An Analysis of the Utilization of Under-Utilized Hotel Rooms
Inventory as Executive Serviced Office Space
Jeffrey R. Victor, CHA, CHE, CHS, CMP
Fairleigh Dickinson University

Author Note
Correspondence concerning this paper should be addressed to:
Jeffrey R. Victor, CHA, CHE, CHS, CMP
Fairleigh Dickinson University, Madison, NJ 07940.
Contact: jvictor@jeffreyvictor.com

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Abstract
When hotels are built, the number of rooms built into inventory becomes a static item. Due to the physical nature of construction, the number of rooms become an inflexible and perishable commodity. In looking at the growing nature of the Executive or Serviced Office industry and the similarities between their product and a hotel’s offerings, it has been theorized that there are revenue opportunities in deploying a serviced office product in pre-existing hotels. Through an analysis of industry trends, demand for offices, product needs and revenue opportunity, a financial model has been developed. After reading this paper, the reader will be able to understand what a serviced executive office is, the similarities between that product and a hotel product and understand how to analyze revenue to determine the financial impact of repurposing a number of rooms as executive offices. They will then be able to utilize the model contained herein to determine if repurposing rooms in such a manner would work in their individual situation.

Analysis of Repurposing Underutilized Hotel Rooms Inventory as Executive Office Space

Table of Contents

Figures
Figure 1...............................................................................................................5
Figure 2...............................................................................................................6
Figure 3...............................................................................................................10
Figure 4...............................................................................................................24
Appendix .........................................................................................................................32
Abstract ............................................................................................................................2
Introduction ......................................................................................................................4
Research Problem and Conceptual Framework .................................................4
Methodologies ....................................................................................................8
Methods of Analysis ...........................................................................................9
Anticipated Significance of Research Findings .................................................9
Literature Review.............................................................................................................10
Analysis & Findings ........................................................................................................16
Conclusion .......................................................................................................................28
References ........................................................................................................................29
Appendix ..........................................................................................................................32

2

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INTRODUCTION
Research Problem/Questions and Conceptual Framework.
As stated above, the author will attempt to answer the following central question:


What is the financial benefit and possible revenue impact of converting underutilized rooms inventory into serviced, executive office space?

In order to answer this question, we will explore the following sub-questions that will assist the author in determining if this is a beneficial business strategy or an exercise in futility.


What are executive offices and what services must be included in offices to create a value proposition for the consumer?



How will underutilized inventory be determined and what are the fixed and ongoing costs involved with changing the inventory from rooms to offices?



What are the revenue impacts of removing rooms from inventory for offices, versus standard rooms inventory and what types of clients will utilize the inventory?



What is a virtual office and how can that help increase revenues?



Can repurposing this inventory be a sustainable model to increase hotel revenues or will have a negative impact?

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Research Question

What is the financial benefit and possible revenue impact of converting underutilized rooms inventory into serviced, executive office space? Can this be a sustainable model to increase hotel revenues or will it be a neutral or negative impact? Bodies of Literature

Archival Review

Hospitality Industry
Real Estate
Marketing
Technology

Journals
Peer Reviews
Trade Journals
STR Reporting
Financial Documents

Financial
Model

Results/Conclusions

Research Questions







What are executive offices and what services must be included in offices to create a value proposition for the consumer?
How will underutilized inventory be determined and what are the fixed and ongoing costs involved with changing the inventory from rooms to offices?
What are the revenue impacts of removing rooms from inventory for offices, versus standard rooms inventory and what types of clients will utilize the inventory?
What is a virtual office and how can that help increase revenues?
Can repurposing this inventory be a sustainable model to increase hotel revenues or will have a negative impact?

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Research industry trends for both executive offices and hotel rooms to determine growth potential and market penetration.

Define the products involved as well as the necessary elements and conversion from one product to another. What is the financial benefit and possible revenue impact of converting underutilized rooms inventory into serviced, executive office space? Can this be a sustainable model to increase hotel revenues or will it be a positive, neutral or negative impact?

Review of hospitality industry statistics and analyze financial data to devise a model to determine profitability and sustainability.

Conclusion

The conceptual framework and the research design are created to assist the reader in understanding the problem that the author wishes to address, the products in question, the bodies of literature that will be examined, and the financial model developed in order to determine a proof-of-concept. The research question that will be developed is the central focus of this document and will be answered through the research. To understand the launch of a new product in this realm, one

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should be educated on the product itself, and understand the history, how the product can be integrated into existing inventory and where the similarities and differences are. The author anticipates that they will discover the significant similarities between serviced office and standard hotel inventory as well as a low barrier to conversion
The second item is to look at trends in both industries to determine if there would be a future market that exceeds the current market as it stands. Is the executive office market growing?
Is that growth outpacing hotel growth? Is there congruence amongst the growth of each industry to justify this undertaking? The author believes that with the exploding growth of this industry, it certainly would pace or outpace the hotel industry.
The third item for review would be looking at industry statistics to develop a financial model that allows for analysis of the business concept. This would be developed using market information to determine if the financial investment and financial impact would be worth the undertaking. With technology, current hotel offerings across varied brand standards, and revenue models, it could be argued that this could be a sustainable model for increasing overall profitability, while sacrificing little revenue opportunity, if amortized across the year.
Finally, the model will be analyzed using actual data from a hotel to determine if the model could work in a practical manner and compare it to the costs of carrying an unoccupied room for most of the year.

