What will be the operating costs of the hotel? How much of these costs will you have to bear?  

     We have already seen that although the Chicago luxury segment is poised to become substantially more crowded, the overall picture shows that hotel supply will remain low, partially due to high construction costs. Can this be the only reason for the shortage in hotel rooms, or are there alternate explanations for why many developers are staying out of the hotel market? One reason may be that of rising operating costs. While traditional barometers of industry health, such as RevPar (Revenue Per Available Room) and ADR (Average Daily Rate) are at their highest levels since 2000, profit margins have not completely recovered from the post September 11th,2001 downturn because, according to Smith Travel Research, the cost of running a hotel in today’s environment has overshadowed
revenue growth.¹

PKF Hospitality Research has noted that the total cost of operating a U.S. hotel grew by 6.5% in 2005, with two of the most significant cost increases found in management fees (8.9%) and franchise fees (9.8%).²This is noteworthy considering that unit owners of the Shangri-La Chicago will likely be responsible for both of these fees as part of their monthly assessments.

    Another common area of concern, especially for luxury operators, is room inventory and amenity costs. In 2005, inventory expenses increased 7.3%, the single largest increase for any revenue-generating department.³ While much of the expenses are variable in nature, there are some costs particular to luxury hotels that are significant. “Amenity creep,” where upscale hotels compete with one another to create a better environment in guest rooms, has been rampant, with more amenities added in the last five years than were added in all of the previous fifteen years.⁴While the luxurious environments created in Shangri-la’s hotels are part of the attraction, they do not come without a cost.

    Will Shangri-la be able to offset these costs with higher rates? Can they do so as a new player in the market, competing with so many other luxury hotels? Finally, is this made more difficult because of the nature of condominium hotels? According to Sean Hennessey, CEO of Lodging Investment Advisors, condominium hotels operate at a lower occupancy than transient hotels “because there’s some constraints on your ability to manage the inventory and maximize your utilization.”⁵  

Notes