As part of our most recent Hotel Investors Gauge, we asked investors, lenders and developers to rank their top markets in terms of investment potential. These included both primary markets and secondary hotel markets. Washington, D.C., topped the list among investors, with New York City a very close second. Second-tier cities that ranked high on the list were Austin, Texas; Portland; and Charleston, South Carolina. The list of the top 10 markets investors selected is shown below. Markets are listed in order of total ranked score.
1. Washington, D.C.
2. New York
3. Austin, Texas
4. Portland
5. San Francisco
6. San Jose, California
7. Miami/Fort Lauderdale
8. Los Angeles
9. Boston
10. Charleston
However, there are numerous reasons for the locations above to be the preferred targets of investors. Using our GeoSTAR visualization tool, we evaluated the tracts in each of the market areas that were highly rated by the hotel investment community. In doing so, we filtered the data on multiple metrics and the changes in those benchmarks, not only from period to period, but also from the market peak and over the course of real estate cycles. We also included future supply growth in our examination of markets.
The map below shows the 60-plus market tracts that comprise these 10 markets colorized based on 2010 RevPAR change. Looking at them from this perspective, only Washington, D.C., and Miami/Fort Lauderdale have market tracts that declined in revenue-per-available-room performance. The darkest green indicates a ReevPAR change of 25.9%.
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The heat graph below shows the top 10 market tracts within these larger markets ranked by demand growth in 2010. Year-over-year changes in occupancy, average daily rate, RevPAR and supply also are indicated.
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Historical strength
Going with the best market available is always a good formula to eliminate investor risk. New York City has three of the top RevPAR submarkets in the United States. Miami Beach is the only other submarket chosen by investors that ranks in the top 10 of 2010 RevPAR performance.
Strong growth
If you were to slice 2010 by the markets with above-average, year-over-year demand growth (7.9%+), above-average occupancy (>60%), and positive ADR growth, only 15 U.S. hotel markets would remain. Only four of those submarkets are situated in metropolitan areas that are ranked as most popular among investors: three in San Francisco and one in Los Angeles. San Francisco seems finally to be emerging from the slow recovery it experienced in the previous cycle.
While Los Angeles is a primary urban market and a gateway city, the downtown Los Angeles hotel market has been somewhat dormant until recent years. In 2010, downtown Los Angeles, which opened the new JW Marriott and Ritz-Carlton convention hotel complex, saw the largest volume of demand growth within the LA area.
High-tech areas
With the advancements in new technology, places like Austin and San Jose, California, are still high on investors’ lists. As the heat graph illustrates, Austin’s three primary market tracts rank one through three in terms of 2010 demand growth against the 60-plus market tracts that comprise the top 10 market areas ranked by investors. As home to Dell and also a strong presence by IBM, Austin NW/Arboretum and Round Rock/Georgetown both experienced demand growth greater than 20% in 2010.
The San Jose area seems to be a favorite among investors with a strong outlook for Apple (Cupertino) and Google (Mountain View). As the chart indicates, the Palo Alto/Northwest tract appears to be capitalizing on the growth in that area of Silicon Valley.
Consistency and resilience
Resilience during down times also is an appealing trait to investors. With high barriers to entry and relatively consistent demand levels, D.C. did not see as steep of a decline in 2009 and it is already close to reaching its previous peak in RevPAR. Boston is another market that is performing close to its market peak, after experiencing only a mild decline in RevPAR in 2009. Santa Monica/Marina Del Ray is probably L.A.’s more resilient submarket as it actually experienced positive RevPAR growth in 2009 and continued to see demand improvement in 2010.
Charleston also is a very consistent market with high barriers to entry and a strong reputation not only regionally, but also internationally. Charleston is a one of the premier niche markets similar to Napa, California, and Santa Fe, New Mexico, where the prime locations achieve significantly high occupancies. The demand base is primarily leisure-oriented, as the destination is often highly ranked by Conde Nast Traveler and Travel & Leisure.
The complete results of the Q1 2011 Hotel Investors Gauge will be released in the next issue of the Hotel Investment Barometer. Results from the prior survey can be found here. To learn more about STR Analytics’ GeoSTAR products, please e-mail shennis@stranalytics.com.