Emerging development trends in 2013
Emerging development trends in 2013
13 DECEMBER 2012 7:05 AM

Although the pace of recovery has been slow, it has also been steady, and some noteworthy trends are beginning to emerge within Midwestern markets and the broader industry.

Across the Midwest and the nation, the hotel industry is continuing to slowly reclaim some of the ground that lost during the recession. Some of that ground is literal, with slowed or stalled development initiatives, and some of it is figurative, with at-times surprisingly steep drops in rates compounding the difficulties introduced by sagging demand.

While the pace of recovery has been slow, it has also been steady, and some noteworthy trends are beginning to emerge—both within individual Midwestern markets and across the broader industry. A snapshot of which markets are seeing more development momentum and an examination of what that development looks like will provide some hints about where the industry and the region are today, and, more importantly, what comes next in 2013 and beyond.

Development direction
In general terms, industry-wide development has started to pick up. The Midwest mirrors the larger national trend in that regard, but there are some signs the region is becoming more of a destination with hotter sub-markets that present some solid opportunities for hoteliers.

While the overall direction is a positive one, and some important development and financial indices are getting marginally better, the bad news is the improvement we are seeing is exactly that: marginal. The wild card remains the ability to place debt. The largest shadow hanging over banking right now is still the challenging regulatory environment. Hotel development is viewed as one of the riskiest lending categories, and while the purse strings for construction lending have started to loosen up somewhat, credit is still in relatively short supply. While there are reasons to believe the credit markets will continue to thaw, the fundamental development dynamic (slow and steady) probably will not be changing any time soon.

One of the reasons the development inertia of the recession has been broken, however, is because of the degree to which regional banks have stepped in to fill the financing gap. While some of the bigger players have increased their lending goals somewhat for 2013, there is little to indicate there will be any big movement in the near future. The aftermath of the election, with uncertainty surrounding the details of how Obamacare will play out, the looming fiscal cliff and more general concerns about the political gridlock in Washington will also likely continue to exert a drag on the economy and contribute to the slowness of the recovery.

To be sure, there will definitely be more interest in development, but the structural obstacles will be slow to erode. As a result of that dichotomy, we will see hotel developers and investors focusing more strategically on deals that make sense and deals that can get done. Outside of New York and a handful of hot markets, the more speculative, ambitious and romantic projects will likely have a harder time getting buy-in. The meat and potatoes opportunities, however—the smaller, high-quality lower-risk deals—will be getting done.

Midwest market overviews
Chicago is, unsurprisingly, getting a lot of development attention these days. It is interesting to note demand fell only marginally in Chicago, even in the depths of the recession; it was rate that scaled things back the most. With that in mind, continued rate recovery will provide a significant boost in markets such as Chicago. The rate drops that diluted revenue per available room significantly in the Windy City (which were largely a self-inflicted wound) are a thing of the past, and Chicago is still a top business destination with a diverse economy and demand base, as well as strong convention, leisure and business components. If there is a note of caution here, it is that Chicago’s many assets can also be a liability from a development standpoint: Too much of a spike in development activity will be a problem if supply outpaces demand.

Outside of Chicago, there are some promising hotel development trends in other Midwestern cities. Markets including Milwaukee, Minneapolis and Omaha, Nebraska, all have positive outlooks, and while none of them are as deep, diverse or dynamic as Chicago, they have shown a steady level of demand and modest growth that bodes well in the near to medium term. Indianapolis is also a solid-to-strong market with a quality business environment, big-time sports teams and other civic assets, but questions remain about the recent influx of development. Thus far, the Indianapolis marketplace has absorbed that well, but there are some concerns about market saturation going forward.

Emerging trends
Taking a step back and looking at a more macro-view of the industry, it is apparent the hotel industry will have to pay even closer attention to the changing preferences of travelers, as technological and generational changes will continue to impact development going forward. Technology has influenced some of the metamorphoses of the hotel business, cycling from a period where larger mega-brands were able to leverage their presence through a wider range of media, through to the current day where the successful (re)emergence of smaller, boutique lines has been largely driven by their ability to market themselves online.

The cachet, individuality and specialized nature of boutique offering is en vogue. Technology has also been an integral part of shaping and reporting the guest experience, from its role in choosing hotels, to providing feedback and ultimately determining what is (and is not) cool. As guest priorities continue to evolve, hoteliers need to pay close attention to these changes and to integrate these trends into their development calculus.

First Hospitality Group, Inc. has been involved in the development, ownership and management of hotels since 1985. Currently, the First Hospitality Group, Inc. portfolio consists primarily of Hilton and Marriott affiliated assets. In addition, First Hospitality Group, Inc. has ownership interests and manages hotels affiliated with InterContinental, Hyatt and Carlson. For further information, visit www.fhginc.com or call Robert Habeeb at 847-299-9040.

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