Hotel Experts Point to Pros and Cons of Hotel Development

Hotel experts are not fully comfortable with the status of the market enough to recommend a strong buy. STR’s chairman and founder, Randy Smith, says – “We have never seen supply growth this low when we’ve seen demand this high” (04 June 2013). For some reason, the market is not rushing to invest in that demand and build more hotels. Demand cycle Pro: The business of business travel is a constant, a low constant during the recession. Likewise, personal travel has not been so open ended. When that demand for accommodations increases in volume, spending, and promise, there is reason to invest. Moreover, travelers travel with their different tastes. As those customers segment the market, it should create a variety of investment opportunities. Con: Like any market, hotel values fluctuate and affect hotel investor opportunties. To call such changes a cycle assumes a regularity and predictability not in evidence. This lack of predictability makes forecasting risky. The sale of hotels has increased by 44% since the 2010 bottom of the market. But, while hotel experts believe the trend will continue, none of them is predicting anything beyond two years. During these same years, the sales price has increased 25% which is a ROI of 6%. But, notice the assumption that you entered the market at the right time. Good ROI happens when you buy into the market at the bottom half of the “cycle” and sell during the top half. This demands a lot of the investor in terms of having enough capital flexibility to manage the timing of the purchase and disposition of the investment. Markets on the edge Pro: Areas at the fringe of urban development are increasingly attractive. Business travelers want proximity to the corporations they serve, but they all need minimal services or want the conveniences of home for an extended stay. Properties with fresh breakfast and rooms configured as suites have become home for business travelers and an increasing number of families who see the advantages. Con: Full-service hotels are layered investments, so you profit from the spa, restaurants, and meetings as well as room occupancy. Unfortunately, each layer multiplies your management risks. As an arm’s length investor, sold on the idea of this being a passive role, you have no hands-on control over the cash-flow or the quality of the people managing it. Having the wrong people in responsible positions guarantee sub-par results. Saving a dollar on people to run an investment of 2 to 100 million dollars will directly impact your ROI. Look into the people as seriously as you look into the facility and market. Have your consultants vett them deeply. You are looking for experience and diligence. You want management skills and proven leadership. You simply cannot align yourself with the “right” people unless you spend time with them. You are investing in the human resource as well as the facility and market, so you need to be positioned to price that resource. Profit margins Pro: There will always be a luxury market. The profit margins for high-end hotels remain fairly constant as their customers travel regardless of the economy. So, the top brands have projects in cities like Austin, West Palm Beach, Philadelphia, and San Jose, basically putting up a 5-star where there had been none. You might want to be part of the capital group behind such projects. Con: The margins on 2 to 3-star properties are thinner. While many of these budget and suites concepts serve their markets well, many do not. These hotels are found near airports and at major highway intersections. In fact, you find so many of them, it should be a concern. If you buy a hotel that is branded, consider that the occupancy rate at these highway franchises has flat-lined at 60%, a number that disappears in broader and global statistics. Group and individual investors not only need hotel experts to assist them; they also need experts specific to the market segment and investment model.