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Methodologies
This combination of industries is still very much in its infancy and has rarely been put into practice, so the author will review literature from both the hotel and real estate sectors.
Publications to be reviewed are the Journal of Real Estate Portfolio Management, the Journal of
Property Investment and Finance and the Journal of Corporate Real Estate. The author will also review hotel industry trends from the American Hotel and Lodging Association and Smith Travel
Research.
It is through this research that the author hopes to analyze the growth of the serviced or executive office and from there, apply those statistics to a hotel application. The author will also look at the industry trends to correlate hotel trends to see how similar they may be. Through the use of provided proprietary data from both the hotel industry and the executive office industry, we can take a practical look at the model to determine if such an undertaking is worth the effort.
The author has also obtained access to confidential sources within the executive office industry to provide insight into expanding into this space. The author will ask the following questions of the sources:


What are economic trends you are seeing within the industry?



What are typical financial costs, revenues and occupancies of offices and other space within your centers?



What is your typical staffing level?



What types of amenities and infrastructure do you provide?



Do you feel that hotels and conference centers are areas of expansion that can be explored?



Is your company looking towards this as a venue to support their own brand in the future?

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

What are your rates for offices, and how do they correspond to a per-square-foot price?



What are the rates for your other services?



What are your startup costs for an office? What items do you purchase, lease, rent or share with landlords?
The author also will attempt to explore the history of executive offices, as well as looking

into any properties that have put such a plan into action.
Methods of Analysis
By utilizing industry data, as well as property specific data, a financial model will be developed to analyze the financial impact upon the hotel and determine if there is a positive or negative impact upon revenues.
Anticipated Significance of Research Findings:
In conclusion, the author anticipates that the study will prove that executive offices are a viable alternative to unoccupied hotel rooms space. From those findings, the author will be able to determine exactly how to implement a financial model that will be able to give hotel owners a general idea of how executive offices will perform in relation to high occupancy days and the corresponding average daily rate for those days, how much inventory could be allocated and if the costs of an unoccupied hotel room are higher in relation to hotel or office usage.

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Literature Review
One thing is certain in light of the technological and economic changes over the last decade, people are working differently than ever before. People are beginning to think about how they work and companies are beginning to look at the total occupancy cost of an employee’s workspace.
(Gibson, 2003)

TOTAL OCCUPANCY COSTS BY CATEGORY
Fit-Out 16%
15%

Operation - 16%
15%

Support - 18%
17%

Occupation - 48%
45%

Management - 8%
8%

While rent (occupation) is still the highest cost, half of the additional costs are items that can be solved with executive office space. Today, startups and corporations alike are allowing employees to work in a manner that suits them, versus adhering to a standard of perceived physical presence. (Interview Subject)
In light of this, more and more companies are turning to executive office space. With the flexibility of term, ease of access and low barrier to entry, it lines up with trends across the business marketplace. Analysis of Repurposing Underutilized Hotel Rooms Inventory as Executive Office Space

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The space per worker as a trend is declining as well. Gone are the days of the junior executive or even middle manager with their own large office and admin area. As corporations re-negotiate leases, it is anticipated that space will decrease by as much as 30% per employee.
However, it has also hypothesized that downsizing efforts have not been as effective as planned, so that provides an opportunity for companies who are downsizing space, but still have needs larger than anticipated. Companies have tended to, contrary to popular belief, not to over-purchase space, but have negotiated for increases. This is another market opportunity, because, as the author has discovered through research, it can take 12-18 months to negotiate for space, fit out and occupy. In the meantime, that presents huge opportunities to grow. (Miller, 2014)
This has helped fuel industry-wider growth. From the 1990’s on, the executive suite market grew at a rapid pace, responding to the changing needs of companies and how they organize their workforce. Corporations have concentrated on core activity, outsourcing, more diverse patterns of employment and shorter employee life cycles (higher turnover) and has such began to change the way that companies expend on office costs. (Byrne, et.al, 2002)
Nokia has outsourced twenty percent of their office space needs to serviced providers.
Again, as companies are pushed more towards focusing on core operations and outsourcing areas they are not experts at, they are looking towards the executive office model. (Felstead, 2002)
Companies have begun to realize that long term commitments and investment are not appropriate in markets that have uncertainty or where cyclical expansion is necessary. Capital costs could be preserved to focus on core businesses if needs were outsourced and they had the flexibility of easy entry, fast occupation and, even more importantly, easy exit. Additionally, in

