Problem Definition
Lumen Hotels is a privately held U.S. boutique hotel group. It owns and operates 11 lifestyle hotels (about 1,480 rooms in total) in cities such as Denver, Portland and Minneapolis, and earns annual revenue of roughly $140 million. Each Lumen hotel has a design-led public space (lobby bar, restaurant, rooftop), a local art program and between 90 and 160 rooms. Lumen's hotels usually earn more revenue per available room (RevPAR) than the average hotel in their city, because guests pay a premium for the experience.
The U.S. hotel market has cooled. In 2025, national occupancy and RevPAR fell year over year for the first time since 2020: occupancy dropped to approximately 62%, RevPAR stayed at about $100 and ADR rose less than 1% to about $161. Forecasters expect only modest growth in 2026 (RevPAR up about 3%). At the same time, building costs remain high. The median cost to develop a full-service hotel in the U.S. is now approximately $467,000 per room.
Lumen's board has approved up to $100 million of total project cost to open two new hotels within three years. Management has shortlisted four cities: Nashville, San Diego, Austin and Savannah. The CEO has asked your team: Which two cities should Lumen enter, and what could make that choice go wrong?
Additional InformationAsk for dataInterviewer’s data
If asked, please share that:
- Lumen's existing hotels achieve, on average, about 130% of their local market's RevPAR (a "RevPAR index" of 130)
- Rooms revenue is about 75% of total revenue at a Lumen hotel; the rest is food, beverage and events
- Lumen targets a stabilized yield on cost (net operating income divided by total project cost) of at least 6%
- Lumen has never operated in a market where hotel staff are mostly unionized
- A new hotel takes about three years from site purchase to opening, and two more years to reach stabilized performance
- Lumen prefers to own its hotels but has never ruled out other structures
Question 1Structuring
How would you decide which two of the four cities Lumen should enter?
Hint · Structuring
Build 3–4 branches that are specific to this client and question, not a generic framework. Check they don't overlap and together cover the problem.
Additional InformationAsk for dataInterviewer’s data
- Share that the CEO wants the choice made on "risk-adjusted returns, not on which city is most fashionable"
- If asked, the board has no preference between the four cities
Try it first, then checkCheck my answerModel answer
A strong structure would cover four areas:
1. Market attractiveness (today)
- a) Demand: visitor volumes, overnight stays, convention and business travel, event calendar
- b) Performance: occupancy, average daily rate (ADR), RevPAR, and the trend over the last two to three years
- c) Fit with Lumen's guest: share of leisure travelers, interest in design-led stays, neighborhoods with a strong food and culture scene
2. Market attractiveness (at opening, three to five years out)
- a) New supply: rooms under construction and in planning as a share of current rooms
- b) Barriers to new supply: zoning rules, historic district limits, land availability
- c) Demand drivers that will change: new convention centers, airport expansion, major events
3. Lumen's economics in each city
- a) Expected RevPAR = market RevPAR x Lumen's RevPAR index for that city
- b) Total revenue = rooms revenue / 75%
- c) Net operating income (NOI) margin, which depends on labor costs (union or non-union), property taxes and insurance
- d) Total project cost = rooms x cost per room
- e) Yield on cost = NOI / total project cost, compared with the 6% hurdle
4. Risks and execution
- a) Downside if RevPAR falls (how sensitive is NOI?)
- b) Ability to find a site and get approvals
- c) Operating risks in a new labor market
- d) Portfolio fit: do the two cities together fit within $100 million and diversify Lumen's exposure?
What the interviewer is looking forInterviewer’s viewInterviewer’s view
A good candidate will set out a structure with attractiveness of the market, Lumen's expected returns, and risk. A strong candidate will make the branches specific to hotels. For example, they will split the market side into demand (visitors, business travel, events) and supply (current rooms plus the construction pipeline), and they will define returns as yield on cost compared with the 6% hurdle. An excellent candidate will note that the relevant question is Lumen's performance five years from now, when the hotel is stabilized. So today's RevPAR matters less than where supply and demand will be in five years.
