UNIVERISTY PARK, Pennsylvania—At many recent hotel investment conferences and in recent issues of hotel trade magazines, hotel developers have proposed that a hot prospective location for hotel development is near colleges and universities.
The primary reason often cited for this optimism is the relative stability of hotel demand generated by colleges. However, until now, this proposition has never been empirically tested, and no empirical research has shown hotel developers and investors what variables about colleges they should study to determine the feasibility of hotel development in any given college marketplace.
The ICHRIE Penn State Research Report titled, “University Lodging Demand: An Analysis of its Stability and Guidance for Estimating its Growth Potential at the Market Level,” discovers that college hotel demand is in fact more stable than typical hotel demand, and that markets dominated by a college are more stable in terms of not only occupancy rates but average room rates as well. However, the study also concludes that college hotel demand has overall below average occupancy and rate levels.
The research study analyzed university-related hotel demand over the 24-year period since 1990. The project focused on 27 college towns to isolate the dynamics of supply and demand related to colleges. Also, the study compared the supply and demand in college towns to U.S. averages and to similarly-sized cities not dominated by a college, and the study concluded that hotel demand in college towns is more stable than both U.S. averages and similarly-sized cities.
The translational research study showed that significant predictors of hotel demand growth in college markets include city employment and population trends, as would be expected. Specifically, each person employed in a university town was associated with approximately 10.5 occupied room nights in the regression equation derived from this study.
2 surprising predictors of demand
Interestingly, university grant funding and graduate student populations—two factors that haven’t been previously studied—are also strong predictors of hotel demand.
Regarding grant funding in particular, each $1,000 in grant funding was associated with 14.4 additional occupied room nights.
Grant funding appears to be a good indicator of commerce generated by universities themselves. In particular, grant funding includes research dollars captured by university faculty and staff from such sources as foundations, associations, corporations and state and federal agencies. Grant funds may be used for research, training and outreach. Grant funding typically results in visitation to campus from foundation, association, corporate and governmental representatives, as well as research project collaborators. In addition, grants often result in the development of campus symposia, conferences and training sessions, which can generate significant visitation and room night demand.
Each graduate student, meanwhile, was associated with 68.1 occupied room nights.
Similar to grant funding, the graduate student population appears to be an indicator of university-related commerce, though in the case of graduate students it would be activities primarily related to research activities at the universities included in the sample in this study. At such universities, graduate students generally work on research projects, and larger, more complex projects require more graduate student support.
The weakest indicator
Of the variables studied in this project, the total student population by year was found to be the relatively weakest predictor of hotel demand growth. That finding is particularly interesting considering that a proprietary consulting report recommended consideration of trends in total student population.
Though undergraduate student population trends are not irrelevant, they are a weaker predictor of hotel demand than graduate student population trends, possibly because undergraduate student population is relatively more stable. Further, this study suggests that other university-related factors such as grant funding, and other city factors such as employment trends, possess superior predictive capacity related to hotel demand.
The study finds that college markets are more stable than both U.S. averages and similarly sized markets, in both occupancy and average rate. The primary take-away point for hotel feasibility analysts is that when studying hotel development and acquisition opportunities in university markets, they should evaluate both grant funding and graduate student population trends.
About the author
John W. O'Neill, MAI, ISHC, Ph.D., is director of the School of Hospitality Management at The Pennsylvania State University where he has taught and conducted research in real estate and strategy for the past 14 years. He previously held unit-, regional-, and corporate-level management positions with Hyatt and Marriott in a variety of cities.
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