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other studies, corporate real estate as a fixed asset is not something that shareholders desire. There is a needed market for easy entry in and exit out. (Nourse, 1994; Rodriguez & Sims, 1996)
Furthermore, location wise, there was a belief that executive suites would only operate best in the areas of highest concentration of certain sectors that correspond to the executive suite business model. Whereas these sectors had the most volatile growth cycles and needed the most flexibility, it was also discovered that the demand for suites in growing regional centers can outpace the large established metro areas. (Byrne, et.al, 2002)
This realization is a perfect argument for this business model. Hotels that would most likely see the largest benefits would not be in the downtowns of major cities. They would be located in second or third tier cities, or in the outlying metro areas of major populaces. Basically, the areas where corporations have retreated to avoid increased costs are the areas where this business model would be most likely to financially succeed. (Confidential Subject, personal communication, March 2, 2015)
One hotel that has already latched onto this concept is described here. The Harbor Court
Hotel in Baltimore took an unused storage space in their hotel and invested in a “3,500-squarefoot temporary office, complete with a 25-person conference room, three private offices (including one with a view of the harbor), a secretary's station, a small kitchen, private restrooms and a large central "bullpen" that can be furnished or left empty according to each company's needs.” With their proximity to a busy federal court, they have had a steady stream of attorneys who have taken rooms as office space. (Asirvatham, 1997)
The hotel, instead of incurring the expense of relocating furniture constantly, they decided to invest in a complete build out. Spending $100,000 on decorating and furnishing the space, it

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keeps with the hotel’s overall design and provides upgraded space. They are looking to rent the space at $1000-$1500 per day. (Asirvatham, 1997)
Morgans Hotel Group also partnered with a famous modeling agency at one of its more famous properties. Wilhelmina Models established offices at Mondrian in South Beach in specific partnership with the brand. (BusinessWire, 2009) Morgans showed that attracting businesses that fit into your brand can be a boon for the core business as well as provide extra revenues.
Marriott is also launching a similar, but slightly divergent concept as well. The chain has partnered with the Steelcase office furniture company to create Workspring at Marriott, the industry's first purpose-built suite of integrated spaces and common areas designed for small meetings. “Workspring at the Redmond Washington hotel consists of five studios of varying sizes, to accommodate meetings from 3 to 75 attendees. The modern venue also features several common areas, many with natural light and outside access, making the facility unique to other hotel meeting spaces.” They are also creating an integrated price structure that includes meeting space, technology, wireless internet, office supplies and food & beverage options. (Marriott, 2015)
Economics has been a huge factor in the development of serviced office space as well.
According to Colliers International, the global financial crisis has forced layoffs across the economy. As those economic victims begin to think about self-employment as a means of job security, they are incorporating newer and smaller businesses. The optimal way to launch a new business is through a serviced office and the shorter flexible terms and minimal capital investment is attractive. (Stewart, 2011)
Special events have also had economic benefit towards executive suites. In the United
Arab Emirates, there has been increased demand since the announcement of the 2020 World’s Fair

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Expo in Dubai. (McClatchy –Tribune, 2014) The same can be said for other markets that hotels can serve, such as film and television production and disaster recovery. During the aftermath of
Hurricane Sandy, executive office space was selling for $2000, per person, per month as companies need to back up and running quickly. (Confidential Subject, personal communication,
March 2, 2015)
The Executive Suite business model can be traced back to many providers innovating at the same time, however, it is generally accepted that OmniOffices, a privately held firm began marketing executive suites in 1962 in New York City. In 1967, Executive Assistance added offices to its telephone answering service in San Francisco. EA then becomes the HQ Companies in 1977 and begins to franchise and expand. In Europe in the 1989, Regus begins and in 1999. Omni,
Vantas and HQ merge. In 2004, Regus and HQ merge, and becomes the largest provider in the space, now amounting to 3000 locations, and doing $2.4 billion dollars in revenue in 2014 (Regus
Annual Report, 2014)
On the hotel side, occupancy rates have continue to climb steadily since 2009. This is likely from the recovery from the great recession from a low of 54.6% to a high of 65.1% in 2014.
However occupancy rates are forecasted to fall in 2015 to 64.2%. This shows a consistent pattern with an occupancy rate of 59.6% in 2001. This indicates that even though there has been growth of over 800,000 rooms, the supply has kept up with demand and there does not seem to be significant growth towards the future. (AHLA, 2014)
Rate, however, has continued steady growth. Consumer Price Index inflation from 2003 until 2013 was approximately 18%, but rates have increased 33% in the same time period. While

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this shows healthy financial growth, it also shows that there is still an excess of inventory in rooms that could be deployed in a different manner. (CPI Data, 2014)
All of this data shows that there is a growing and expanding market for Executive Office
Space and that hotels do have an excess of inventory, ergo, the basics behind the business model is one of sound business judgment.

