Wednesday, March 21, 2018

How do you know a hotel will do well in a given location?

I've seen hotels built for the most respectable reasons, after carefully researching a market, the planned location of the hotel, and that area's needs, and what sort of hotel would best answer those needs. I've seen them built for reasons as not-so-respectable as the fact that the owner owned the site and wanted to put a hotel on it (never mind it would be the worst part of town in which to locate a hotel, or that town had less-than-zero need or demand for new hotels at all), or someone had friends, family or a girlfriend living in a certain town; or someone had a relative who needed a job and the owner figured, how hard can running a hotel be? People who can access the resources to build a hotel can put one wherever they can secure a building site, and many do so, shall we say, quite freely.

Here is how I go about it.

Image result for new hotel construction

We look at the specific location within a town that we have in mind. Just being in one part of town or another can make quite a difference even in a smaller city. So, you want to sort out your existing hotels in a city by the individual submarkets within that city in which they are located.

HVS divides most larger cities into recognized submarkets, but you can identify them yourself (adequately, if not altogether accurately by HVS's methodology) by bringing up a city in which you're considering a new hotel on Google Maps, searching 'hotels', and noticing in what areas of town that the little red symbols that represent the hotels that come up seem to be clustered on that map. A few isolated properties will occur, but each of these clusters indicates the presence of a separate submarket.

Each of these submarkets will have different demand generators: if you're traveling to Charlotte to do business near South Park, you don't drive across town to check into one of the hotels near the University. Hotels usually tend to be clustered near the largest demand generators, or the largest concentrations of demand generators, in a town. (Even smaller towns the size of Wilson, North Carolina or Parkersburg, West Virginia can be sorted into 'hotels in town' and 'hotels out near the interstate'.)

Some, but not much, competition occurs between hotels across submarkets in a city. The rates at hotels in different parts of town will reflect this. Room rates are a function of supply and demand. I can get into the idea of putting a new hotel in Raleigh, but the very next question is going to be, where in Raleigh? It makes a difference. People are going to stay as close as possible to the demand generator that drew them to that town: they're not going to want to drive across town from their hotel to it without some reason.

(Sometimes, the reason is that they can save a few bucks if they drive from another part of town, or someplace just outside town. If I'm going to be staying a few nights in New York City on business, unless it's going to keep me out so late or get me up so early that I can't make the New Jersey Transit bus schedules work, I'm going to stay in north Jersey rather than pay midtown Manhattan rates.)

Marketability of your new hotel is paramount. If you're going to sit on your butt and wait for business to come to you from the interstate like a mom-and-pop roadside motel from the sixties, you'll eventually be running a sixty-dollar a night property with a weenie franchise like Days Inn or Quality Inn or Travelodge, not much more; no matter how much you invest in it or what franchise you select. So, don't invest any more than it takes to build a property like that. Don't even invest that much: don't build one, buy one. Look at Loopnet; and at The Mumford Company, and a couple of dozen other hotel broker sites: there are literally hundreds available. Some people make a pretty good living running them without having to work too hard at it, if they watch their costs and do a halfway decent job of keeping them up but, obviously from the sheer number of them that are up for sale, they do get tired of them after a while.

Any good hotel is going to require some marketing: either you or someone you hire to do it will need the ability to find, reach out to, connect with, and bring to your property people who don't mind paying $100 or more for a hotel room, so long as you deliver the value that will justify the price. If you build a new hotel, it's hard to make the numbers work on anything less than that.

One thing I look for -- sometimes, even before I pick a town or a part of town -- is lots of activity.

I want to see demand generators.

I want to see lots of companies that operate in the area, from which I can draw business travelers. Most hotels live and die by business travelers. No business travelers, no hotel, end of discussion. This one's a non-negotiable. You'll see why as you read on.

I can live without one if I have to, if there are compensating factors, it's not a non-negotiable like business travelers; but I want to see busy event venues: an arena, a stadium, a convention center.

