Pinnacle Advisory Group


The Nation's Leading Full Service Hospitality Consulting Firm.

Quantifying the Affect of Newly Occupied Office Space on Lodging Room Night Demand Presented by: Alan Suzuki

Presented by: Alan Suzuki

Over the years, many investors, consultants, and franchise representatives, among others, have opined upon the potential correlation between occupied office space and lodging room nights. In most cases, when new companies and employees occupy office space within a lodging market, there is a higher likelihood that more transient and corporate group related room nights will be generated. I have heard some experts hypothesize that a million square feet of office space will create enough lodging demand to justify the development of a new hotel. More recently, an article was published about the relationship between occupied office space and lodging room nights in major urban cities by analyzing data compiled from their internal office statistics and lodging statistics from Smith Travel Research. Furthermore, the author estimated the amount of lodging room nights that can be generated from every 1,000 square feet of office space occupied. While identifying a relationship between total occupied office space and total lodging room nights is a compelling observation, we believe that the more important analysis is the quantification of lodging room nights based on newly occupied office space. Equipped with this information, an analyst can estimate the affect of new office building developments on the local lodging market. In the following section, we present a general guideline for how the potential impact of newly occupied office space on the lodging market can be determined. It should be noted that the resultant calculation should not simply be used as a rule of thumb for every lodging market in every situation, rather, the process should be used as a helpful guideline in estimating future corporate demand growth. As an example, we have presented our calculations of corporate room night production for every one million square feet of office space (the metric we decided to use for the purposes of this analysis) for three separate and distinct lodging markets in suburban Boston.

The following table presents the total annual supply of available room nights, total annual room nights occupied, total annual corporate related room nights occupied (transient and group), total occupied office space (square feet), and the total annual corporate room nights accommodated per one million square feet of office space for the following lodging markets: Route 495/Route 2 West, Waltham, and Route 128 South, all located in the suburban regions of Boston. We believe that it is important to differentiate all corporate related room nights from the total room nights accommodated since leisure demand and some group demand is not tied to occupied office space. This can be achieved by estimating the market mix of transient corporate and corporate group demand as compared to overall demand. For our calculation, we had the benefit of determining corporate related room nights through interviews with management at each hotel as well as our intimate knowledge of the market. Total occupied office space can be determined through office brokers in the local area. In our calculation, we have used data compiled from CB Richard Ellis.

Lodging Room Nights and Office Space Analysis: Year-End 2007

Total Supply Total Demand Occupancy Corporate Related

Route 495/Route 2 West (Westford, Littleton, Boxborough, Devens) 380,695 226,359 59% 156,200

Waltham 609,550 420,562 69% 294,400

Route 128 South (Dedham, Norwood, Westwood, Canton) 426,320 275,391 65% 187,300

Source: Smith Travel Research, CB Richard Ellis and Pinnacle Advisory Group

As presented above, we determined that corporate related demand (both transient and group) in the three suburban Boston markets analyzed, accounts for approximately 69 percent of overall demand in the Route 495/Route 2 West office and lodging market, 70 percent in Waltham, and 68 percent in the Route 128 South market. With the estimate of corporate related demand combined with the data for total occupied office space, we determined that corporate lodging demand per one million square feet of office space would be 41,000 room nights in the Route 495/Route 2 West market, 39,500 room nights in Waltham, and 38,800 room nights in the Route 128 South market. Given the similarity of corporate demand in these three suburban Boston markets, we found that there was a similar correlation between corporate lodging demand and occupied office space. In these three markets, we found that one million square feet of office space generates approximately 40,000 annual room nights, as of year-end 2007.

As mentioned earlier, the calculation of approximately 40,000 room nights generated from one million square feet of office space in the three suburban Boston markets analyzed should not be used as a rule of thumb for all lodging markets. Corporate room nights generated from a certain amount of office space may differ from market to market and from year to year for a variety of reasons. For one, it is important to consider that the types of companies that are occupying the office space may have an impact on the degree of demand that is generated. Do the types of companies occupying the office space hold training sessions throughout the year? Do these companies have other regional offices in other domestic or international cities that may bring executives in for periodic meetings? Do these companies host a number of salesmen or consultants? As an example, companies such as nationally and internationally known finance and high-technology companies are far more likely to generate demand than local professional services companies and industrial/manufacturing companies. Additionally, corporate lodging room night production is variable based on the health of the industry and/or the national economy. In a peak economic year, one million square feet of occupied office space may generate X amount of demand, however, corporate cutbacks and the expense of travel may negatively affect that room night total during a recession year. Furthermore, a stronger correlation is likely to exist in a contained lodging and office market rather than a sprawling metropolitan area. For example, determining the correlation between occupied office space in downtown Boston and corporate lodging room nights may be affected by lack of supply or high rates, which may drive some corporate demand out to other outlying lodging markets such as Cambridge, the airport, or other suburban cities. Thus, appropriate adjustments must be made in light of these considerations.

While there is no magic coefficient or number that can be applied to every lodging market in the United States in any year, we do believe that it is possible to estimate a general range of room nights that may be generated from newly occupied office space by estimating the amount of corporate lodging demand that exists with the total occupied office space in the area.