Why are hotels so expensive?

July 2, 2009 12:16 AM

Why are hotels so expensive? San Francisco for instance - my studio costs $925/month which works out to about $31/day. Why would a hotel up the road cost four to six times as much? I understand they have to be cleaned daily and the front desk needs to be staffed, and they are furnished, but really, hotel rooms are generally much smaller and much less livable than apartments. Why such a huge price difference?
posted by fourmajor to travel & transportation (37 comments total)

Priceline prices are comparable to rental costs if you're willing to change hotels every week or so.
posted by orthogonality at 12:24 AM on July 2

The reason your apartment is cheaper than a hotel has to do with staffing and cleaning and maintenance, yes, but it also is cheaper because you signed a lease which means the landlords can count on that income for a specific period of time. With hotels, they can't guarantee a sell-out every night, yet they still have fixed costs they need to pay, so they're priced accordingly.

You can see this in action when you price extended-stay hotels where travelers get a room that will often have a kitchenette and less visits from housekeeping. Your per-night cost goes down the longer the booking.
posted by inturnaround at 12:27 AM on July 2 [3 favorites]

Prices are based on what the market will bear - businesses charge as much as people are willing to pay, not as little as they can afford to recoup.
posted by moxiedoll at 12:28 AM on July 2 [6 favorites]

I understand they have to be cleaned daily

One room takes 5 minutes to clean @ $10/hr or about 80c.

Plus another $1 or so for laundry etc.

and the front desk needs to be staffed

Desk staff of 2 x 24 hrs @ $30hr / 100 rooms = $15/room

and they are furnished

$4000 maybe over 5 year useful life is $2/day.

they can't guarantee a sell-out every night, yet they still have fixed costs they need to pay, so they're priced accordingly

This probably isn't the case. Occupancy is around 80% during normal economies, and is predictable.

Here's a post from Calculated Risk showing what's happening.

With all the business hotels springing up like mushrooms I've seen, clearly the profit margins are pretty good with hotel construction. If they can get the occupancy they are indeed a money machine compared to other commercial uses of the space.
posted by @troy at 12:51 AM on July 2 [1 favorite]

Five minutes to clean a hotel room? Make the beds (possibly change the sheets), empty trash, straighten up, check & restock the minibar, clean the tub & toilet, replace soaps & shampoo, swap wet towels for fresh ones, perhaps mop the bathroom floor & vacuum in the room... and probably other tasks I am not thinking of. I don't think this can all be done in five minutes.
posted by Conrad Cornelius o'Donald o'Dell at 1:18 AM on July 2

I had a good friend who was a hotel room housekeeper. She did one to three rooms an hour. Sometimes four. The stories she told about how some people would leave their rooms would make your skin crawl.

A neatly kept room for a guest who was staying another night (no sheets change, not as thorough of cleaning would take maybe 15 or 20 minutes. A pit left by a bunch of frat boys that needed to be turned over to new guests could take an hour.
posted by Bueller at 1:23 AM on July 2 [1 favorite]

@troy writes "One room takes 5 minutes to clean @ $10/hr or about 80c."

That would work out to 96 rooms per 8 hour shift however it takes a lot longer than five minutes. 10-20 minutes is a lot more realistic depending on the property (Motel 6 is going to be less than the Hyatt) with the occasional sty that consumes significant time. You can see this yourself at home just time how lng it takes to: change the sheets and pillow cases on your bed; vacuum your living room, clean your toilet and sink, wash your dining room table, empty out your kitchen and bath garbage bins, wash a few glasses and buckets, and maybe clean up a condom stuck to the rug. And other stuff that you do weekly rather than after every guest like washing windows. And that assume you can manage to hire competent hard working staff, slackers are going to add 50% to those times. Plus because even a modest property is going to have half a dozen housekeepers you have the cost of housekeeping's manager/supervisor.

Oh and there is the cost of cleaning supplies, carts, uniforms, vacuums, etc. for each of those employees.

A few thoughts:
Most hotels would be ecstatic with 65% occupancy on an annual basis. And for the vast majority of properties business is seasonal which means you have to make enough money when you have 95% occupancy to keep afloat during your off season when business drops to 35%. Very few of the costs scale with occupancy.

Hotels experience more wear and tear than long term residences. And where long term residences generally get that wear and tear taken care of when a renter moves out hotels need to keep the premises presentable.

Laundry is probably more like $1 per person + capital costs and lost square footage.