I don't necessarily need one. but I'd like to see at least one college or university. A good academic reputation, and lots of visiting professors I could check in as guests, would be nice. A popular NCAA football or basketball team, that will allow me to fill the hotel every time they have a home game at increased, revenue-managed rates, would be even better.

A referral hospital close by would be nice.

I'd want to see a beach or mountain resort area, or a theme park, nearby, but in a good business travel location I don't really need one, and there's no way I'm going to depend entirely on something like that.

What I'm looking for are things that answer the question, "what would make someone want or need to come to this town and check into a hotel here for a few days?"

Most importantly, I want to see a variety of activity and demand generators. 'Company towns' are great -- if you have the only hotel in town. And even then, what do you do if the local company cuts back or the plant shuts down? If you build in a military town, you'll have twenty to fifty other properties competing for the same 'business from the base' that drives a lot of misguided businesspeople to launch a business there (Military town markets: Why a catastrophic natural disaster, that would wipe out most of Fayetteville, North Carolina, would be for “Fayettenam’s” own good), and your hotel will be just one of those. Identifying that business a little more precisely and reaching out to those who can and would refer it to you (government contractors, individual unit organizations, etc.) is going to take much more study, data crunching, and work than it would in a town with more of a variety of local employers.

The problem you're going to have attracting business travelers if you set up in a beach or resort area is that the top twenty companies in, say, Myrtle Beach, are all tourism-related -- and if you own a hotel there, all of the hotels that compete with you are 'tourism-related', too. (That's just the way hotels are.) Look how many hotels there already are in Myrtle Beach that snarf up any tourism-related business travel that appears.

I won't touch a casino town with a ten-foot pole. Casinos are usually accompanied by large casino hotels that are way overbuilt, with lots of really nice, cheap rooms, that you can't compete with and get a decent rate. Casinos are a demand generator that take away with their left hand what they give with their right, and then some. Even in healthy casino markets. And as casinos are becoming more widespread, as more and more more isolated towns build them to stimulate tourism and the local economy, towns best known for their casinos are in decline. Atlantic City has a couple of casino hotels that have been closed down and are sitting empty. (So long, Atlantic City, it was nice while it lasted, I enjoyed being close to the affordable, big name stage acts when I lived in Bethlehem, too bad it couldn't go on forever . . .) Cherokee has several hotels, including franchised properties, that close down completely in the winter.

Vegas may be hanging in there, but if I put a property there, I wouldn't count on too much tourism business. I'd love to have a property in Bethlehem, Pennsylvania where I lived for several years, but I wouldn't count on anything from Sands Resort, and I'd get on my knees and thank the good Lord every night that they built it right in the middle of what has been allowed, over the last forty years, to become a bad area of town since Bethlehem Steel shut down. The only need for a 300-room hotel in that spot is to have 300 to 1000 people checked into the rooms and afraid to go wandering around outside, and provide little else for them to do on the inside except to play at the tables. Something that was always a problem in Atlantic City is, once you're more than two blocks away from a casino hotel, the entire city was a depressed area. It still is. Only now it's even worse. If you come to me with a hotel you own in or around Atlantic City, the best I can promise you is to try and keep your losses down until you can find a buyer, or until you get tired of losing money and board the place up.

One of the reasons I had a less than stellar career prior to launching my own company is that I was never much of a good sport, or a good player, at doing the 'pick me, pick me!' thing with employers in a job market where even middle management (even hotel general managers) is commoditized. I'm not gambling a ten-million-dollar new hotel investment on my ability to do it — even with your money. Anything I get involved with is going to be unique, not commoditized, have something about it that makes people seek it out; and will have a targeted list of prospective corporate or group customers that I can reasonably anticipate will come to me, not make me have to go after them. Because once whatever you're offering is commoditized, then you're competing solely on price. (Either that, or that “pick me! pick me!” game that I absolutely hate and don't play very well.) And as far as competing on price goes, the only time I like cheap rooms is when I'm the one checking in as a guest. Anyone else, that shows up in one of mine, I want to get as much money out of them per night as I can.