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Analysis & Findings
Executive, or serviced, offices is office space that can be used on a short or long term basis that generally offers infrastructure, office management services and support, facilities support, furniture, utilities and other items that make it an all-in-one solution for companies looking to either start-up, downsize or reduce costs. It is an ideal solution that facilitates small companies to focus on building business instead of managing facilities or infrastructure and also allows large companies to enter markets rapidly, without the long term costs or implications of traditional space. Executive office space allows companies to reduce the overall capital costs of fit-out of space, purchase of furniture, IT and telecommunications infrastructure and professional fees. On an operating basis, it is an inclusive financial model that includes rent, building variable operating expenses, taxes, maintenance, repairs, cleaning, utilities, reception staff and insurance in one package. As a result of combining facilities like meeting space, restrooms, lobby areas,

maintenance and utility areas and other public space, the per person square footage requirements also drop.
In looking at the essentials of a serviced office, you do not need to look much further than a hotel’s existing offerings. Besides furniture, which we will revisit in a moment, the other services are built into the hotel’s existing infrastructure. Telecom would be served by the current hotel communications infrastructure. This could take place in one of two ways. Either with existing
PBX systems, or through a VOIP PBX solution separate from the hotel’s PBX system. Many hotels have been upgrading telecoms in the past years, and programming telephones for office use versus room use is a simple task that can be trained to a front office or engineering staff. If the

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current system isn’t serviceable for such a use, a separate VOIP service is scalable based on offices and usage, and could be an attractive solution that would allow for minimal cost investment. Either way, in most cases, additional direct-dial telephone numbers will be necessitated.
Internet access is another area of major usage. Most hotels now have large enough internet bandwidth infrastructure to support most average office usage. However, with the advent of decreased costs for increased bandwidth and the rise of net neutrality, creating a dedicated bandwidth solution for office clients would be a service that the hotel is most likely paying for anyway as a fixed cost. Allocating a chunk of existing bandwidth for office clients, say 0.5 MPBS per client, would be easily done, and accommodate most needs, and would most likely incur little if no additional costs.
Copy services is an area of revenue opportunity for the hotel as well. While the cost of printing has dropped significantly in the last few years and the cost to print is lower than ever (all in one laser machines cost less than $500), clients may need something higher quality or that has higher speed capabilities. In this case, the hotel’s resources are there to help. Most hotels lease a machine for use in its executive and front offices and through the front desk associates, a client can have services completed. Again, this would not be a large increased cost, and in some cases, very little cost increase will occur.
Flexible meeting space is a requirement of today’s serviced offices. Full and select service hotels can fulfill this requirement well. With meeting space already in place, the hotel must be prepared to respond to meeting requests on short notice. Through the use of technology and personal communication, the hotel should be prepared to handle the requirements of meetings with no issue. With in-house foodservice, there are opportunities for catering as well.

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Reception services are also a major draw of executive offices. In this case, Front Desk personnel can also serve in this capacity. They have the ability to answer calls that come into the office switchboard and transfer, take messages and deal with visitors. Especially in today’s automated world, with more and more functions moving to a computerized system, there should be little increase in effort to accommodate the needs of office clients. As fewer and fewer clients are coming to the front desk to check out, it stands to reason that the busiest time for the office clients is a quieter time for hotel clients and vice-versa. This provides an excellent use of preexisting labor and justifies costs. Additionally, this staff may be tasked with administrative duties.
These could be handled by the hotel’s administrative staff from the executive offices or sales, or on non-time sensitive issues, by even night audit staff who can have periods of underutilized time.
Another offering could be video-conference services. This, again with the advent of today’s technology, would require an investment in equipment ($3000-5000) and connectivity
(minimal), but could provide a revenue stream from not only the office clients, but to regular meeting room clientele as well.
Another element that is built into the hotel is utilities and facilities management. In all cases, these areas would be part of the hotel’s existing infrastructure and require no additional manpower or investment in the building.
Clients would also use the hotel’s address as their mailing address, and the mail and receiving system would need to be tailored to them. Again, this is not an additional cost unto itself, but more of a training issue with the various departments.
The final elements to provide basic executive office services would be the rooms themselves, as well as the furniture. The rooms would require very little change. Existing key

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and lock systems would be utilized and the traditional furniture and equipment removed. The room could then be outfitted with furniture. Furniture could be either purchased or rented, and there are advantages to both. Purchase allows for depreciation of the expenses over time, while rental allows for flexibility and paying only for what you need. Cost from CORT would be about
$100 per month, per workstation, for mid-range furniture.