Push back if the candidate lists generic "market size, competition, capabilities" without saying how each one would be measured for a hotel.
So What? cascade:
- Level 1: we need to look at each city's hotel market and Lumen's likely returns
- Level 2: returns depend on three numbers per city: market RevPAR, Lumen's premium over that RevPAR, and the cost per room to build
- Level 3: because a hotel opens three years after the decision, the construction pipeline in each city is as important as today's RevPAR. A strong market today can be a weak market on opening day
Question 2Numeracy
Using Exhibit 1 and the data I will share, estimate the stabilized yield on cost for a Lumen hotel in each city. Which cities clear the 6% hurdle?
Hint · Numeracy
Write the formula before you plug in numbers, keep units and zeros explicit, and sanity-check the order of magnitude at the end.
Exhibit 1Hotel Market Snapshot for the Four Shortlisted Cities
| City | Occupancy (2025) | ADR (2025) | Market RevPAR | Existing hotel rooms | Recent supply trend |
|---|---|---|---|---|---|
| Nashville | ~67% | ~$199 | ~$133 | ~60,000 (metro) | Supply up ~3.4% in 2025; RevPAR down ~2% |
| San Diego | ~72% | ~$213 | ~$154 | ~69,000 (county) | Occupancy steady; ~1,200 rooms under construction |
| Austin | n/a | n/a | ~$121 | ~37,000 | Room revenue flat at ~$1.6B for three years |
| Savannah | n/a | n/a | ~$106 (H1 2025) | n/a | Supply up ~5% in the past year; RevPAR down ~4.5% |
Market RevPAR for Nashville and San Diego = occupancy x ADR. Austin RevPAR is derived from 2025 state hotel tax filings (~$1.64B room revenue / ~37,000 rooms / 365). Savannah figure is first-half 2025. All figures rounded. Sources: see Data Sources.
Source: Lumen Hotels case file
Additional InformationAsk for dataInterviewer’s data
Share Exhibit 1 and the following Lumen estimates:
- Lumen's expected RevPAR index by city: Nashville 135%, San Diego 125%, Austin 130%, Savannah 150%
- Hotel size: 150 rooms in Nashville, San Diego and Austin. In Savannah, local rules and building sizes limit the project to a 90-room conversion of an existing historic building
- Rooms revenue is 75% of total revenue
- NOI margin (after management costs, property tax, insurance and reserves): 28% in Nashville, Austin and Savannah; 22% in San Diego, where most full-service hotel staff are unionized
- Total project cost per room: Nashville $400,000; San Diego $560,000; Austin $380,000; Savannah $360,000
- Round Lumen's RevPAR to the nearest dollar and use 365 days a year
Try it first, then checkCheck my answerModel answer
Step 1: Lumen's RevPAR in each city
| City | Market RevPAR | Lumen index | Lumen RevPAR |
|---|---|---|---|
| Nashville | $133 | 135% | $179.55 → $180 |
| San Diego | $154 | 125% | $192.50 → $193 |
| Austin | $121 | 130% | $157.30 → $157 |
| Savannah | $106 | 150% | $159 |
Step 2: Revenue and NOI
Room-nights available per year: 150 rooms x 365 = 54,750; Savannah 90 x 365 = 32,850.
