Pinnacle Advisory Group


The Nation's Leading Full Service Hospitality Consulting Firm.

What are Impact Studies and Why are they Necessary in Today’s Hotel Climate? by Meri Keller

With nearly 4,100 hotel projects totaling nearly 500,000 rooms under contract in the U.S., and 17.1% increase in rooms under construction year-over-year according to the most recent STR Pipeline Report, the impact of new hotel supply is a major concern for existing hotel owners.  The major hotel brand families seek to capitalize on this expanding supply by extending the geographic reach of their existing brands and developing new brands targeting ever-narrower market niches. Some savvy developers seek to multiply brand equity through the development of dual-branded hotels that allow a single hotel project to affiliate with two brands, generally within the same brand umbrella. Some hotel owners are beginning to complain, concerned that the addition of new hotels nearby in the same brand family will cannibalize the business they have so carefully built over time. Conversely, new hotel developers and the franchise reps say the properties appeal to different segments of the market and will compete only peripherally –Who’s right?

As hotel supply increases and hotel companies merge and consolidate, hotel impact is becoming an increasing concern.  To those who understand the implications of current impact policies, the word “Impact” can represent a commitment to protecting franchisees’ rights. For developers looking to expand a franchisor presence in a specific market, the word can frequently signify delays and challenges in the franchise approval process. For franchisees the word frequently represents erosion of their key asset and probable demand generated through their brand’s central reservation system. New supply in a hotel owner’s competitive market is the most common cause for investigating impact.

But what exactly is impact?

Base Impact is defined as the effect of new competition on an existing property, usually resulting from the addition of hotel rooms to the competitive market.

Incremental Impact is defined as the effect of new competition on an existing property due to the addition of hotel rooms that operate under the same brand, within the same franchise company, or access the same reservations system.

It is important to distinguish between the two different types of impact. While new supply may cause base impact, new supply within the same franchise or reservations network may cause base and incremental impact. The additional impact incurred due to the dilution of the franchise company-generated business is the incremental impact.

Each hotel company maintains their own impact policy.  Typically, the impact policy can be broken down into four key tasks: notification/timing, objection process, evaluation, and decision.   Once the franchisee is notified, they are given a certain period of time to object if so desired.   If the franchisee objects to the new proposed hotel development, the evaluation process begins.  Some hotel companies offer internal impact analysis, while others use third-party sources to evaluate impact in an objective form.

The critical steps in an impact study are as follows:

  • Evaluate the existing property (Location, access, visibility, proximity to demand generators, condition, pricing, amenities, market mix, demand generated through brand CRS, percent of guests that are rewards members, top accounts)
  • Analyze the competition and competitive market (brands, quality, locations, topline performance, new supply, demand trends, market mix, new demand generators, general economic health)
  • Profile the applicant property (location, facility, access, visibility, location, brand)
  • Profile the characteristics of both the parent franchise company and relevant brands
  • Project occupancy and average daily rates for the existing hotel “as-is” (assuming applicant does not exist), base impact (new hotel rooms w/out same brand affiliation), and incremental impact (assumes new hotel rooms have same brand family).
  • Estimate the impact

Correctly done, the evaluation of impact involves an unbiased analysis.  Through diligent market research and thoughtful analysis, a well-supported projection of potential impact can be developed. This unbiased analysis is the very reason that qualified, independent consultants should be utilized, rather than parties with an interest in the proposed project.

Meri Keller is a Vice President for Pinnacle Advisory Group’s Boston office.   Ms. Keller has over 10 years of hospitality experience specializing in financial and market feasibility, acquisition and development underwriting, value-add opportunity analysis, and single asset and portfolio advisory sales. She has evaluated and advised on numerous assignments throughout the United States and Caribbean including luxury destination resorts, hotel conversion opportunities, university hotels, golf resorts, mixed-use developments, airport hotels, luxury destination resorts, and boutique properties.