The rooms could be decorated

differently or they could be kept intact with the same design scheme so they could be converted back to inventory. This, again, keeps investment down.
The unique part of utilizing space in this manner is that the average hotel room bedroom size, not counting the bathroom, is around 250 square feet. This means that it could be a nicely sized executive office, or could accommodate multiple occupants in the same office. This is a great way to develop pricing advantageous to larger groups. Additionally, with the private bath, it is a great way to attract clients who are looking for different experience than a traditional office.
The biggest issue would be allocating inventory. Selecting what rooms to utilize would be something that requires some thought. You would have to select inventory that is convenient to the lobby or elevators, and close enough for the front desk to be able to manage to go back and forth, if necessary. You also would need to select inventory that would have the minimum impact on overnight guests, while allowing for the occupants of the office space to come and go freely.
The inventory should be clustered together to avoid the impact of other daily hotel operations. By selecting one area of a floor, or a wing, the disruptions from the hotel’s regular operations, such as cleaning, maintenance and guest traffic should be minimized on office clients and disruption from office clients on hotel clients as well. The hotel’s physical plant will dictate this, but it is a consideration when selling.

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One area that is client-facing and necessary, but not essential to the operation from a customer perspective, is sales. There needs to be someone available to sell the facility to clients.
These tasks can be handled by in-house sales staff already in place, so it shouldn’t be a huge burden on these employees. Indeed, many other staff members can be trained to provide the basics of touring the space, including front office staff, reservations and revenue staff and executive and sales coordinators. In the environments where we are proposing this model, these staff members would already be in place.
There is also opportunity to have offices booked online. Through small reservations system providers such as InnRoad, Little Hotelier or Sirvoy, you could easily establish an online booking engine that performs exactly the same way as the hotel’s booking engine, but at a lower cost and with a solution that could be implemented anywhere, including on a tablet or smartphone for ease of administration.
In terms of what types of clients utilize executive offices, according to a study by the Office
Business Center Association International (now the Global Workplace Association), the core markets for executive offices are technology, law, financial services, telecommunications and business services. However, according to this study, 23% of businesses fall into other categories, which would allow for access to a wide variety of prospective marketplaces. Additionally, 60% of clients tend to be entrepreneurs or small businesses, while 40% tend to be larger corporations.
Additionally, 41% of the clients had previously occupied traditional office space and 29% of clients utilized a home based office. That means that there is opportunity across the board when it comes to where to attract clients from.

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As the old saying goes, it is location, location, location, and this is no exception. A hotel considering this marketplace must also consider the commercial real estate environment around it.
Is there enough of a marketplace to attract the same type of clients who occupy traditional office space. A little investigating with a CoStar report or through site visits will help determine if an area is right for this solution.
The aforementioned Workspring product is an example of this. Workspring only has two locations, and only one is located in a hotel. Also, being located in Redmond, WA, the home of
Microsoft, has a built in technology centric clientele that would utilize team meeting space and collaboration space more than the average office client.
The employment market can and has effected executive office space as well. As discussed prior, companies are outsourcing more and more non-core functions.

This has created

opportunities for small businesses to start, grow and expand, and this is a huge opportunity for emerging executive suites. Attorneys, technology professionals, analytics and data, meeting planners, web designers, graphics and print layout designers are all prime candidates who have been experiencing outsourcing as a whole and moving towards a freelance model.
So, how do we determine a model that works? There are a number of items that we need to take into account to determine if this undertaking is a financial advantage. The first is the hotel’s revenue situation. If a hotel is nearly fully occupied year round or for a large part of the year, than this model may not work.
We’d begin with occupancy. The hotel I am going to use as a baseline is a 150 room hotel, with 12,000 square feet of function space. It is located in the Northeast on the I-95 corridor and holds a franchise with a major chain. This hotel is running 63.5% occupancy annually, which is

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slightly below the national average of 65.1%. It would be simple to say that 36.5% of the inventory is underutilized. However, when we drill down on a monthly basis, during May, which is the highest occupancy month, the hotel would average a 73% occupancy. However, we need to drill down further to determine what the actual opportunity cost would be.
The biggest factor we need to look at are how many days, per year, is the hotel above a certain target. That target is determined by the amount of offices we think we would like to create.
So in this case, if we were to look at 10% of inventory to be devoted to this venture, which would be 15 rooms, we would need to ask how many days was the hotel above 90% and what the average daily rate was on those days, versus the overall hotel average. Since a hotel in a sold-out situation tends to have a higher rate than the average night, that would be a necessary factor.
In this case, the hotel is at 90% occupancy or above 30 days out of the year, or at about a little over 8% of the time. The average daily rate for those times is an average of $165.00 for those
30 days. So, in calculating lost revenue opportunity, you’d be looking at a total of $74,250. Take this, and divide this by 15 offices, and you’d need an average of $412.50 per month, per office, providing they were fully occupied, to make up the revenue side.
It seems like simple math, but it’s not. Now you need to look at the cost side. Since this is no longer hotel inventory, there is no 12% royalty and marketing fee, which lowers the break even revenue by 12% to $363.00. You also would look at decreased variable costs from housekeeping, maintenance, etc. However, those become impossible to truly quantify.
Where the numbers get really interesting is the cost per unoccupied room. If you look at the costs across the rest of the year, that room costs $43.15 per night, every night in fixed and