Another thing I like to see is how a new hotel in a given location might support hotels that we already have. I'd like to see area demand generators that are common to both hotels. If, for example, you already operate a property near a Marine base that's doing well, it only makes sense to put your next one in another Marine Corps town (subject, of course, to the foregoing caveats about putting one in a military or other 'company town'). The two hotels in the two Marine towns will refer lots of business to one another, and much of it will come to you naturally if they like you in one town, and word gets around that you also run the hotel in the other (What is a good way to start a hotel chain?). If you have properties in several larger cities in Virginia, it doesn't make good nonsense to not consider something in Richmond: sooner or later nearly everyone travels to the state capital. If Sticky Widgets, Inc., has operations in your town that is sending you lots of corporate business, and they also have a plant a couple hundred miles away in Greensboro, by all means consider Greensboro -- specifically, a site as close to their Greensboro plant as commercially feasible.

And once I have decided on a spot, something else that it's important to think about is infrastructure that will support a hotel. We are not in the restaurant business and we don't really want to be but recently we reached out to Huddle House for a solution where we have sites where there are no eating places on the off-ramp. If you don't have somewhere for people to eat, they may end up staying at a place close to where they can have dinner at night: if you don't have it nearby already you might want to think about putting it there. (This also solves another problem we have: occasionally we end up overpaying a little, for a bigger site than we need, and we need to get a return on the leftover space.) As lack of nearby restaurants will overstrain your complimentary breakfast and still not be enough for your customers; lack of a nearby convenience store will overstrain your little lobby 'marketplace' operation, still not be enough for your guests, and still won't make your 'marketplace' profitable. If you're in a midtown location and don't have free parking, the daily cost of parking is going to have to be added to your room rate as a total cost of staying a night in your hotel. A more outlying hotel of comparable quality that does have free parking could offer your guest a better value. And if it's not easy to get your car in and out, your hotel needs to be in a spot where there are lots of things to do within an easy walk in the evening.

All of this, of course, is when I have that much of a say in where we put the hotel.

Beechmont is a management company: we do not own any hotels, we contract the management of them for others. Frequently, they come to us with a site that they already own, and we then take on the job of making it work, or of coming up with a hotel that will work there. Right now, we're working on partnering with some commercial real estate brokers and developers who don't do hotels specifically, and will get better at being able to pick our spots. But we still want to be good at taking anything (almost, within reason, of course . . .) that anyone brings to us, and finding a way to make it work, because that's the need of most of the customer base that, for now, we do have.

Location is not the only factor you'll want to consider. You'll also want to consider what type of product will work best there. The last thing the Roanoke-Salem, Virginia area needs is another Hampton Inn -- there are already too many -- but an upscale brand like Courtyard, Element, or SpringHill by Marriott might do very well there.

Some people, accordingly, we turn away, or they go away on their own. Usually it's because of capital stack or financing problems. (If you don't have access to enough money to build or buy a hotel, there's not much I can do for you, except wish I could find a way to bill you for the work we put into it before it finally became clear that you never had enough money to do it. There's not much I can do for me when I don't have access to enough money to build or buy a hotel.)

Sometimes, the best thing we can do for them in that location is a Holiday Inn Express, a Hampton Inn, or a Marriott brand -- and we do not do IHG- (for now), Hilton- (less likely) or Marriott-branded hotels (we don't aspire to be a Marriott developer at all). If the best thing for you is one of those products, I'll refer you to a friend who owns an altogether separate management company, who does nothing but Marriott, Hilton and IHG. (Beechmont is created to be the kind of company that operates more flexibly and spontaneously than Marriott, Hilton and IHG will allow. Our strong suit is that we can take a Best Western, Red Lion, Comfort Suites, Country Inn and Suites by Radisson, or Wingate by Wyndham -- less supportive of the individual property, but also less capital-intensive and more flexibly operable brands -- and go after the nearby Hampton Inn, Holiday Inn Express or Fairfield by Marriott and mix it up with them, and do well and hold our own against them competitively.)