Plus the cost of the pool and gym. Franchise fees. Hotel taxes (often hidden in whole or in part). Services like ice. Utilities (gas/power/sewer/water/cable/internet/phone). Commercial properties pay more taxes than residential properties.

Hotels generally have more landscaping than residential properties and it is required to be maintained to a higher standard.

Hotels have more charge backs than residential properties.

Higher advertising costs.

Shorter amortization period. It's a lot easier to rent a 20 year old apartment than it is to rent a 20 year old hotel room.

Also larger hotels are often maintain restaurants that lose money.

Shrinkage isn't much of a problem in residential properties but it is rampant in guest accommodations.
posted by Mitheral at 1:35 AM on July 2 [3 favorites]

The way I heard it put once is that you're not paying more so you can stay there, you're paying more so you can leave. What that means is that it's not just that there are operational costs -- for some people it's worth more than the actual cost NOT to have those operational responsibilities on their shoulders. You're paying for the privilege of simply walking away when you're done. You're paying for a service.
posted by Jeff Howard at 1:50 AM on July 2 [1 favorite]

Why is a restaurant meal more expensive than the same meal you bought ingredients for at the supermarket and cooked yourself? Because it is a service, and if you wanted to save money and do it yourself, then you would never have gone there in the first place.

Even then, carrying troy's calculations out...

cleaning = $1/day = $30/month
laundry = $1/day = $30/month
+pool/gym = $1/day = $30/month
continental breakfast/shampoo/keycards/disposable - $5/day = $150/month

front desk = $15/day = $450/month

+cable TV, internet service = $1/day = $30/month
+heat/AC, hot water, = $2/day = $60/month

That's easily $1000 once other incidentals have been added together. Something else to consider is the amount of staff that is actually employed at this hotel. Just because you only interact with the front desk and maybe the cleaners doesn't mean they are the only ones there. You also have concierge, security, valet, managers, maintenence, cooks, etc, etc. This alone could easily run another $2000/month. Additionally, hotels tend to be built in central, highly desirable locations, making their real estate value more than that in a typical residential area, even if it is close by.
posted by sophist at 1:50 AM on July 2

"You're paying for the privilege of simply walking away when you're done. You're paying for a service."

This.
posted by orthogonality at 2:03 AM on July 2

For one thing, it's my understanding a lot of the rent in SF is controlled by a rent control board. So that might account for part of the difference right there.

But in addition, let's imagine you decided to buy a building full of apartment-like rooms, that you wanted to turn into a hotel.

1) It probably needs to be updated with the latest zoning ordinances, since it's a business. If it's more than one story, it's gonna need to be wheelchair accessible, hence elevators. And a whole other slew of architectural requirements that your building may or may not have had when it was built. You'll need to have it inspected, and most likely pay for this inspection, as required by law, every year or two years as the city dictates (and I have heard the Fire zoning laws in SF change quite often, and you'll have to stay on top of them, or else you get a big fat fine.). There's lighting requirements, earthquake requirements, structural requirements....this can get very pricey, very soon. Whether modifying your building or running your business, you'll also need to purchase the requisite city permits, which can run into the tens of thousands of dollars, for a mid-sized business. And if you want a liquor license, yikes!

2) You'll need to pay all your employees, not only their wage, but additional taxes as required by law. Your employees pay part of it, you pay the other part. In California, this includes unemployment insurance, and state disability insurance. In San Francisco, add in Paid Sick Leave. If you pay your employees $10 an hour, your actual costs for that employee will at least be $20 an hour (not including any additional benefits). There's also a health care security ordinance that adds another $1-2 per hour for every employee in businesses with 20 or more employees.

3) The California corporate tax rate is close to 9%. In addition to the Federal tax rate that varies between 15 and almost 40 percent. There's also property taxes you need to pay for the building you own. (Though you can subtract that from your total taxable income...I think, but I'm not sure.)

This isn't everything, just some of the stuff you are expected to pay on top of just normal wages and the basic costs of doing business (electricity, water, advertising, supplies, etc.) that you might not see when you're booking your hotel room for the night. For the business to make it worthwhile for them to stay in business, they'll pass the overhead onto the customer, as well as whatever else the customer is willing to pay.

Since SF is such an awesome city, the customer is usually willing to pay a nice amount (at least in good economic times.)

