REPORT FROM THE U.S.—Headlines might boast of record hotel development in major metropolitans such as New York City, but that doesn’t mean secondary markets in the United States are devoid of opportunity.
On the contrary, shovels are hitting pay dirt in oft-forgotten cities such as Cleveland and Pittsburgh, where returns are proving right for investors.
Raleigh, North Carolina-based Concord Hospitality Enterprises Company has been particularly active in the latter, with 18 hotels in the greater Pittsburgh area. Less important to the company’s development team is the market’s profile as is its fundamentals.
“We look for markets that have pockets of growth,” said Mark Laport, Concord’s co-founder, president and CEO.
That often means outside of the urban center.
Downtown Cleveland, for instance, has seen a swell of new hotels opening their doors, with several more planned to open in 2015. Wary of oversupply, Laport and his team passed on a development opportunity there.
But as they expanded their search, they found the University Circle submarket on the near East Side with steady demand drivers and a lack of rooms to serve it.
“We felt a new hotel would make a lot of sense. … We took that risk and proved to be very fortunate,” he said.
Concord’s Courtyard Cleveland University Circle has benefitted from steady demand from two nearby medical campuses and Case Western Reserve University.
“It’s our wheelhouse to study markets whether they have the capacity for more hotels or not. We think we’re good at it. We don’t go to feasibility companies. We do that feasibility in house,” Laport said.
Those studies increasingly are backed by strong performance. Among hotels in the 26th through 50th largest U.S. markets tracked by STR, parent company of HNN, occupancies on average are up 4% in the year-to-October period. Average daily rate, meanwhile, is up 5.4%, while revenue per available room is up 9.5%.
The number of properties in those markets increased 1% (69 hotels) year over year, while the room count increased 0.9% (6,175 rooms).
Sniffing out opportunity
Concord isn’t the only developer to venture off the beaten path.
Atlanta-based Capella Hotel Group, which operates the Capella Hotels and Resorts and Solis Hotels & Resorts brands in addition to six independents around the globe, looks for opportunities where the team can add value.
“We look at each potential project, market and partner on a standalone basis. We try to determine if there is an opportunity to become No. 1 in the segment in the destination in order to create superior financial results through superior service and quality,” Fausto Barba, Capella’s VP of finance and development, wrote in an email.
“By way of example, we may consider a resort location that is a bit out of the beaten path if it offers a range of attributes desired by our guests and if its accessibility is reasonable,” he added.
Conducting due diligence typically is easier in primary markets, Barba said.
“There is ample information on the demand, the competitors as well as potential additions to supply. Also, most economic indicators are easily traceable and financing is more readily available,” he said.
Capella’s executives unearth opportunity though “long-standing relationships and word-of-mouth recommendations or our partners, lenders, owners, consultants and sometimes our competitors,” Barba said.
Concord often follows success with success. When the group develops a property in one secondary market, it often follows up with more projects nearby to leverage that experience.
Or as Laport explained, “We tend to cluster where we’ve already been successful.”
For a major chain such as Marriott International, development opportunities are often dictated by individual brands, explained President and CEO Arne Sorenson during the recent opening of the group’s first AC Hotels by Marriott property in New Orleans.
AC hotels, for instance, is a good fit for urban center markets that aren’t gateways, he explained.
But there are customers in every market, in which hoteliers must fit the right product. Marriott has 18 such brand arrows in the quiver to aid in the company’s first priority: “unit growth,” Sorenson explained.
Barba shared a similar perspective.
“Capella Hotel Group operates ultra-luxury, luxury and lifestyle hotels. … If a secondary market can’t support the rates of our branded products, we typically create a unique independent hotel with the goal of becoming the rate leader in the destination,” he said.