Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
Revenue per available room (RevPAR) is a metric used in the hospitality industry to measure hotel performance.
Last week we defined a related calculation…ADR or Average Daily Rate. Click here for that blog article. One of the limitations of the ADR calculation is that it doesn’t factor in unsold rooms. That means a hotel’s ADR could go up while occupancy is down and revenue is down. So, a rising ADR doesn’t tell us enough. That’s where RevPAR comes in…
Average daily rate (ADR) is needed to calculate RevPAR. ADR tells a lodging company how much they make per SOLD room, on average, in a given period. Meanwhile, RevPAR measures the average rate the lodging company gets for ALL its available rooms.
RevPAR = Average daily room rate (ADR) x Occupancy rate
RevPAR = Hotel’s total room revenue / total number of available rooms in the period
A hotel has a total of 150 rooms of which the average occupancy rate is 90%. The average cost for a room is $100 a night (ADR). A hotel wants to know its RevPAR so it can accurately assess its performance.
RevPAR = $100 per night ADR x 90% occupancy rate = $90.00
Note: To find the monthly RevPAR, multiply the daily RevPAR by the number of days in the month.
What does this calculation tell us?
RevPAR is a metric used in the hospitality industry to assess a property’s ability to fill its available rooms at an average rate.
An increase in a property’s RevPAR means that its average room rate or its occupancy rate is improving.
The hotel manager can make decisions based on the RevPAR. The manager can see how well the hotel is filling its rooms and how wisely the average hotel room is priced. With a $90 RevPAR but a $100 ADR, the hotel manager could reduce the average rate to $90 to help realize full capacity.
Growth in RevPAR does not mean that a hotel’s profits are increasing. This is because RevPAR does not use any profitability measures or information on profits. Focusing solely on RevPAR, therefore, can lead to declines in both revenue and profitability.
Many hotel managers prefer to use the average daily rate as a performance measure since it’s the main driver of hotel occupancy. Therefore, with accurately priced rooms, the occupancy rate should increase, and a property’s RevPAR should also naturally increase.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com