Oh yeah, one more thing!!! SF adds a hotel tax that you also have to pay: 15.6%, I believe.
posted by thisperon at 2:49 AM on July 2

Prices are based on what the market will bear - businesses charge as much as people are willing to pay, not as little as they can afford to recoup.
posted by moxiedoll at 2:28 AM on July 2

moxiedoll has it -- they charge what someone will pay, not what it costs them -- how much does it cost a plumber to stick a wrench in his back pocket, walk in and fix your sink? Takes five minutes. Cost to the plumber -- he had to take his finger out of his nose so he could pick up the wrench to shove it in his pocket. Cost you to -- at least a hundred bucks. He's got skills you don't, and the right tools for the job. Hotels have what we want, will charge every dime that they can scrape from us. I surely would, if I were in their shoes. It's business is all.
posted by dancestoblue at 2:58 AM on July 2

Consider the price of hostels in comparison.
posted by bad grammar at 3:10 AM on July 2

moxiedoll wrote, Prices are based on what the market will bear - businesses charge as much as people are willing to pay, not as little as they can afford to recoup.

Individual businesses do this, but competition drives prices toward the marginal cost. In competitive markets, prices end up reflecting costs far more than what consumers would be willing to pay if they had to. (The classic example: why do diamonds cost more than water?)

So we do have to explain this in terms of costs, or else explain why the market for hotels is subject to less competitive pressure than the market for apartments.
posted by abcde at 3:15 AM on July 2 [5 favorites]

Further to moxiedoll's argument above, Hotel Babylon, an "insider reveals all" account which is supposed to be pretty accurate, sets out in appalling detail just how much profit real "top-class" establishments can make by exploiting a. their work force and b. their clients' susceptibility to "prestige".
posted by runincircles at 3:41 AM on July 2 [1 favorite]

Buying in small increments generally does cost more per unit than buying in bulk. Some of the same economic principles apply.
posted by orange swan at 3:44 AM on July 2

"You're paying for the privilege of simply walking away when you're done. You're paying for a service."

Now it sounds like we're talking about prostitution. Which also applies, I guess.

Having waited for my room to be cleaned more than once, it's definitely more like 20 minutes each, so that was a bad guess.

But overall, as many have sniped above, it's about all the differences in the risk/reward spectrum. Given the same building, use as a hotel has a higher earnings ceiling than an apartment (all rooms full, high rates), but also a lower floor and a higher risk (more subject to economic downturns, weather, seasonal fluctuations, competition) and higher costs (taxes, upkeep, staff, advertising).

That same building as an apartment requires much much less staff (from 30 or so down to what, one guy with some keys?), pays lower taxes, and doesn't need to be kept in such pristine (expensive) condition in order to rent.

You'll likely take a so-so looking apartment building, but pass on a hotel with a dirty lobby, right? And when's the last time you saw advertisements for your apartment building?
posted by rokusan at 3:58 AM on July 2

On rereading, restaurant/home-cooking (per sophist) is a great point.
posted by rokusan at 3:59 AM on July 2

...explain why the market for hotels is subject to less competitive pressure than the market for apartments.

1) The supply of hotel rooms is limited by the government in most markets. For various reasons, most cities would prefer to have relatively few nice hotels than a lot of cheap ones. Since visitors don't vote, there's few constituencies pushing for cheaper hotels.

2) Most room-nights in decent urban hotels are purchased by business travelers, who are not spending their own money and are thus far less price sensitive than long-term renters. A business traveler will spend a lot of somebody else's money to avoid even a small risk of a bad hotel experience.
posted by backupjesus at 4:09 AM on July 2 [1 favorite]

Mitheral made a lot of good points, but I also want to up the rate for the staff. Many of the top hotels in SF are unionized. When I worked at a union Hyatt in DC 4 years ago, the base rate for housekeeping wsas $13.00/hr, with extras for doing cots, extra people, hazard pay (puke) etc. And the benefits paid were higher too. I also don't think they were expected to do more than 10 rooms a day.
posted by saffry at 4:35 AM on July 2

From this fact sheet for visitors to San Francisco:

Number of visitors per year: 16 million
Average daily room rate: $181
Hotel occupancy: 79%
Average length of stay: 4.6 nights
Number of hotel rooms: 33,372

- So each night there are about 44,000 people looking for a bed in one of those hotel rooms. It is difficult to determine the extent to which the scarcity of beds may be driving up prices but, with the number of hotels in reasonable proximity to places people want to be limited, its a safe assumption to say scarcity keeps rates high.

