The Current Market and the Value of Inns
In my travels round the Mid-Atlantic States these past few months, the topic of the values of inns seems to be grabbing an increased level of interest and conversation than ever before. I believe the real estate boom in the first four years of this decade, and subsequent discussions (and Wall Street Journal articles!) on the demise of some bed and breakfast inns selling as private residences, has fueled the interest.
Some data presented at the 2007 PAII Convention in Myrtle Beach during the “Valuations from the Four Corners” workshop offers a glimpse into some interesting trends that seem to be emerging lately.
A Quick Definition:
Gross Revenue Margin (GRM) is the Sales Price of an inn divided by the annual Gross Revenues the inn earns. It is a fairly reliable rule of thumb, but is certainly subject to the ups and downs associated with a particular inn’s location and financials.
Notice that the trend, from about the turn of the century to 2006, for each source, is trending up as each year ticks by. The trend shown in the Michael Yovino-Young column shows GRM a full point or more above the other sources since California has experienced higher real estate prices for some time now.
Although not shown in the chart above, the selling price per guest room from each of these three sources is also going up noticeably over the previous study period of time:
- The price per room from 2004-06 from Oates & Bredfeldt is up 31% over the previous study (’99-’03).
- The price per room from 2004-06 from Lodging Resources is up 14% over the ’02-’04 study.
- Michael Yovino-Young’s data shows a 20% increase in the price per room in the 2006 data over the study of just one year prior.
Conclusions from this study information:
1. Clearly, these trends reflect the real estate boom of late.
2. The GRM of recent inn sales is now starting to exceed 4.0-5.5, the commonly-recognized range for viable inns.
So what does that mean for the future sale of your inn?
Here are a few observations:
- There are fewer viable inns than in the past. Some inns, especially in those plum regions where real estate prices have skyrocketed, buyers will not be able to cover the debt service with the Net Operating Income (NOI) being earned by the inn they are investigating. These inns may very well sell as private residences if they decide to sell in the current market.
- There may be a trend occurring among aspiring innkeepers, as well. Many are starting-up or renovating existing residences into inns. Although this is much more risky as a business venture, the cost of entry is much lower.
- Pennsylvania inns do not seem as prone to the increasing GRM trend that neighboring coastal inn sales have shown. The PA inn sales (although based on a sample size of only 4 inn sales in the last couple of years) shows the GRM still in the 4.0-5.5 range, good for buyers (and thus good for sellers!). There is no Maryland data available with these studies.
- Buyers are still looking for a lifestyle change. Even though an inn may not be as viable as it used to be because of skyrocketing real estate prices, aspiring innkeepers are still willing to try to break into the business. If they cannot afford a huge down payment to buy a less viable inn, some are seeking the smaller, more affordable inns to get started.
Although the inn sales market has shown some change, our advice is the same:
- The importance of increasing your Net Operating Income (NOI) is as important (or more!) as ever to keeping your selling price stronger. Buyers want a profitable inn.
- You can’t just cut costs to increase NOI. Increasing occupancy through effective marketing (does not necessarily mean advertising!) channels is critical. If you don’t know how, seek help.
- Average Daily Rate (ADR) needs to reflect value to the guests. Don’t just increase your rates without perceived increased value to the guest.
- Aspiring Innkeepers: Don’t get drawn into the romance and lure of a particular inn without knowing the financials of the inn and assessing whether the sales price is fair.
The real estate market has been cooling down in most regional markets and there have even been some price reductions to reflect this adjustment. We may see the GRM creep back down into the viable range over the next couple of years.
We are now in the PROFESSIONAL innkeeping market. A few of the lesser professional inns may sell as residences, but that decreases the inventory of bed and breakfast inn rooms. The remaining inns will pick up the demand (which continues to be strong) increasing their occupancy and improving their NOI and viability. The result will be a stronger selling price when it is time to sell. It all runs in cycles!
Copyright Scott Bushnell 2007. All rights reserved.