Introduction
Table of Contents
- 1. What is RevPAR?
- 2. Why does a RevPAR adjustment work?
- 3. Why not just use average daily rate?
- 4. How does it work?
- 5. When is a RevPAR adjustment ineffective?
1. What is RevPAR?
RevPAR, or “revenue per available room,” is best described as the
total guestroom revenue earned per available room, per day. The most
common way to calculate it is by multiplying a hotel’s average daily rate
(ADR) by its occupancy rate, as shown below:
$150 ADR × 70% occupancy = $105 RevPAR
Another method divides a hotel’s total guestroom revenue by both its room
count and the number of days in the period. While usually discussed as an
annual average, RevPAR can also be calculated for a month, day, or
year-to-date. It is always important to specify the time frame referenced.
For a proposed hotel, RevPAR should be adjusted to reflect values current
with the date of analysis.
2. Why does a RevPAR adjustment work?
Using RevPAR as an adjustment basis highlights income potential as the main driver of hotel investment decisions. Much like capitalization rates and revenue multipliers, it applies income capitalization concepts to the sales comparison approach. RevPAR works because revenue levels align with net income, and net income ties directly to market value. If Hotel A produces more income per room than Hotel B, its per-room value should be higher, all else equal.
A hotel’s average rate reflects both product quality and market positioning, and it strongly relates to location. As one of RevPAR’s two inputs, ADR accounts for differences in quality, orientation, and location. Market value trends also track ADR shifts: rate growth flows directly to the bottom line, while occupancy gains often bring extra costs. At stabilized performance, raising ADR is the most effective way to increase net income and boost value. When no recent comparable sales exist, RevPAR adjustments allow older sales to be updated, since changes in ADR usually mirror value appreciation or decline. That said, other factors—such as debt and equity costs—also shape hotel values beyond RevPAR.
3. Why not just use average daily rate?
Hotels may discount or inflate ADR depending on occupancy strategy. Because RevPAR combines both occupancy and rate, it provides a fuller and more accurate basis for adjustment.
4. How does it work?
The adjustment is based on the percentage difference between the transacted hotel’s RevPAR and that of the subject property. For example, suppose Hotel A is a proposed property with a projected stabilized RevPAR, deflated to January 1, 2003, of $103.50. Hotel B, a competitor, sold in 1999 for $135,000 per room and had a RevPAR of $90 that year. The $13.50 difference represents 15% of $90. Applying a 15% upward adjustment to Hotel B’s sale price yields an adjusted comparable value of about $155,000 per room for Hotel A.
5. When is a RevPAR adjustment ineffective?
A RevPAR adjustment becomes unreliable when the transacted hotel serves a market orientation that is significantly different from the subject property. At times, comparable data may only be available from hotels with somewhat or very different facilities. For instance, the RevPAR of a first-class resort will not reflect revenue from profit centers such as spas, golf courses, marinas, or casinos. Similarly, a downtown convention hotel may rely heavily on a large food and beverage operation whose effect on net income is not captured in RevPAR. Extended-stay hotels pose additional challenges. They often generate stronger RevPAR results and operate with greater efficiency than full-service hotels, yet they provide fewer amenities and face risks tied to lower entry barriers. Their physical plant may also lack the durability of traditional hotels, making direct comparisons problematic.
It is also important to remember that RevPAR offers only a snapshot of performance at a point in time. For example, a RevPAR recorded in 2001 may not fairly represent long-term potential, given the disruptions caused by the September 11 attacks.
When is a RevPAR adjustment effective?
RevPAR adjustments work best when comparing identical brands (e.g., Embassy Suites, Residence Inn) across a wide region, or when using comparable data drawn from the same market (e.g., Downtown Boston). In such cases, the adjustment is more adaptable, though it should be paired with other adjustments when necessary.
Even in seemingly ideal situations, an outlier may resist adjustment into a reasonable range. The complexity of hotel real estate often makes comparable sale analysis frustrating. Wildcard elements such as ground leases or unusual seller motivations can further complicate matters, and sometimes no objective basis for quantifying an adjustment exists. For these reasons, the sales comparison approach is generally best used to support or bracket the value indicated by the income capitalization approach. Like all adjustments, RevPAR should be viewed as useful but inherently imperfect.
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