How Fast Do New Hotels Ramp Up Performance?

Abstract

Using an event study methodology and data from 3,494 new entrants in the U.S. lodging industry, this paper examines how quickly new hotels ramp up their performance after opening. For the years 2006 through 2009, new entrants entered with average daily rates (ADRs) above incumbents, and took seven quarters (1.75 years) to ramp up occupancies to the levels of comparable incumbent hotels. These averages include performance behavior of brand-managed, franchisee-managed, and unaffiliated independent hotel new ventures compared with incumbent hotels in similar geographic markets, locations, and price segments. Overall, new hotels reached comparable revenue per available room (RevPAR) performance by the second quarter of the second year of operation. RevPAR ramp-up was earlier for brand-managed hotels (first quarter of the second year), an outcome primarily attributable to higher occupancies and lower initial ADRs. Independent hotels took substantially longer than other new entrants to reach the RevPAR performance of existing hotels. Based on the faster ramp-up of new branded properties, the chief implication is that hotel developers should consider affiliating with a brand for quicker stabilization and short-term gain. The speed of hotels’ ramp-up also calls into question the conventional view that new hotels represent a relatively risky investment.