It’s not just cost savings: LEED certification boosts hotel revenue too
This article was co-authored by Rohit Verma and Matthew Walsman of the Cornell Center for Hospitality Research.
We’ve known for some time that LEED certification helps cut operating costs for all kinds of commercial buildings, including hotels. But we wanted to get a handle on whether LEED also could improve revenues for hotels. This is a big issue for the hotel industry, since the top line, which we measure as revenue per available room (RevPAR), is a major measure of a hotel’s success.
Fortunately, Cornell’s Center for Hospitality Research has a tremendous data resource from STR, a firm that records average daily rate, occupancy and revenues for most of the chain hotels in the United States and is a partner of the Cornell Center for Hospitality Research. STR’s confidential data allowed our research team to compare the top line for LEED-certified hotels to a competitive set of non-LEED hotels in a study titled, “The Impact of LEED Certification on Hotel Performance.” In addition to us, our team included Suresh Muthulingam, who has just moved to Penn State from Cornell.
We identified 93 LEED-certified U.S. hotels with revenue data available from STR data during a six-year period (2007-2012). We then matched their revenues, occupancy and daily rates to a set of 514 comparable competitors. We focused our attention on a three-year window comprising the year before certification and two years following. During this window, the certified hotels obtained superior financial performance as compared to their competitive set. We had to limit the study to the two years after certification, because many of the hotels have only recently been certified. We think that perhaps it will be worthwhile to repeat this study as more hotels become LEED certified and we have a longer period for comparison.
We see the hotel industry embracing LEED not only because of the savings from operations, but also because hotel customers want to know what hotels are doing to limit their carbon footprints. Now we can also add the benefit of improved revenues. Beyond the 93 hotels that we were able to include in our study, several hundred hotels have registered their projects with the USGBC. Just as one example, Marriott has now included LEED as part of its own design specifications for new construction, and other major brands are doing the same thing.
Our analysis included 65 new hotels and 28 renovated hotels, as shown in the two graphs. We note that certification can follow project completion by a year or more. Separating these types of projects, we see that new hotels start from behind, as expected, but within the first year after certification, they pass their competitors. Renovated LEED hotels in our data set have a consistent RevPAR advantage even before certification, so it is unclear whether they get the same boost from certification that new hotels receive (the small dip in year two is likely a function of the sample getting smaller).
We found that the revenue benefit applied to all types of hotels in our study, but to varying degrees. For example, new luxury and upscale LEED hotels quickly caught and passed competitors, while lower-class LEED hotels were much slower to catch up. That said, most of the hotels we studied were upscale or luxury properties located in urban or suburban locations. This makes sense, because many of the LEED standards involve site criteria that you typically find in urban areas (such as connection to public transportation).
We’ve posted the study at no charge on the Cornell Center for Hospitality Research website. All you have to do is register for a free account to get the PDF download.
To summarize, our question was whether there is a revenue benefit for hotels from LEED certification. We found that the answer is, absolutely yes.