REPORT FROM THE U.S.—Universities and colleges have always been a unique driver of demand for hotels, and with the sting of a deep recession still throbbing, investors are finding hotels near a steady demand driver that much more appealing.
Hotels in cities with a college or university—whether it be a major urban setting such as Atlanta or a more rural college town such as Chapel Hill, North Carolina—have become a hot commodity.
“What’s attractive to companies about college towns—especially coming off such a bad couple of years and going through a downturn like that—you like to stay around the markets that are more stable,” said Roy Kretschmer, executive VP of operations for Valencia Group, which recently debuted a roadside hotel concept targeting university markets in the Southeastern United States. “Government business, medical business, educational business—that demand is not so cyclical. It’s pretty consistent, and you’re not going to see big cycles where there are huge demand peaks and valleys.”
“Universities have a continuous and often times growing need for hotel rooms,” said Adam Valente, senior VP with RockBridge Partners, which in March acquired the University Hotel Minneapolis on the campus of the University of Minnesota and will renovate and rebrand the property. “There are lots of different segments on the demand side: there is business related to the university; suppliers; visiting lecturers; support for the athletic teams; graduations; move-ins; move-outs … from a hotel standpoint, you start to get a little excited really being able to grow profitability.”
There is an important distinction, however, between urban markets with a university and college towns. In an urban market, a hotel can rely on outside demand generators to provide ancillary demand. In a secondary or tertiary market—a college town—sources said the hotel must be either on campus or very nearby to be successful.
Paramount Hospitality Management in March signed a deal to build a 112-room adaptive reuse Hilton Garden Inn at the University of Tennessee in Knoxville. Paramount has experience owning and operating in college settings—the company’s portfolio includes a Hampton Inn in Atlanta adjacent to the Georgia Institute of Technology and a Hampton Inn in Carrollton, Georgia, near the University of West Georgia.
“What attracted us (to Knoxville) is we wanted a high-barrier-to-entry market,” said Nick Lakha, Paramount’s president and COO. “We’ll be well positioned from our location as we’re close to the university, and we see a lot of value in that.”
At the end of the day, hotels located on or near college campuses, specifically in an urban setting, are safer assets from a risk perspective. However, with that risk mitigation comes higher prices on the transactions market.
“They’re sheltered from the economic cycles and these hotels generally provide more consistent returns,” Lakha said. “That might drive higher prices on the market, but those are also things that make for a compelling investment.”
For that reason, Kretschmer said building ground up might be more cost effective, and that’s precisely what Valencia is evaluating in 20 markets stretching from Texas to Georgia’s east coast. If developers target secondary markets rather than primary urban locations—but still have universities and potential government business in state capitals—they can get land at reduced cost.
“We’re not talking about trying to secure land in a California market or Chicago, so the cost of land is much more conducive to what the rate would sustain,” Kretschmer said. “We know we can’t go in and get a $300 rate in market like that, but everything is relative from a cost-per-key perspective. You can still get returns equal to what you would get in a top market.”
Sources offered different perspectives on whether properties near a college campus should be branded or remain independent. Paramount, which primarily works with Hilton Worldwide and Marriott International, chooses to go the brand route. “I think branding is very important because it takes the guesswork out of it from a travelers’ perspective,” Lakha said. “Many travelers are very loyal to their respective brands, and we try to maintain relationships with the brands that have got the highest volume of loyalty members.”
Valente said the asset on the University of Minnesota campus will remain independent. “We believe the University of Minnesota is really the brand,” he said. “As big of fans as we are of brands, we feel, at this hotel, the right ingredients are in place to remain independent.”
Including the nearby university in the name of the hotel can be extremely beneficial from a traveler recognition standpoint, but owners must tread carefully when doing so. There are legal and copyright issues associated with university names; including related terms is acceptable and suggested.
“The goal is to come up with a name and an aura or style of hotel that resonates with alumni,” Valente said of the Minnesota campus property. “You can use a name of a park on campus or pull some history or lore from the university.”
While referencing the university in the name of the hotel might be important, partnering with the school to capitalize on unique demand generators is essential.
Building a relationship with the school can help both parties. At the University of Tennessee, Paramount has already approached executives and will tailor some of their hotel construction to fit the school’s needs. The school will help determine the amount of meeting space, particular amenities and a parking partnership. Because parking on UT’s campus is a challenge, Lakha said there will be an opportunity to use their parking lot as a revenue generator.
“Ultimately we’ve got to figure out how to partner with the university. The first step is reaching out to them and holding interactive sessions. We’ve already started that conversation,” Lakha said.
Paramount will reach out to university heads, individual college heads within the university and individual school heads within the colleges, hoping to get on the radar of the travel planners in each department. There are opportunities for both academic and athletic partnerships, he said.
In Minneapolis, Valente said revenue management will be crucial. While university partnerships will help create demand, often times that demand is at discounted, negotiated rates.
“The question becomes at what rate will those rooms sell,” Valente said. “Universities are filled with a lot of good business minds who know they have some bargaining power as to what those rates are. Especially where there are other hotels, and they have options.”
Valencia’s Kretschmer said hotels directly on campus typically are governed by a state rate so there will be little flexibility on average daily rate. It’s another reason why they are looking at land just outside town.
“Although we’re looking at the university visitors, we’re also looking at all of the events that would be created by that demand generator, such as sporting events—the social and the leisure demand,” he said. “But we’re not cornered in by that rate ceiling.”