Why now is a great time to invest in renovating, building or acquiring a hotel.
By Mike Muir
It’s a great time to be in the hotel industry – whether you’re building, acquiring or renovating, opportunity abounds. In fact, according to a forecast by STR and Tourism Economics, the hotel industry will post a 2.1 percent growth in demand with only a 1.9 percent growth in supply. This continues a six-year trend of demand growth outpacing supply growth.
Take the top five markets out of the equation – New York City, Houston, Dallas, Los Angeles and Nashville – and supply growth is even lower. All of these numbers can create the perfect opportunity to invest in a hotel property, particularly in cities outside the top five that also have multiple drivers for occupancy. For example, areas with colleges/universities, government travelers, sports teams, major events, leisure appeal and more will have a steady demand for hotel rooms.
Making the decision to get started is only the beginning. There are several key factors for anyone choosing to begin or grow their presence in the hotel industry must consider: the market, the property, the brand and the lender.
Let’s start with the market and property. This decision involves finding the right city or town, the right location therein, and determining whether to build a new property, renovate your current property or acquire an older property and renovate it. New or recently renovated hotels always win.
If you build it, they will come (usually)
With occupancy demand outpacing supply nationwide, now is a great time to build a new property in the right market and location for several reasons. First and foremost, guests always prefer new or recently renovated properties.
But before you dive in – ask yourself a few questions:
1. Why build in this market?
Don’t be tempted by markets that seem hot for singular reasons but may not be able to sustain long-term growth. Look at markets with several drivers for consistent occupancy. If you’ve identified the market because there’s a single large company or tourist attraction, you may want to reconsider. You don’t want one market shift to tank your opportunity.
2. What’s the competition like?
Once you’ve picked a market with solid demand generators and drivers, it’s time to evaluate the competition. Those top five markets listed on page 30 have great drivers for occupancy, but they’re also stacked with competitors. An investment in a sustainable market with less competition and older products can be your best bet.
3. Which location?
The first two questions have likely narrowed down your city and even area. Now it’s time to pick an exact location. Do this with the aforementioned drivers in mind. For example, if your drivers are a thriving tourist attraction that brings in leisure guests and a major industry that brings in business travelers, then consider a location best suited for both. Business travelers drive weekday occupancy while leisure travelers drive weekend occupancy, so a good mix ensures a constant flow of customers.
Also consider areas within the city that are experiencing growth. While a downtown area is often the obvious choice for a new property, it can also be stacked with your competitors. Look at areas where there has been sustained growth over the past five to 10 years, particularly those with extensive dining and shopping options that would be appealing to business and leisure travelers alike.
4. Which brand?
Hotel brand is important to both travelers and lenders, as it can enhance customer loyalty and frequency of guests. It comes down to looking at who your target customer is – in both the commercial and leisure segment – and determining which brand will resonate with them.
Conduct market research to determine the types of room your target guests prefer (single, suite, etc.), price point they’re willing to pay and amenities they want. This broad research will help determine the class and segment of the business, from which you’ll have several hotel brand options to choose. If business guests are a primary driver, don’t overlook whether the company or group of companies you are targeting has relationships with a specific brand. Loyalty and rewards are key components that drive repeat business for hotels.
Is renovating or acquiring to renovate the best option?
Building a new hotel presents a wealth of challenges – there can be construction delays, permitting issues and more – and new construction may not always be what the market needs.
If you already own a hotel property, consider a property improvement plan (PIP) or upgrade of furniture, fixtures and equipment (FF&E). From time to time, a PIP is required by your hotel brand to ensure your property continues to meet brand standards. However, PIPs and FF&E upgrades can also help owners increase market share and enhance profitability. Likewise, if a PIP is not required by your hotel brand, you may consider one to upgrade your property to a higher level brand and attract a new base of customers.
Acquiring to renovate can also be appealing, particularly for those newer to the industry. When acquiring a current property, you can look at their current occupancy rates and rest assured that the location and market are ripe with opportunity. Just remember, new is always better in this industry. By acquiring and then renovating a property, you ensure current customers don’t look for a better option, while also attracting new customers who are searching for the latest and greatest.
Whether you are renovating a property you currently own or acquiring to renovate a property, take all of the market considerations into account.
Financing your hotel investment
The right financial partner and best available loan programs are vital to meeting your goals for the project. Construction delays, regulatory hurdles and cost overruns are just a few of the challenges you may encounter.
The best route is to talk to a lender or bank that specializes in hotel financing. Loan programs like those offered by the Small Business Administration (SBA) or U.S. Department of Agriculture (USDA), in addition to conventional loans, are viable options and can be customized to meet your specific needs. Often these lenders can close and fund your project in less time than traditional banks because the process is streamlined for the hotel industry. Banks with industry knowledge may also be able to assist you with tasks involved in the construction phase, similar to an assigned project manager.
Above all else, select a lender that will be with you from the first question to guests streaming through the door of your property. ■
Mike Muir, a hotel franchise development veteran, serves as executive vice president and general manager of Live Oak Bank’s hotel lending group. The bank’s industry knowledge, financing expertise and innovative technology combine to deliver unique financial solutions for hotel borrowers. Live Oak Bank programs include working capital and all closing costs, as well as competitive fixed and variable rate options. For more information, visit www.liveoakbank.com.