Heartbreak for Hotels
Subject Demand for capital investment
Topic Resource markets
Key Words Capital, budget, slowdown, revenue, expenses, employment, profits
News Story

Approximately 6 percent of the hotel construction projects scheduled for completion in 2002 and 2003 have been canceled or delayed since the September 11 events. This affects 33,000 hotel rooms. For instance, Starwood Hotels and Resorts is freezing most capital expenses over $3 million, including the 40-story St. Regis Hotel in San Francisco. At the other end of the market, 15 Red Roof Inn and Motel 6 projects have been frozen. Omni Hotels is also postponing renovations to its meeting rooms in six hotels in order to save a quarter of its capital-spending budget.

The intent is to slash spending amidst the travel slowdown. It is estimated that, through the end of the year, guest room occupancy will fall an average 8 percent a month and revenue per room by 10 percent compared to last year.

Other expenses are being trimmed also. There are plans to reduce employment by 115,000. Services are being cut back, restaurants are open for shorter periods, business centers are becoming self-service, and front-desk employees are doubling as concierges. Nevertheless, hotel industry profits are expected to fall to $17-20 billion compared with $23.5 billion in 2000.

(Updated November 1, 2001)

1. Draw a diagram with axes representing the interest rate and the amount of investment in hotels. Show the initial demand for investment.
a) Explain why the demand for investment curve reflects the marginal rate of return.
b) After September 11, what happened to the marginal rate of return on investment in hotels and why?
c) How did this affect the demand for investment curve?
d) Assuming a constant interest rate, what happened to the amount of investment in hotels?
2. Some projects are being delayed, rather than canceled. What is the underlying assumption about the marginal rate of return and the demand for investment? Or the rate of interest?
3. Cutbacks are also being made in employment. Explain how a similar logic to that identified in Question 1 is at work.
Source Salina Kahn, "Hotels put the brakes on building plans," USA Today, October 10, 2001.

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