| City | Rooms revenue | Total revenue (÷ 0.75) | NOI margin | NOI |
|---|---|---|---|---|
| Nashville | $180 x 54,750 = $9.86M | $13.14M | 28% | $3.68M |
| San Diego | $193 x 54,750 = $10.57M | $14.09M | 22% | $3.10M |
| Austin | $157 x 54,750 = $8.60M | $11.46M | 28% | $3.21M |
| Savannah | $159 x 32,850 = $5.22M | $6.96M | 28% | $1.95M |
Step 3: Project cost and yield on cost
| City | Project cost | NOI | Yield on cost | Clears 6%? |
|---|---|---|---|---|
| Nashville | 150 x $400K = $60.0M | $3.68M | 6.1% | Yes (just) |
| San Diego | 150 x $560K = $84.0M | $3.10M | 3.7% | No |
| Austin | 150 x $380K = $57.0M | $3.21M | 5.6% | No |
| Savannah | 90 x $360K = $32.4M | $1.95M | 6.0% | Yes (just) |
Step 4: Budget check
- Nashville + Savannah = $60.0M + $32.4M = $92.4M, within the $100M budget
- San Diego alone would use $84M of the budget and fails the hurdle by more than 2 points
Key insight: San Diego has the strongest market today (highest occupancy and RevPAR), but it is the worst investment for Lumen. High land and building costs and a lower NOI margin from unionized labor push the yield to 3.7%. On paper, Nashville and Savannah are the only two cities that clear the hurdle, and both only just clear it. That makes the next question, about risk, decisive.
What the interviewer is looking forInterviewer’s viewInterviewer’s view
The test is whether the candidate can carry a chain of calculations cleanly and keep units straight: RevPAR is per room per night, so it must be multiplied by rooms and by 365. A strong candidate will set out the formula before calculating and will notice that Savannah's smaller hotel changes total NOI but not necessarily the yield. An excellent candidate will immediately ask how sensitive these yields are to RevPAR and to the NOI margin.
If the candidate is stuck, prompt: "Start with one city. What is Lumen's RevPAR there, and how many room-nights does the hotel have in a year?"
Reality check: yields should land between roughly 3.5% and 6.5%. A candidate who gets 20% or more has probably dropped a zero from the project cost; one below 1% has probably forgotten to multiply by the number of rooms or by 365 days.
Question 3Judgement & Insights
Nashville and Savannah both clear the hurdle by a very small margin. Look at Exhibit 2. How confident are you in each of them?
Hint · Judgement & Insights
Read the exhibit title, axes and units first. Lead with the ‘so what’, then back it with one or two numbers.
Exhibit 2Construction Pipeline and Supply Barriers
| City | Rooms in pipeline | Pipeline as % of existing rooms | Rules limiting new hotels | Notes |
|---|---|---|---|---|
| Nashville | ~16,700 (Q1 2026) | ~28% | Few | ~6,600 rooms expected to start construction within 12 months |
| San Diego | ~1,200 under construction | ~2% | Coastal zone rules, high land cost | Large 1,600-room resort opened in 2025 |
| Austin | ~13,900 (Q1 2026) | ~37% | Few | ~6,100 rooms expected to start construction within 12 months |
| Savannah | n/a | n/a | Hotel development overlay extended in Oct 2025 bans most new hotels in three mid-city neighborhoods | Supply grew ~5% in the past year before the new limits |
Pipeline counts include projects in early planning, many of which are never built. San Diego counts only rooms under construction, so it is not directly comparable. Sources: see Data Sources.
Source: Lumen Hotels case file
Additional InformationAsk for dataInterviewer’s data
Share Exhibit 2 and the following:
- Lumen's finance team estimates that, because many hotel costs are fixed, each 1% fall in RevPAR reduces NOI by about 2.5%
- Savannah's hotel development overlay prohibits most new hotels larger than 15 rooms in several mid-city neighborhoods. Lumen's candidate building is in an area where a hotel conversion is still allowed, but approval requires a public review
- Lumen's candidate site in Nashville is in a downtown-adjacent neighborhood where three other lifestyle hotels are under construction
Try it first, then checkCheck my answerModel answer
1. Downside test
A 10% RevPAR decline reduces NOI by about 10% x 2.5 = 25%, so the yield falls to 75% of its base value:
