Panelists sing praises of small hotel markets
Panelists sing praises of small hotel markets
01 DECEMBER 2014 7:36 AM
Opportunities for hotel development and ownership exist outside the large markets, but it’s important to fully understand the competitive landscape.
CHICAGO—While the top 25 hotel markets in the United States get a lot of attention from developers and investors, there are great opportunities in second- and third-tier markets, said speakers during a panel discussion at the North America Hotel Investment Conference.
“Even during the downturn we saw (revenue-per-available-room) growth in our hotels in smaller markets,” said Ravi Patel, president of Hawkeye Hotels, during a panel titled “Below the top tier.” Hawkeye is an Iowa-based owner and operator of more than 30 hotels, many of them in smaller markets.
“We were able to succeed then and now because we put customer-centric-branded hotels in markets where there had been no new development for quite some time,” he said. 
The panelists said it is important to fully understand the dynamics of a smaller market before committing to develop or acquire a hotel.
“You need a feasibility study from someone who understands the market and the model you’re proposing,” said Brian Wogernese, president and CEO of Cobblestone Hotels. “You’re not going to be able to pull a STAR Report for Newton, Iowa, so you may have to look at a market 30 minutes away for comparisons.”
He said there is another way to measure the feasibility of a new property in a small town.
“Our personal litmus test is the community and the investors,” Wogernese said. “You can do studies all day long, but if there isn’t a local interest from investors behind the project, that tells me we shouldn’t be there. If I go to a town of 5,000 and no one thinks (a hotel) is a good idea, I get back in the car.”
While several of the speakers said they develop hotels in third-tier markets, other possibilities exist.
“In some second- and third-tier markets there are conversion and upbranding opportunities,” Patel said. “If you have an independent or economy hotel, there is often a rate ceiling. But investing in a property and making it a midscale hotel can drive revenues.”
Renovating an existing property is another avenue.
“There’s a lot of deferred maintenance in many of the older hotels in these smaller towns,” said Sam Cicero Sr., founder of Cicero’s Development Corporation. “Many of these owners have sentimental value in these hotels, so they sometimes need to get creative with tax benefits and other things to help them achieve their goals. We can help owners find energy credits and other incentives from utility companies.”
Open arms
The speakers said unlike the red tape required to develop hotels in some urban markets, hotel projects in small towns are often viewed as an asset by the communities.
“Some smaller communities actively court us with tax abatements and other incentives,” Patel said. “They outwardly express the fact they want a hotel and they will put in place incentives to make it happen.”
Cicero added that it’s good practice to gauge reaction to a project beyond a town’s city hall.
“You need to spend time in the community finding out what the community wants in terms of hotels,” he said. “And not just what city leaders want, but the people of the town, too.”
Size matters
The speakers said it’s important to know how many rooms are appropriate in the market.
“Originally, our small-town properties were in the 61- to 65-room range, but our new guideline is about 77 rooms for a community of 20,000 to 35,000 population,” Patel said. “This size justifies the new labor models and enables enough revenue to fall to the bottom line. In slightly larger markets, we will go up to 93 to 107 rooms.”
Labor requirements and cost dictates the hotel size Cobblestone will develop in small markets.
“Our hotels average 42 rooms, which enables us to run a tight labor model that eliminates the need for a breakfast person and a head housekeeper,” Wogernese said. “It doesn’t cost much to build an extra 20 rooms, but if the market doesn’t need them you shouldn’t put them there. We usually develop on the conservative side but with the ability to add rooms if the market grows.”
Patel said even though his company’s hotels are generally in smaller markets, they can achieve performance results and valuations comparable to properties in larger metropolitan areas.
“When it comes to selling hotels, it doesn’t really matter where the assets are located, and I haven’t seen any decline in pricing just because we’re in a market of 30,000 people,” he said. “While we typically package these properties together in portfolios with hotels of other sizes and in larger markets, if we were only selling assets in smaller markets there would only be a slight compression in (capitalization) rates—perhaps 30 to 40 basis points.”

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