Speaking of Hampton Inns . . Hampton by Hilton is not my favorite hotel franchise but one thing I do have to acknowledge them for, then and even now, is their contribution throughout their entire existence to the field of hotel market research, surpassed in the years since only by TripAdvisor. Rooms at a Hampton Inn pretty much come one way, they'll have the same furnishings and amenities, and any noticeable imperfections will give a guest grounds to invoke Hampton's infamous '100% Satisfaction Guarantee' and get out of paying for the room. So, if the Hampton Inn in Hooterville has a rate of $159 per night, and the Hampton Inn in Pixley is offering a similar room for $109 per night, guess which one of those towns has, according to the law of supply and demand, the greater need of a new hotel? Before Al Gore invented the Internet, one of the most reliable guides to where the greatest need or opportunity existed to build a new hotel wasn't some proprietary document that you had to pay a lot of money for, or have an insider connection to even access it at all; nor was it an arcane, well-researched business publication put out by Cornell, HVS or STR that was available only by subscription as a exorbitant fee. It was a 9-by-4-inch booklet having about three hundred pages that you could walk into any Hampton Inn and they'd gladly give you for the asking. You didn't even have to ask: most of them had a rack with their directories, with their locations and rates listed, on display and available for the taking.

However, we don't just look at Hampton Inns. Hampton Inns, Holiday Inn Express, and Fairfield by Marriott are upscale select service products. So are Comfort Suites, Country Inn and Suites by Radisson, and Wingate by Wyndham, but we consider these separately. We compare rates for comparable products (brand) of comparable quality (TripAdvisor reviews). We consider the total investment involved, and take care to note what sort of product shows up as missing in that market.

For example, Choice Hotels is making a fresh commitment to the Comfort brands, and we are currently working with some people from Choice in finding places to put new Comfort Inn and Comfort Suites properties. Winston-Salem, N. C., is not one of those places: Choice brands are oversold here, there are too many of them, and their rates lag below their competitors. A Country Inn and Suites by Radisson, however, might work well here. By contrast, a new Comfort Inn might go very well in an area of Asheville, N. C. that we're considering, but if I were to acquire one of the three Country Inn and Suites in that market, I would demand it be delivered unencumbered by franchise, and would very quickly re-brand it to a Red Lion or Best Western. For a brand as comparatively weak as Country Inn and Suites in a market no larger than Asheville, three is too many. There are only three Hampton Inns in Asheville, and Hampton is a much stronger brand. The limited demand for their product shows in the Country Inns' rates by comparison to those at the nearby Hampton Inns, those three properties having the highest TripAdvisor reviews of any chain hotels in Asheville (including the Hampton Inns) notwithstanding.

In some places, you may want a different sort of product altogether; perhaps an all-suite, extended-stay product like a Candlewood Suites or a TownePlace Suites; or their slightly more plush and upscale counterparts, Staybridge Suites or Residence Inn by Marriott. (I prefer the SpringHill Suites by Marriott or the Comfort Suites: you get a slightly smaller suite that's more ergonomically efficient, the guest doesn't go stir crazy like he would if he spent three or four days in a more conventionally sized hotel room, but the lower square footage per key results in a significant cost savings in construction and development costs.)

Smith Travel Research offers you, if you're a subscriber, lots of performance data in any market with existing hotels -- average occupancy, average daily rate (the rate actually billed to guests, not advertised rates), average revenue per available room -- but much of that information, and then some, is available on TripAdvisor.

From TripAdvisor, you'll get the advertised, and some discounted rates. If an existing hotel's ADR is far below its advertised rates, that will tell me that they're marketing aggressively and offering deep discounts to certain companies and groups, but we're not necessarily going to do that. What TripAdvisor will tell you that STR doesn't is the guests' reviews of the existing hotels in a market. This will give you a pretty good idea of what you'll be competing with.

Good luck in your search for a place for a new hotel. Call us if you need us.

Originally appeared on Quora

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