| City | Base yield | Yield if RevPAR falls 10% |
|---|---|---|
| Nashville | 6.1% | 6.13% x 0.75 = 4.6% |
| Austin | 5.6% | 5.63% x 0.75 = 4.2% |
| Savannah | 6.0% | 6.02% x 0.75 = 4.5% |
| San Diego | 3.7% | 3.69% x 0.75 = 2.8% |
2. How likely is that downside in each city?
- Nashville: high risk. The pipeline equals about 28% of existing rooms, supply grew about 3.4% in 2025 and ADR already fell about 1.3%. Three lifestyle competitors are being built near Lumen's site, targeting exactly Lumen's guest. The 135% RevPAR index assumption is at risk as well.
- Austin: highest risk. It fails the hurdle even in the base case, and its pipeline is about 37% of existing rooms. Room revenue has not grown for three years.
- Savannah: lower risk. Recent softness (RevPAR down about 4.5% in the first half of 2025) came after supply grew about 5%. The October 2025 overlay now blocks most new hotels in nearby neighborhoods, so the supply growth that hurt the market is being choked off. Demand is solid: about 12.9 million visitors in 2024. The main risk is getting the approval, which is a one-time risk, not a permanent one.
- San Diego: protected from new supply, but the economics fail regardless.
3. Conclusion
Savannah is the most reliable of the four despite its small size. Nashville's base-case yield is attractive but fragile. Lumen should not commit to a new-build in Nashville without a way to reduce cost or risk.
What the interviewer is looking forInterviewer’s viewInterviewer’s view
This question tests whether the candidate reads beyond the base-case yield. A good candidate will see that Nashville and Austin have very large pipelines. A strong candidate will quantify the downside: a 10% fall in RevPAR cuts NOI by about 25%, which would take every yield well below 6%. An excellent candidate will spot the asymmetry: Savannah's new regulation, which looks like an obstacle, is actually a moat. It limits future competition for a hotel that is already approved, which makes Savannah's 6.0% yield more reliable than Nashville's 6.1%.
So What? cascade:
- Level 1: Nashville and Austin have many rooms in the pipeline
- Level 2: new supply competes directly with Lumen in its first years, and Lumen's yield has no buffer; a 10% RevPAR drop takes Nashville from 6.1% to about 4.6%
- Level 3: the best market for a new boutique hotel is one where it is hard for the next hotel to get built. Savannah's rules are a barrier to Lumen's approval, but once Lumen is through them, they protect its returns. Nashville needs a different entry route (for example, buying an existing hotel) rather than adding another new building to a crowded pipeline
Question 4Creativity
The CEO still wants to be in Nashville, because it is one of the strongest leisure brands in the country. How could Lumen enter Nashville while reducing its risk?
Hint · Creativity
Brainstorm in buckets (e.g. internal vs external, short vs long term) so ideas stay structured and you can see gaps.
Additional InformationAsk for dataInterviewer’s data
- If asked, Lumen has a strong management team and brand, and other owners have approached it about managing their hotels
- If asked, some Nashville hotel owners that financed new projects with debt in 2022-2024 may face refinancing pressure
Try it first, then checkCheck my answerModel answer
1. Change how Lumen owns the hotel (reduce capital at risk)
- Management or franchise agreement: brand and run another owner's hotel for fees. Lumen earns income with little capital and learns the market
- Joint venture with a local developer: Lumen puts in 20-30% of the equity and runs the hotel
- Sale-and-leaseback or ground lease to reduce up-front land cost
2. Change what Lumen builds (reduce cost per room)
- Convert an existing building (warehouse, office, older hotel) instead of building from scratch
- Buy and rebrand an underperforming hotel: supply pressure may push some owners to sell below the approximately $400,000 per room it would cost Lumen to build
- A smaller hotel (90-110 rooms) in a less crowded neighborhood rather than downtown
3. Change when Lumen enters (reduce supply risk)
- Delay Nashville by 18-24 months until the current wave of openings has been absorbed; use the capital in Savannah first
- Sign an option on a site now and decide later
4. Change how Lumen competes (protect the RevPAR premium)
- Differentiate from the new lifestyle hotels with a strong local food and music program, which is harder to copy than design
- Build group and event business (weddings, small corporate events) that does not depend on transient leisure demand
What the interviewer is looking forInterviewer’s viewInterviewer’s view
Look for ideas grouped into clear buckets (for example: change how we own, change what we build, change when we enter). A strong candidate will link each idea back to the specific risk it reduces: supply, cost or execution. An excellent candidate will spot that a large pipeline creates opportunities as well as threats: when many new hotels open at once, some owners will be under pressure, and Lumen may be able to buy or rebrand an existing hotel below replacement cost.
