REPORT FROM THE U.S.—While the likes of New York and San Francisco have dominated much of the deal-related buzz in recent years, several secondary markets are beginning to elbow their way onto investors’ radars.
From Tucson, Arizona, to Tallahassee, Florida, it’s these smaller, more stable markets now poised with the greatest projected increases in value on a per-key basis, according to HVS’ “2012 United States Hotel Valuation Index.”
That means more deal activity is sure to follow, said Stephen Rushmore Jr., president and CEO of HVS and co-author of the report.
“I think we will begin to see a lot more transactions in the secondary markets over the next four years,” he said.
But which secondary markets top the list? Using HVS’ project value increases, here are the top five secondary markets in which hoteliers should invest during the months ahead.
1. Tucson, Arizona
Projected value increase through 2016: 170%
September YTD performance:
Occupancy: +0.6%
ADR: -1.4%
RevPAR: -0.8%
“Tucson maybe hasn’t enjoyed quite the same level of growth, at least through the first several months of the year, but we’re starting to see that turn gradually,” said Brent DeRaad, president and CEO, Metropolitan Tucson Convention & Visitors Bureau.
Located 110 miles south of Phoenix, Tucson typically trails the state capital by six months in hotel performance, he said. But 2013 is already looking strong.
“We do expect in 2013 a jump in occupancy, and I think that’s certainly going to help … it bodes well for the market, and the ability for the value of hotels to pick up. I think we’ll start to see some additional activity in that regard.”
The city will benefit from development of a light rail project set to be operational by next year. The rail, which starts at the University of Arizona and runs west to the other side of town, has already spurred “hundreds of millions of dollars of private investment” along the downtown core, DeRaad said.
“We’re feeling like things are moving in the right direction here in Tucson,” he said. “It’s going to continue to escalate here in value in terms of hotels and resorts.”
2. Tallahassee, Florida
Projected value increase through 2016: 94%
September YTD performance:
Occupancy: 3.9%
ADR: 1.3%
RevPAR: 5.2%
Tallahassee has come a long way since Edward Xanders moved there to manage the Tallahassee Hilton in 1979. Back then, the average daily rate was $26. Today, the market is pulling ADR of $78.65, according to September year-to-date data from STR, parent company of HotelNewsNow.com.
Xanders, now president of Interim Hospitality Consultants LLC, said the state capital is “recession resistant,” buoyed during the worst of times by demand from government officials and college students from nearby Florida State University, Florida A&M and a four-year community college.
“Because we manufacture little to nothing, we don’t care what happens on Wall Street,” he said. “The state legislature’s got to meet by law. And Junior’s got to go to school.”
While the market experienced declining occupancy during 2008 and 2009, drops held to mid single digits, compared to plummeting metrics throughout the much of the rest of the country, according to STR data.
Occupancy ended 2011 flat at 52.9%, while ADR was up 6% and revenue per available room increased 6%.
Despite such bumps along the way, Xanders doesn’t see much changing in the future. “Because of legislative business and school calendars, everything just repeats, repeats, repeats.
“I’d advise investing.”
3. Sacramento, California
Projected value increase through 2016: 88%
September YTD performance:
Occupancy: 2.6%
ADR: 1.8%
RevPAR: 4.4%
It’s been a rocky road for Sacramento, said Thomas E. Callahan, co-president and CEO of PKF Consulting’s West office.
“A lot of hotels got built in the period from 2005 to 2008, so you’ve got a compounding of a lot of rooms being built coupled with the fact that the main driver of the economy, which is still the government, doesn’t generate as much demand as it used to,” he said.
Those factors contributed to a 20% drop in RevPAR during 2009, according to STR, from which the market has only recently begun climbing its way out.
After RevPAR growth of 7.1% during 2011, PKF is forecasting increases of 5.5%, 6% and 8.9% during 2012, 2013 and 2014, respectively.
“We’re looking at some pretty good RevPAR growth, but if you add it up—we’re not going to get back to where we were in rooms revenue … until 2014,” he said.
What does that mean for hotel investment?
“It depends,” Callahan said. “… Is it a good time to invest in new hotels? No. Is it good time to buy an existing hotel presumably at well below replacement cost and then participate in the upward rise in revenues? Absolutely.”
4. Hartford, Connecticut
Projected value increase through 2016: 76%
September YTD performance:
Occupancy: -2.4%
ADR: 3.7%
RevPAR: 1.3%
“On an overall basis, our booking leads are up significantly over the same time last year,” said Michael Van Parys, president of the Connecticut Convention & Sports Bureau, which is based in Hartford.
While Hartford doesn’t draw the high-profile events of Boston or New York flanking its either side, the city has emerged as something of a haven for smaller, grassroots sporting competitions such as the 2013 U.S. Gymnastics Championships, he said.
Such demand drivers, along with a broader economic uptick, has put the market’s hotel industry on a track for success, Van Parys said. It also helps that much of its hotel stock is recently renovated, he added.
“We’re pretty much established now. We opened our convention center in 2005. We’ve done renovations. ... Now our hotels are either completely or finished renovations, so our hotels are in pretty good shape.”
And after a two-year period of financial austerity (and a $1 budget), Van Parys and his team at the CVB now have $15 million to spend to drive more demand to the market.
“Just the fact that we’re actually out there again and we’re a player and we’re building recognition is helping to rise the boat,” he said.
5. West Palm Beach/Boca Raton, Florida
Projected value increase through 2016: 74%
September YTD performance:
Occupancy: 2.9%
ADR: 4.7%
RevPAR: 7.7%
There hasn’t been much deal flow in Boca Raton during the past year. “We can count them on one hand,” said Bob Goldstein, founder, president and CEO of Hospitality Consultants. And what has been traded was distressed in one way, shape or form.
But a recent uptick in performance throughout broader Palm Beach County is sure to lure eager investors who were late to the game in nearby Miami, he said.
“We’re going to see an increase in the business back to mid-2000s when things were doing really, really well,” Goldstein said. “That means that some of the valuations … are going to increase. With an increase in valuations, there’s going to be a renewed transaction appetite … We’re going to find people on the sell side that are feeling that they can start to recoup some of the investment that they have in the property. And on the buy side, we’re already seeing a renewed appetite.”
So is now the time to buy in Boca Raton?
“I absolutely think it’s the best time,” he said, citing three key reasons.
“You’ve got a market on the upswing. I’m a big proponent of buying into a market on the upswing. No. 2, I think there’s some values. No. 3 is we’ve seen a contraction in the number of rooms in the market.”