Why CapEx spend is rising—and how hoteliers are spending money

Another year, another record breaker. But this time it’s not for money going into hoteliers’ tills, it’s for what’s coming out. Capital-expenditure spend is forecast to hit a record level of $6.85 billion in 2017, according to a new report from Bjorn Hanson, clinical professor at the NYU Jonathan M. Tisch Center for Hospitality and Tourism. That’s an increase of about 3.8 percent and approximately $1,400 per available room.

Hanson said there are two main reasons why CapEx spend keeps rising every year.

“Many hotel management agreements have a CapEx formula. For full-service luxury it is 5 percent of gross revenue. As gross revenue rises, the amount put into CapEx reserves increases,” he said. “The brands also keep changing brand standards that increase cost.”

What’s more, the U.S. hotel industry’s revenue per available room is expected to increase between 2 percent and 2.5 percent, so CapEx could increase between 60 percent and 70 percent more than the percent increase in RevPAR, according to the report.

How Hoteliers Are Spending Money

Even so, Hanson said it’s important to remember that a hotel that looks new and fresh will outperform a hotel that doesn’t.

“Curb appeal is No. 1. No. 2 is the lobby because people see the lobby before the guestroom,” he said. “Third is the guestroom itself.”

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When it comes to what hoteliers are spending their CapEx reserves on, Hanson said it depends on the property and brand. Even though it is years later, some hotels are coming out of a period of property-improvement-plan deferrals from 2009 through 2013.

However, he said one of the biggest CapEx trends he’s seeing is a focus on hotel lobbies.

“It seems no one wants to spend time in the hotel room ever again, so lobbies are being designed with a level of energy and entertainment,” Hanson said.

Hotels are adding new tech in lobbies, including directory boards with interactive screens and big-screen TVs, he said. They are also adding new food-and-beverage outlets adjacent to and in the lobby, and many are eliminating the front desk and replacing it with kiosks that allow guests to check in themselves.

Another trend Hanson sees is that hoteliers are spending money on improvements that offer no additional stream of revenue. For example, a huge area of improvement comes in the way of adding more internet bandwidth.

“It’s much larger than consumers think, and it can be a $40,000 expenditure,” Hanson said. “And in most select-service hotels it offers no additional revenue.”

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Hanson said some brands are requiring updated breakfast experiences as well as fitness centers, which also would not lead to more dollars to the bottom line.

However, he said some hoteliers are installing gates for surface parking in suburban locations. These gates will require a keycard and payment that will add some additional revenue.

Whatever it might be that hoteliers are spending their CapEx reserves on, Hanson said the days of simply saving 4 percent are gone.

“Probably 2.5 [percent] to 3 percent is enough for annual spending. However, every five to seven years, guestrooms, lobbies and F&B needs to be updated. Every 10 to 12 years, things like the parking lot needs to be paved or the swimming pool needs relined or the roof needs resurfaced,” he said. “The proper number is 7 [percent] to 9 percent if the number were to be smooth over a long period of time.”