So What? cascade:
- Level 1: list of ways to enter a market
- Level 2: each idea addresses a different part of the risk (capital at risk, cost per room, timing)
- Level 3: the pipeline that makes a new build risky creates cheaper ways to enter later. Waiting 18-24 months and buying a hotel that is struggling may give Lumen Nashville at a far lower cost per room
Question 5Synthesis
The CEO walks in. What is your recommendation?
Hint · Synthesis
Answer first: the recommendation, two or three reasons with numbers, then risks and next steps.
Additional InformationAsk for dataInterviewer’s data
- Remind the candidate of key figures if needed: yields of 6.1% (Nashville), 6.0% (Savannah), 5.6% (Austin), 3.7% (San Diego); pipelines of ~28% (Nashville) and ~37% (Austin)
Try it first, then checkCheck my answerModel answer
Recommendation: build in Savannah now; enter Nashville, but not through a new build today. Do not pursue San Diego or Austin.
1. Savannah: commit now
- Yield on cost of about 6.0% on a $32.4M, 90-room conversion
- New local rules limit future hotel supply, so the yield is more reliable than in any other city
- Visitor base of about 12.9 million a year and a historic setting that suits Lumen's brand, which supports a 150% RevPAR index
2. Nashville: enter, but reduce the risk
- The base-case yield (about 6.1%) falls to about 4.6% if RevPAR drops 10%, and the pipeline equals about 28% of existing rooms
- Preferred route: buy or rebrand an existing hotel in 2027-2028 once new openings have put pressure on owners, or start with a management contract
- Keep about $60M of capacity reserved for Nashville, but release it only if the cost per room is well below $400,000 or the yield clears 7%
3. Reject San Diego and Austin
- San Diego: strongest market today (about 72% occupancy), but a yield of about 3.7% due to high costs and a lower NOI margin
- Austin: a yield of about 5.6% in the base case and the largest pipeline relative to its size (about 37%)
Risks and next steps
- Savannah approval: engage early with the planning commission and neighborhood groups; the decision could take months
- Labor: confirm the NOI margin assumption in Savannah with a local operating budget
- Nashville: set up tracking of hotel sales and distressed loans in the market, and start talks with two or three owners about management contracts
- Re-run the yields with the 2026 forecast (RevPAR up about 3% nationally) and with a downside case before the board meeting
What the interviewer is looking forInterviewer’s viewInterviewer’s view
A good candidate gives a clear recommendation first, backed by two or three numbers. A strong candidate distinguishes between the base-case math and the risk-adjusted view. An excellent candidate turns the answer into a plan with a sequence and names the next steps and the conditions that would change the decision.
