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Hotels must achieve higher occupancy rates to attract investors.  It is natural that hotels sometimes fill vacancies through aggressive discounting.

 

The first part of this blog addressed community interests in vacation rentals.  This second part discusses actions managers can take to defend against hotels and cruise lines.

 

What Community Leaders Should Understand About the Unique and Critical Role Played by Vacation Rental Homes in Local Economies and Why They Should Promote a Level Playing Field

 

As noted in Part 1, vacation rentals are well equipped to survive aggressive promotional discounts by hotels and cruise lines which, by virtue of their more demanding investor expectations, must always rebound to higher prices than are charged by vacation rental homes.

 

But when municipalities place unfair regulations on vacation rentals, long-term damage can result to both the local economy and the vacation rental industry.

 

It is important to recognize (and educate community leaders on this point) that vacation rentals’ unique investment profile generates economic benefits that—on a per-visitor basis—cannot be matched or replaced by hotels.

 

Large hotels are often not financially viable (and thus not present) in vacation markets that are just beginning to attract tourists or have short seasons.  Hotels in such markets would need to charge prices that are too high to generate the high occupancy rates required by hotels.  Here:

 

  • Vacation rentals bring the capital investment (housing infrastructure) that is necessary to lure tourism dollars to destinations that lack sufficient traffic to support large hotels.
  • Vacation rentals offer lower-priced or higher-value lodging than could be offered by hotels and motels.  This brings more tourists and primes the pump for tourism growth.

 

It is also important to recognize (and educate community leaders on this point) that vacation rentals bring economic benefits to a community that goes far beyond those traditionally generated by hotels and captured within the scope of tourism metrics. Vacation rentals typically:

 

  • Involve longer stays;
  • Involve larger travel groups;
  • Employ more employees per bedroom for maintenance and housekeeping;
  • Support larger numbers of small business;
  • Accommodate peak season overflow that hotels cannot cover;
  • Generate economic benefits beyond those embedded in “tourism” metrics:
    • Prodigious numbers of housing construction;
    • Large volumes of real estate sales commissions (5-8 year home turnovers);
    • Related volumes of mortgage financing and fees;
    • Home furnishings and housewares sales;
    • Indirect employment and sales measured as economic multipliers;
    • Tax revenues related to underlying employment and sales

 

Local leaders seldom realize the full range of benefits their communities receive by nurturing and protecting vacation rentals.  As an industry, we can’t expect community leaders to understand our industry until we do.  It is our responsibility to educate ourselves, then others if we are to defend against regulations that restrain vacation rentals at the prompting of competitors.

 

What Defensive Actions Should Managers Take to Compete with Hotels and Cruise Lines?

 

My advice:  educate yourself on the forces that actually threaten vacation rentals or dictate what we can and cannot achieve.  Engage where you foresee clear benefits.  Otherwise relax.

 

Cruise lines advertise some incredible prices for all-inclusive vacations that can include air fare, a cabin, entertainment and food.  What can you do in defense?  You could pass along articles that show how much cruise lines generate from drinks and gambling, but consumers probably sense that anyway.

 

  • Cruise ships require massive capital investment, and a small decline in bookings can be disastrous.  Unlike rental managers, cruise lines have to pay for empty rooms. 
  • It’s important for cruise lines to be full even if they have to give rooms away because cruise lines get revenue from liquor sales, gambling casinos, and shopping. Plus, ports often pay a fee for each disembarking passenger.
  • Cruise passengers don’t necessarily spend less, but they love the idea that they can spend less, eat endlessly, or put vacation money into shopping, drinking and gambling.
  • Cruise lines won’t supplant vacation rentals.  There’s room for both.  I believe vacation rentals offer more of a recurring lifestyle vacation embedded in family traditions. Cruises fit in the category of infrequent travel adventures, ala Las Vegas or Disney World.
  • For 2011, economic stabilization is allowing cruise operators to demand higher prices, and this should result in less competitive pricing pressure on vacation rentals

 

Periodically, ski resorts and high-end hotels steeply discount room rates to fill vacancies. 

 

  • Resorts and high-end hotels have higher fixed costs than vacation rentals and fight to cover those costs by getting “heads in beds” that generate additional spend from spas, lift tickets, restaurants and shops. When these entities discount lodging by 50%, their revenues drop just a fraction of that and could actually increase.
  • Managers and homeowners do not generate similar supplemental spend, and are hurt more by lodging discounts.  Managers should inform homeowners about steep hotel or resort discounts and give homeowners the option to defensively discount rents to retain renters—many homeowners will  discount rather than get nothing.
  • When resorts ask homeowners and managers to discount lodging to lure renters from competing destinations, do the math and raise the issue if it appears that private homeowners contribute 90% of the discounts but resorts reap 90% of the benefit.
  • Managers need only calculate how low rents can go for them to break even.  Profit is desirable, but it is better to help homeowners get some revenue through discounted rents (even if the manager makes no profit) than to lose the homeowner (and future profits from his home) because the homeowner thinks you didn’t try hard enough

 

Remember, the ability of hotels and resorts to meet fixed expenses depends on high occupancy rates.  This dictates that hotels deliberately keep capacity below levels required for peak demand days, leaving room for vacation rentals. 

 

Also keep in mind that hotels must charge enough to generate a return on investment, whereas vacation rentals need not even cover investors’ costs of home ownership. 

 

These facts, combined, make hotels and resorts vulnerable to vacation rentals, which deliver excellent value and lower prices. 

 

In other words, vacation rentals offer a better lodging value for the renter’s buck during normal times.  Hotels and resorts inflict the biggest pain on rental managers during periods when declines in demand make it hard for hotels to cover their larger fixed expenses.  But vacation rentals will always remain healthy competitors in the lodging market.

 

For 2011, U.S. hotels appear to be on pace to grow room revenue (RevPar) 7%, and this should alleviate the steep discounting of prior years. 

 

In all events, the threat from hotels and resorts is not great over the long-term. But I'd love to hear different perspectives if you have them.