Many hotel investment strategies involve targeting specific types of hotels in high-growth markets. Some involve matching a given RevPAR index such as STR’s Top 25, total US or total Upper Upscale hotel market. Many hotel investors focus on what they believe are high-growth markets in the hope that their portfolio can meet or exceed a given RevPAR index. They focus on acquiring and operating hotels in markets that they believe have multiple demand generators and hope these hotels generate higher returns on investment.
Rarely do they want to own the entire index unless it is made up of very few markets. Suppose an investor wants to match STR’s Top 25 RevPAR index as closely as possible with 10 markets. The problem becomes one of selecting 10 of 25 markets (there are over 3,268,000 ways to do this!) that minimize over, say 24 years, the sum of annual RevPAR growth on the Top 25 markets minus the annual RevPAR growth of the ten markets.
Recently we assisted a client that sought to identify 18 markets out of 35 potential markets that best matched an Upper Upscale RevPAR index over the past ten years. The challenge: there are over 4.5 billion ways of selecting 18 of 35 hotel markets! With the help of optimization software which uses innovative genetic algorithm (GA) and linear programming technology we identified the 18 markets that best mirrored the performance of the historical RevPAR index. We then identified the 18 markets that provided a 150 basis point RevPAR spread above the index over the next five years.
The following graph illustrates the significant annual distribution of RevPAR CAGR for the Top 25 Hotel markets in the U.S. for eight-year holding periods. There is a average 239 basis point difference between the 25th and 75th percentile RevPAR CAGR over the period 1995-2018.
Hotel market selection and asset allocation play an important role in determining the overall performance of hotel portfolios. The availability of timely market intelligence, and the seemingly predictable nature of hotel real estate markets, also give investors more confidence to target markets. Over the past ten years, good statistics on markets have become readily available, giving investors ammunition for market forecasting, and identifying target markets from the hotel investable universe.