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overhead costs. The 15 rooms cost the hotel $236,231.80. That means the hotel is only seeing a revenue return of 31% on the investment in those 15 rooms annually.
So, if the hotel were to have $700.00 per month in additional revenue from each of those
15 rooms per month, you’d be looking at a revenue of $126,000, which expands the revenue return to 53%. Since the cost per unoccupied room is from already established fixed costs, the additional revenue of $51,750.00 will go straight to the gross operating profit of the operation.
These are the purely revenue costs from the offices. Now, if you include ancillary revenues from other sources related to the occupancy of offices, the number goes higher. Meeting rooms at an executive office center can contribute 10% of overall revenues, so if we went by that benchmark, you’d be looking at an additional $12,000 in meeting room rental. That excludes food and beverage, so that could be an additional revenue stream.
Customer service streams of income, such as copier service, administrative services, postage and courier services, even office supply orders, will also add to the bottom line. The average rate for administrative services is $40 per hour, postage and supplies are sold with a 10% markup, copier and scanning service runs from $.05 to $1.00 per page. All of these additional streams of income can add up to large increases in revenue.

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Financial Analysis of Unoccupied Rooms vs. Occupied Offices
Financial Analysis of Unoccupied Rooms
Number of Rooms in Hotel

150

Number of Rooms to Convert

15

Number of Rooms expressed as a percentage

10%

Occupancy Threshold to determine Revenue

90%

Number of nights above Threshold per year

Number of Rooms as a percentage minus 100%

30

ADR of Nights Above Threshold

$

165.00

Revenue Opportunity

$

74,250.00

Total Hotel Revenue

$ 6,125,547.00

Total number of room nights per year

Rooms X ADR X Nights

54750

Debt Service

$

687,225.00

Property Taxes

$

230,081.00

Insurance

$

76,652.00

Capital Reserve

$

245,022.00

Property Operations

$

350,939.00

Energy

$

333,110.00

A&G

$

439,289.00

Total Fixed & Overhead Costs

$ 2,362,318.00

Cost per room, per night

$

43.15

Annual Cost of rooms above occupancy threshold

$

236,231.80

Revenue Opportunity from Hotel

$

74,250.00

Franchise Fees on Revenue Opportunity at 12%

$

8,910.00

Profit/Loss on Rooms Cost

$

Net Office Revenue per month, per office

$

Total Office Revenue

$

126,000.00

Profit/Loss on Office versus room cost

$

(110,231.80)

Advantage/(Disadvantage) Of Office vs. Rooms

$

60,660.00

.

Total Fixed & Overhead / Number of Room Nights Per Year

0.31431

(170,891.80)
700.00
0.533374

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Most facilities also charge an amenities fee, and a hotel can be no exception. There could be a fee for nightly cleaning service, cable television, use of the gym, etc. or they could be included as value added amenities. This is, of course, in addition to any hotel room nights consumed and any a la carte meals taken on a regular or occasional basis.
On the cost side, there is also savings. Office rooms do not need intensive labor for cleaning. You could offer daily cleaning by your housekeeping staff for trash and vacuuming and maybe the bathrooms will be serviced once per week. In doing that, it will incur some cost, but will exceedingly lower the average time to clean an office room versus a guest room. There will also be lower costs of linen turnover, in-room amenities, consumables and other small items. They will also not incur a normal preventative maintenance schedule, which will lower maintenance and engineering costs as well.
Additionally, since these rooms will no longer be considered inventory, they will move out of the purview of franchise fees and inspections. This will lower franchise costs, as now, as in our example, 12% of costs on that revenue, will directly trickle to the bottom line.
These costs savings should more than negate any additional costs for items that would be required. As stated before, many of the items needed are already in place or could be put into place with a minimum of cost and effort.
The final cost to incur that hasn’t been discussed is sales and marketing. This will incur some costs, however, they will be minimal. The 3 main areas people search for office space is
CoStar, Loopnet and Craigslist. Listing cost on CoStar and LoopNet are around $100 per month and Craigslist is free. There will be some labor costs involved with touring, following up and the like, but nothing that should increase workload enough to bring another staff member in house.