Consider also where the money is coming from: for those on a vacation they have a limited number of days to take off each year set against a reasonably high family income (about $90,000 each year). Those being paid by their employer to attend conferences will tend to be relatively insensitive to costs up to a designated limit. By contrast those looking for long-term rentals will tend to be paying with their own money and the expenditure will be constant rather than temporary.
posted by rongorongo at 4:47 AM on July 2

Seconding backupjesus's point about business travellers. If I'm travelling on business and my corporate travel policy lets me spend up to $200/night on the hotel, I'll select a hotel at or below that price based on convenience, comfort, and amenities, but it makes little difference to me if it's $199/night or $89/night.
posted by DevilsAdvocate at 5:04 AM on July 2

So each night there are about 44,000 people looking for a bed in one of those hotel rooms.

Don't forget, a LOT of those people will be couples who will share a room, and who might even have kids who also share the room. It's not like there are close to $10,000 visitors who are forced to sleep in their cars or wander the streets because they lost out on the race to get a hotel room.
posted by orange swan at 5:55 AM on July 2

and the front desk needs to be staffed

Desk staff of 2 x 24 hrs @ $30hr / 100 rooms = $15/room

That would be true if the only cost of employing someone were wages, but that's not true. The hotel needs to pay for their insurance, benefits, perks, etc. (Also true of other staff, of course.) The hotel should also be paying for legal counsel to make sure they're treating their employees properly (and, BTW, complying with all sorts of laws and regulations -- zoning, health codes, etc.). And it needs to pay other employees to do the work of hiring the staff in the first place.
posted by Jaltcoh at 6:41 AM on July 2

how much does it cost a plumber to stick a wrench in his back pocket, walk in and fix your sink? Takes five minutes.

Including or excluding payments on his truck, liability insurance, professional society or union dues, rent on his shop, his receptionist's salary, social security taxes, health insurance, business license, accountant, attorney, parts, tools, bonding and the opportunity costs involved with cancelled or no show appointments? Well, excluding all those things, yeah, it should be practically free.
posted by electroboy at 6:41 AM on July 2 [4 favorites]

they can't guarantee a sell-out every night, yet they still have fixed costs they need to pay, so they're priced accordingly

This probably isn't the case. Occupancy is around 80% during normal economies, and is predictable.

Huh? You mean "This probably IS the case."
posted by Jaltcoh at 6:42 AM on July 2

...explain why the market for hotels is subject to less competitive pressure than the market for apartments.

There's also the possibility that hotels act as Veblen goods for at least some people - higher prices make them think that it's a better place to stay.
posted by yarrow at 6:56 AM on July 2

On top of this, I think rent is probably kept low in a lot of markets by part-time landlords and/or slumlords using depreciation and lack of maintenance to finance things. In my college town, our mortgage+taxes are almost exactly what we'd pay to rent a house.

I've never lived somewhere with a full-time rental agency managing the property, just individuals with real jobs on the side. Most small landlords aren't making much money per month on their properties...mostly they're using the rent to cover the mortgage with the hope that they'll be able to sell the property for a profit some day.
posted by paanta at 7:07 AM on July 2

With all the business hotels springing up like mushrooms I've seen, clearly the profit margins are pretty good with hotel construction. If they can get the occupancy they are indeed a money machine compared to other commercial uses of the space.

A few notes from someone who's worked for a large hotel company for the last 7 years:

• Most new build hotels take at least six to twelve months to break even from cost of construction, with good occupancy.
• RevPAR (Revenue per available room) is in the toilet, across all segments. The cautionary recommendation not to drop room prices too much given during the 9/11 travel downturn wasn't heeded this time, and consequently revenue has dropped significantly for all companies and brands. It will likely take 2-5 years after the economy recovers to get back to previous RevPAR levels.
• There is currently an oversaturation in the most major markets and the room pipeline is still playing out from planning done before the downturn. Many new builds are already at the stage that it would cost more to quit the project than it would to complete the build and take the chance on opening the hotel. So, most markets are just going to get more rooms that can't be filled.
• Several larger hotel companies have followed Starwood's lead and put a lot of their planning energy into the boutique hotel segment--which was great during a growing economy, but now, not so great.

So, no, hotels are not money machines, even in the best of times. Right now, for many owners and management companies, they're money pits.
posted by elfgirl at 7:33 AM on July 2 [3 favorites]

The other thing that's worth keeping in mind is that a lot of the rooms in the hotel aren't renting for advertised rates (and virtually none of them are renting for the overinflated and theoretical rack rates).

