (adjacent to the airport, the convention center, or the ski mountain) worth a premium, or does it require a discount when compared with more ideally situated properties? Consider forming different comp sets for distinctive traveler segments: seasonal vs. off-season, or group vs. transient business.
Use Win/Loss reports in your CRM software to find out how long-term assets are playing a role in actualized bookings and lost leads. Are you losing business to a recently renovated hotel nearby? Or are you gaining wedding bookings with the beautifully designed, well-tended outdoor space perfect for photos of the newlyweds? This is why your conifers, maples, palms, or cacti count among your long-term assets!
A business needs a captain with their hand on the tiller to steer a wise course over the long haul. Make sure you are taking care of your hotel’s long-term assets, and they will help you take care of your hotel business for many years to come.
Ready to leverage a CRM to improve your long-term asset planning? Check out a demo of Social Tables’ group sales and catering CRM software. You can also learn the most effective ways to maximize group revenue with these 4 tips for venue marketing, or discover how to draw more wedding business with 8 ways to make your wedding-friendly hotel stand out.