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The other option, besides longer term clients such as attorneys and financial professionals, is the renting of offices by the hour or the day. This stream of revenue has more potential for a higher daily rate. A hotel could charge from $20-$40 per hour for space, or even $75-$100 per day as an opportunity to build revenue on inventory that may be unoccupied. This could also be offered to in-house clients looking for late checkouts because of later meetings, or for clients looking for day use rooms for interviews and meetings. It will also open the opportunity to provide a low-cost meeting room option for 1-3 people. Possibilities on how to positon this are quite flexible and can be quite unique.
An opportunity to improve this business also lies within the hotel lobby. By making the lobby less conducive to meetings and interviews and driving guests towards the day-use offices, it could provide an option that was otherwise unavailable to them, and give the property an opportunity to capture more revenue. Traditionally, the lobby has long been an area that siphoned revenues off of rooms and meetings, but by driving traffic to the day use offices, there is a revenue potential that is entirely untapped.
The final question that needs to be answered is for an ancillary service, which would be the virtual office. This can be another area of revenue opportunity as well. Virtual Offices are for clients who do not need a physical office space on a permanent basis, but want an address in a prime location, as well as call handling and support. It allows for clients to list a real address on a business card or Web site versus a home address, mailbox store or PO Box.
This service allows the hotel to collect revenues for servicing the clients, collecting mail, answering calls and dealing with visitors, while not having them pay for a physical space. Many business centers see 20% of their business from virtual offices, so there can be a huge upside with

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minimal additional workload or customer acquisition cost. For customers who are not able to afford a full-fledged office solution, this is a great way to capture revenue from them and develop a pipeline of potential clients for open offices in the future. Entrepreneurs often usually start with a virtual office, upgrade to a full time office
Virtual office clients would also translate to daily office business, as well as meeting room business. Since the clients don’t have physical space, the need for in-person meetings for both small and large groups would be a great way to develop the short stay business and increase meeting room usage at the hotel.

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Conclusion
In conclusion, the business model of combining executive offices with the hotel environment can have many economic advantages over underutilized inventory and provide a revenue stream superior to that of only sparingly occupied rooms. While it cannot and should not replace the hotel business model, with a minimum of investment in capital, time, training and labor, the business model can work.
If explored and implemented, it will provide additional built in revenue streams and should create a positive impact upon overall hotel revenues and lower the cost of unoccupied rooms. It is not a one size fits all approach, but it is an approach that will allow hotel owners the opportunity to capitalize upon their already existing property, plant and labor to develop a new revenue stream.

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References
Annual Reports. (n.d.). Retrieved March 8, 2015, from http://www.regus.com/investors/annual-reports.aspx Asirvatham, S. (1997, Mar 22). Local hotel provides alternatives to guest rooms doubling as offices. The Daily Record Retrieved from http://search.proquest.com/docview/389935151?accountid=11809 Average daily hotel room rate in the U.S. 2015 | Statistic. (n.d.). Retrieved March 8, 2015, from http://www.statista.com/statistics/195704/average-hotel-room-rate-in-the-us-since-2005/ Bradley, S., & Hood, C. (2003). Delivering minimalist workplaces that improve corporate agility. Journal of Facilities Management,2(1), 68-84. Retrieved from http://search.proquest.com/docview/218906571?accountid=10818 Byrne, P., Lizieri, C., & Worzala, E. (2002). The location of executive suites and business centers in the United States. Journal of Real Estate Portfolio Management, 8(3), 255-271.
Retrieved from http://search.proquest.com/docview/197956429?accountid=11809
Crosby, N., Gibson, V., & Murdoch, S. (2003). UK Commercial Property Lease Structures:
Landlord and Tenant Mismatch. Urban Studies, 1487-1516. Retrieved April 8, 2015, from Sage Online Business Journals.
Demand for serviced offices on rise. (2014, Jun 09). McClatchy - Tribune Business News
Retrieved from http://search.proquest.com/docview/1534074322?accountid=1180

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Felsted, A. (2002, May 17). Big groups recognize advantages of service: SERVICED OFFICES by Andrea Felsted: Costs for office space with all the trimmings used to be prohibitive but this option is becoming more economical. Financial Times Retrieved from http://search.proquest.com/docview/249179620?accountid=11809 Gibson, V. (2003) Flexible working needs flexible space?: Towards an alternative workplace strategy. Journal of Property Investment and Finance, 21 (1). pp. 12-21. ISSN 1463-578X
Gibson, V. (2003) Evaluating Office Space Needs and Choices. MWB Business Exchange, 32.
History. (2009). In “Supporting You However You Want to Work”. London: Regus.
McAllister, P. (2001). Offices with services or serviced offices? Exploring the valuation issues.
Journal of Property Investment & Finance, 19(4), 412-426. Retrieved from http://search.proquest.com/docview/213005714?accountid=11809 Miller, N.,G. (2014). Workplace trends in office space: Implications for future office demand.
Journal of Corporate Real Estate, 16(3), 159. Retrieved from http://search.proquest.com/docview/1660744449?accountid=11809 Morgans Hotel Group announces Wilhelmina Models Offices at Mondrian in South Beach.
(2009, Nov 11). Business Wire Retrieved from http://search.proquest.com/docview/443780405?accountid=11809 Nathan, M. and Doyle, J. (2002), The State of the Office: The Politics and Geography of
Working Space, Industrial Society. Futures Publications, London, pp. 1-53

