College-owned hotels require clear objectives
09 MAY 2014 6:04 AM
School officials, their partners and service providers must understand that university-owned hotels are different from those owned by more traditional investors.
There is a relative boom going on in college- and university-owned hotel development.
Across the United States there are approximately 85 hotel facilities that are owned by colleges and universities, with an additional 14 in development. These facilities are unique in that they are owned directly by the schools and are closely integrated with the campus. Schools with hotels in development range from small liberal arts colleges such as Swarthmore College to large Universities such as Florida State University.
School officials, their partners and service providers must understand that college- and university-owned hotels are different from those owned by developers, real estate investment trusts and private equity funds. Traditional owners develop risk and financial return expectations and then identify a hotel to develop or acquire. Conversely, colleges and universities identify the type of hotel they want to develop or acquire, and then they evaluate the risk and return expectations.
Unlike typical developers and owners, colleges and universities are not always driven by profit. Their primary objective with any hotel asset is to support, protect and improve their core mission. College and university hotels do this by:
- providing an amenity for campus visitors;
- accommodating demand generated by school-related programs;
- controlling land for future redevelopment; and
- serving as a venue to support hospitality-related educational programs.
Driving up development costs
Due to their unique objectives, college- and university-owned hotels often cost more to build than those developed by independent, for-profit developers. Factors that drive up development costs include:
- The use of union labor: Most schools are unwilling to risk any negative press they might receive for using non-union labor.
- Expensive exteriors: Colleges and universities often have consistent, campus-wide designs that might include features such as brick or stone facades or slate roofs, all of which serve to increase construction costs as compared to more typical new development.
- Extensive meeting space: Some schools develop full-service hotels with extensive meeting space to support their campus needs rather than to drive profits.
- State-of-the-art technology: To positively reflect their larger brand, colleges and universities often require the latest and greatest guest-facing technology (e.g. RFID locks).
- Additional public space: Oversized lobby/public areas are popping up in some recent developments (e.g. the Morris Inn at Notre Dame and the Alfond Inn at Rollins College). These spaces are intended to serve as “the living room of the university.”
Higher operating costs
Operating expenses also can be affected by the school’s objectives. When weighing the projection of the school brand versus increased costs, colleges and universities almost always will choose protection of the brand. Therefore, they are willing to offer higher wages and benefits packages to their employees than a more typical owner might, rather than risk a labor action that might tarnish its reputation.
Additionally, because profit is not the primary motivation, many schools do not actively asset manage their hotels. Therefore, there is no pressure on management to control costs.
Finding the proper balance between revenues and profitability is another challenge. Universities generate the majority of the demand for their hotels, as various departments or groups are expected to use the school-owned facility whenever possible, regardless of whether a more affordable option might exist down the street.
The hotel’s management team might face similar pressure to practice disciplined yield management so as not to appear as though they are price gouging during periods of strong demand (e.g. graduation and sporting events).
To ensure a successful hotel, school officials, their partners and service providers must all have a clear understanding of the school’s objectives and the implications of those objectives. All parties should communicate in the planning, development and operating phases in order to clarify ownership’s objectives. Then, all decisions related to the hotel’s development and operations should be considered with an eye on the ultimate objectives.
Matthew Arrants, ISHC is the Executive Vice President of Pinnacle Advisory Group. Pinnacle Advisory Group is a boutique full-service hospitality consulting firm with several offices throughout the US. For the past 18 years, Matt has specialized in asset management, new development and operational reviews. Matt also recently organized the first annual College and University Hotel Owners Symposium (CUHOS) at Notre Dame, open only to college and university employees responsible for hotel assets.
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