For many hotels, revenues from conferences and events make up a meaningful component of overall financial success. But many hotels also struggle to optimize meeting space and make strategic decisions around the types of groups and events to target. For hotel investors and appraisers, one way to ensure a property’s event facilities are functioning optimally is by analyzing the “space utility index.”
The space utility index (SUI) is a metric that represents a property’s employment of its meeting space. It measures the number of group-oriented patrons that visit the property on an annual basis against the total square footage of meeting space offered at the property (per 1,000 square feet). The higher the index, the higher the concentration of group patronage relative to the amount of meeting space offered by the property.
Typically, the more meeting space a property has, the lower the SUI might be. As group events become larger, meeting planners will typically command more space per attendee. This often includes the meeting and function space itself in addition to pre-function and programming areas.
This metric is useful in determining the level of concentration a property has in the group demand segment, as well as in identifying opportunities to generate more group demand or pursue other revenue-generating activities.
CALCULATING THE SUI
The SUI is expressed as the total number of square feet of meeting space available to each group-oriented guest on a daily basis. For example, if 10,000 guests visited a property during the year to attend events and the property features 20,000 square feet of meeting space, then the SUI would be 1.4—meaning 1.4 guests per 1,000 square feet of meeting space per day.
Let’s take a look at an example:
Hotel C, which features 6,500 square feet of meeting space, operated at the highest SUI (12.0) relative to its competitors. This property features the highest concentration of group-oriented guests in relationship to the amount of meeting space it offers. The SUI reveals that Hotel C is generally effective in utilizing its meeting space and may have an opportunity to displace some of its group demand with commercial demand.
Commercial patrons are generally less price sensitive than group guests. By engaging more commercial patrons, Hotel C has an opportunity to grow its room rates. While this might come at the expense of occupancy, room revenue could still be positive and variable operating expenses could also be reduced.
The property with the lowest SUI is Hotel A, which features 49,929 square feet of meeting space and a SUI of 6.0. This property has the greatest upside with respect to group-related demand, suggesting that occupancy levels could be enhanced with more focused marketing to this segment. However, management would need to assess the number of highly-rated guests already patronizing the property and make sure that these guests are not displaced by these marketing efforts. This displacement could have a negative impact on rate potential and the additional variable operating expenses associated with higher occupancy levels could outweigh any revenue benefit.
PUTTING THE SUI TO WORK FOR YOUR BUSINESS
Meeting space utilization can hold important implications for a hotel’s bottom line. When you think of the tools you use every day to forecast revenues and make decisions in other areas of your business, it makes the need for a metric like the space utility index clear. Once you calculate your SUI and compare it with those of your competitors, you might be surprised by the opportunities that analysis reveals.
Bryan Younge is a Managing Director with Colliers International Valuation and Advisory Services and is the National Practice Leader of the Hospitality and Leisure specialty group. He has completed appraisal, financial reporting, litigation support and consulting assignments on a wide range of asset types throughout North America, Latin America, South America, Europe and the Pacific Rim. Mr. Younge also supervises all valuation efforts within the hospitality and leisure industries for financial reporting purposes which includes studies assisting REIT and other institutional clients in the application of FASB/ASC statements. Services also include a spectrum of consulting related to litigation, arbitration, mergers and acquisitions, economic impact, tax appeal, feasibility and other advisory services.