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Occupancy rate of the U.S. hotel industry 2015 | Statistic. (n.d.). Retrieved March 8, 2015, from http://www.statista.com/statistics/200161/us-annual-accomodation-and-lodgingoccupancy-rate/ Revenue of the U.S. hotel industry 2013 | Statistic. (n.d.). Retrieved March 8, 2015, from http://www.statista.com/statistics/245841/total-revenue-of-the-us-hotel-industry/ Stewart, E. (2011). Serviced offices defy financial crisis. Ultimo: Australian Broadcasting
Corporation. Retrieved from http://search.proquest.com/docview/897887470?accountid=11809 THE LODGING INDUSTRY. (n.d.). Retrieved March 8, 2015, from https://www.ahla.com/content.aspx?id=36332 Analysis of Repurposing Underutilized Hotel Rooms Inventory as Executive Office Space

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Appendix
IRB Review of Interview Research

Jeffrey Victor

Graduate Special Project - M.S. in Hospitality
5 messages

Jeff Victor

Mon, Mar 9, 2015 at 8:46 PM

To: kim_diccianni@fdu.edu
Cc: mbarto@fdu.edu, Erick
Kim,
Dr. Barto suggested that I contact you in regards to my special project.
I wanted to utilize a possible interview in my project of an industry expert.
I also have some documents that I want to reference that need to remain confidential as they contain proprietary information.
I was wondering what guidance you can give me to keep me in compliance with whatever rules FDU has in place.
Please let me know.
Regards,
-Jeff Victor

Diccianni, Kim

Tue, Mar 10, 2015 at 10:39 AM

To: Jeff Victor , "kim_diccianni@fdu.edu"
Cc: "mbarto@fdu.edu" , Erick

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Hi Jeff,
Thank you for your inquiry. Without details, I will be unable to determine if your project meets the definition of human subjects research. Would you please provide me a detailed summary of your project and the questions you will be asking? Is it only one person being interviewed?
Thanks so much.
Regards,
Kim
Kim R. Diccianni, CIP, Manager
Pre-Awards/Human Research Compliance
Grants and Sponsored Projects Office, T-BE2-02
Fairleigh Dickinson University
1000 River Road, Teaneck, NJ 07666
(201) 692-2219 (Phone)
(201) 692-2102 (Fax)
IRB Website: http://view.fdu.edu/default.aspx?id=221
Grants and Sponsored Projects Website: http://view.fdu.edu/default.aspx?id=1372

Jeff Victor

Thu, Mar 12, 2015 at 8:33 PM

To: "Diccianni, Kim"
Cc: "kim_diccianni@fdu.edu" , "mbarto@fdu.edu" , Erick

Kim,
Apologies for the lateness of my response.
I am exploring re-purposing underutilized hotel rooms inventory as executive offices. As such, I wanted to interview a executive office expert and possibly a hotel expert.
The questions will mainly surround usage, occupancy rates and other data that can help to reveal trends. Analysis of Repurposing Underutilized Hotel Rooms Inventory as Executive Office Space

33

Additionally, I have been provided confidential financial data and I want to be able to utilize that in creating a financial model.
Please let me know what other information you need. If you need a complete list of questions I intend to ask, let me know as I haven't created that due to the pending review of this.
Thanks,
-Jeff

Diccianni, Kim

Fri, Mar 13, 2015 at 3:18 PM

To: Jeff Victor
Cc: "kim_diccianni@fdu.edu" , "mbarto@fdu.edu" , Erick

Hi Jeff,
As described, this interview does not seem to constitute human subjects research since the questions asked are specific to the business/organization and not directly to the person. It should be noted however, that information provided that is considered proprietary, private and confidential should be protected to ensure this information stays this way. All information should not be identifiable and the person providing the information, should provide permission for it to be used and provide a description of how this information will be protected and stay confidential.
If you have any questions or require assistance, please contact me. Thank you.
Regards,
Kim
Kim R. Diccianni, CIP, Manager
Pre-Awards/Human Research Compliance
Grants and Sponsored Projects Office, T-BE2-02
Fairleigh Dickinson University
1000 River Road, Teaneck, NJ 07666
(201) 692-2219 (Phone)
(201) 692-2102 (Fax)
IRB Website: http://view.fdu.edu/default.aspx?id=221Grants and Sponsored Projects
Website: http://view.fdu.edu/default.aspx?id=1372

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