So What? cascade:
- Level 1: choose Nashville and Savannah because they clear the hurdle
- Level 2: both clear it only just, and Nashville's result is exposed to a large supply wave
- Level 3: commit to Savannah now, enter Nashville through a lower-risk route later, and keep the remaining capital flexible
Data Sources
Company figures (Lumen's portfolio, RevPAR index, NOI margins, project costs per room) are fictional estimates set against the benchmarks below. Market figures are rounded for interview math.
| Fact used in the case | Publisher, title, year | URL |
|---|---|---|
| 2025 U.S. occupancy ~62.3%, ADR ~$160.54, RevPAR ~$100.02; first annual decline since 2020 | Hotel Dive (CoStar data), "Key full-year US hotel metrics fall for first time since 2020", 2026 | https://www.hoteldive.com/news/hotel-occupancy-revpar-decline-2025/810212/ |
| 2026 forecast: RevPAR +2.8%, occupancy ~62.8%, ADR +2% | Hotel Dive (CoStar / Tourism Economics), "US hotel RevPAR, ADR set for growth in 2026: report", 2026 | https://www.hoteldive.com/news/hotel-industry-performance-2026-costar-tourism-economics/810703/ |
| Median full-service development cost ~$467,000 per room; select-service ~$200,000 | HVS, "U.S. Hotel Development Cost Survey 2026" (via Hospitality Net), 2026 | https://www.hospitalitynet.org/report/4133456/hvs-us-hotel-development-cost-survey-2026 |
| GOP margin ~30.3% at union hotels vs ~36.5% at non-union hotels (basis for San Diego's lower NOI margin) | HotStats, "US Hotels Face Profit Pressure as Labor Costs Outpace Recovery", 2025 | https://www.hotstats.com/blog/us-hotels-face-profit-pressure-as-labor-costs-outpace-recovery |
| Nashville 2025: occupancy 67.0%, ADR $199.20 (down 1.3%), RevPAR down 2.1%, supply up 3.4% | Visit Music City (Nashville Convention & Visitors Corp), "Research & Hospitality Stats", 2026 | https://www.visitmusiccity.com/about/research |
| Nashville hotel inventory grew from ~40,000 to nearly 60,000 rooms (2014-2024) | CoStar, "50% room supply growth over the last decade finally affects Nashville hotel performance", 2025 | https://www.costar.com/article/897885961/50-room-supply-growth-over-the-last-decade-finally-affects-nashville-hotel-performance |
| Nashville pipeline ~16,740 rooms (6,583 starting within 12 months); Austin pipeline ~13,850 rooms (6,097 starting within 12 months), Q1 2026 | Hotel News Resource (Lodging Econometrics Q1 2026 pipeline report), "Dallas Tops U.S. Hotel Pipeline as Phoenix, Austin Report Strong Gains in Q1 2026", 2026 | https://www.hotelnewsresource.com/article141113.html |
| San Diego 2025: occupancy ~72.2%, ADR ~$213, 68,954 hotel rooms (county), 32.4M visitors | San Diego Tourism Authority, "San Diego Tourism Fast Facts", 2026 | https://www.sandiego.org/about/san-diego-tourism-fast-facts |
| San Diego: ~1,200 rooms under construction; Gaylord Pacific (~1,600 rooms) opened 2025 | Hotel Guru (Robert Rauch), "2026 San Diego Hotel Forecast", 2026 | https://hotelguru.com/articles/san-diego-hotel-forecast-2026/ |
| Austin: ~37,013 rooms; room revenue ~$1.64B in 2025, flat for three years (Texas Comptroller hotel tax filings) | TexasHotelSearch, "Austin, TX Hotel Market", 2026 | https://www.texashotelsearch.com/markets/austin |
| Savannah: H1 2025 RevPAR ~$106.29 (down 4.5%); supply up ~5%; 12.9M visitors in 2024 | Hotel Dive, "Hospitality Market Spotlight: Savannah", 2025 | https://www.hoteldive.com/news/hospitality-market-savannah/758604/ |
| Savannah hotel development overlay extended in Oct 2025, banning most new hotels (>15 rooms) in three mid-city neighborhoods | The Savannahian, "The Great Hotel Revolt of 2025", 2025 | https://www.thesavannahian.com/the-great-hotel-revolt-of-2025-takeaways-from-a-rare-grassroots-victory-at-the-mpc/ |
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