When I travel on business, I don't pay nearly the travelocity rate for the hotels I stay in, because my employer has negotiated deals for better rates with our frequently used hotels.

The other side of that equation is that for people traveling for smaller companies who don't have the negotiating power, the individuals aren't paying for the rooms anyway. They're expensing them, so there's not as much downward pressure on advertised prices for business class hotels, since often the people making the arrangements don't actually give a shit what it's costing them.
posted by jacquilynne at 7:47 AM on July 2

Not to mention:

Commercial real estate taxes vs residential taxes. Your landlord may pay 20% of what the hotel pays in taxes, especially if its on a fine piece of real estate downtown.

All manner of insurance. Your landlord probably has some basic disaster insurance, while the hotel needs to pretty much insure everything to the 9's.

Personnel: We are forgetting the security staff, maintenance staff, valets, cooks, waiters, etc. Its not just doormen and maids. Also include all their benefits: insurance, retirement, etc.

Expectations of profit. A landlord may need to own two or three buildings to make enough money to live middle-class, while most people employed by the hotel need to make almost as much as your landlord makes. So lets say you landlord owns two buildings, each giving a $1800 profit monthly after expenses (which is typical in an urban 3-flat+garden) then he's making the equivalent of someone making 50k a year at a regular job. Hell, you need at least two hotel managers who will make around that much, not to mention the rest of the staff.

Marketing: Your landlord puts out an ad on craigslist every so often. Hotels need to market and advertise their service.


The two situations really arent comparable.
posted by damn dirty ape at 8:11 AM on July 2

Taxes on hotel rooms are really huge in many areas because it's a "painless" tax, not paid by local voters.
posted by Chocolate Pickle at 8:48 AM on July 2

Aha! In San Francisco it's 14%.
posted by Chocolate Pickle at 10:26 AM on July 2

Most landlords in San Francisco aren't making much profit, if any; many can't break even. They hope to make gains when they (or their heirs) sell the building, and the rent you pay goes for upkeep, taxes, insurance, etc. They need tenants for cash flow, and to keep the building alive between now and resale. (Vacant houses and apartments deteriorate dramatically.) Hotel owners want profits now.

Both types of owners normally charge the amount that benefits them most, and that's not necessarily the highest dollar amount. I have a small rental unit; I keep the rent lowish because I have an ideal tenant and I don't want him to leave. My uncle has a condo that he rents out on a short-term basis with all its furniture, linens, kitchenware, etc; he charges what someone would pay in a moderately-priced hotel with kitchenette because that's his competition.
posted by wryly at 11:03 AM on July 2

Having worked for a hotel, I can speak to this.

Operating costs like labor, housekeeping, utilities, supplies, etc. are a big deal, but not quite as big of a deal as has been suggested above. The hotel I worked at could support the entire staff, pay its utilities, and stock its closets having only sold 2-10% of its rooms, depending on the time of year. The two main costs here can be attributed to:

1) Taxes. Hotels pay commercial tax rates, which as has been noted are significantly higher than comparable residential rates, but municipalities also charge a per-night tax on top of that. This tends to be pretty big, as business travelers generally don't care (hey, it's not their money), and tourists don't know from expensive.

2) Making a shitload of money. The hotel I worked at, which did okay for itself but was far from luxurious, had a margin around 20%. Full-service hotels are even higher than that.

But Mitheral is definitely right about fluctuation in rates. The hotel I worked at charged north of $350/night between June and August, but was down to $40 in January and early February. It lost money for two months a year, broke even for about six, and made an ungodly amount of money during the summer. Prices now are about as high as they're going to get, so this isn't necessarily the best time to make comparisons.
posted by valkyryn at 12:10 PM on July 2

yarrow: Yeah, I thought of adding "or something more obscure" (like Veblen goods) but I wanted to leave it nice and clean.

I have no doubt that at the least in some fancier hotels higher price adds a significant value, though, so it's worth noting--though it's probably rare that it adds enough that the demand curve actually slopes upward.
posted by abcde at 2:49 PM on July 2

I talked to my sister, she's managed several hotels, about the man power dedicated to housekeeping. She says they'd typically schedule 1 man hour (specifically 2 people 30 minutes each) per double occupancy (IE: two beds) room for housekeeping. This budget also includes cleaning common areas but doesn't include when some psycho trashes a room or smears feces over the walls. This is for an in season $150-$250 dollars a night resort hotel room. Good staff can shave maybe 20% off that time.
posted by Mitheral at 4:51 PM on July 2