downtown hotel development

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Downtown Hotel Development Emerging Opportunities for Small & Medium Size Cities

2010 Main Streets Conference, May 2010, Oklahoma City

Presented by:Bill Ryan and Bill WayDowntownHospitalityAdvisors.com 1

Discussion Points

1. Trends in the Hotel Industry

2. Why Downtown Lodging Makes Sense

3. Downtown Hotel Development Examples

4. Challenges to Downtown Hotel Development

5. Analyzing Market Potential in Your Downtown

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1. Trends in the Hotel Industry

How the Lodging Product has Changed

Current Travel Trends by Market Segment

Lodging Industry Current Performance and Outlook

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The Past:

Highway/Suburban Lodging Orientation

Rapid growth beginning in the 1950’s – Interstate system, increase auto use

Suburbanization – housing was followed by retail, office and lodging development

Cookie‐cutter concepts introduced with standard amenities, designs, operations, management, reservations and advertising

Franchising fueled the growth of these chains

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Howard Johnsonhttp://www.youtube.com/watch?v=IpFpTfnYlRg&feature=related

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Future Trends:

More “Select Service” and Profitable Lodging Concepts

Select Service examples include Courtyard by Marriott and Hilton Garden Inn

Limited Service examples include Hampton Inn and Fairfield Inn.

Future Trends:

Urban “Trendy” Brands

Alternative to the plain vanilla hotel:

Guest Rooms‐ urban‐inspired, loft‐like rooms.

Hotel Lobby‐ lounge areas for working and socializing, desks and comfortable seating

Hotel Features‐ Smaller than full service hotels (typically 100 to 200 Rooms)

6Marriott Courtyard: http://www.youtube.com/watch?v=_gpAyOc8J‐8NYLO Plano: http://www.youtube.com/watch?v=u58dxvnUGwI

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Future Trends:

Lobby as a “Third Place”

A new connection with the surrounding downtown

Upscale and innovative

Visitor information center

Gateway to community

Gathering place for guests to socialize and relax

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Marriott Courtyard’s new lobby: http://www.youtube.com/watch?v=_gpAyOc8J‐8http://www.marriott.com/courtyard/travel.mi#/lobby

Future Trends:

8Hilton Home2 Suites: http://www.youtube.com/watch?v=KIeJyhRQD8c

Home Away From Home Feel

Downtowns are fitting places for some of the newest lifestyle hotel concepts that provide guests with a “residential feel” and a unique lodging experience in each destination.

Future Trends:

Branding Independent Hotels

Hotel companies are finding new ways to bring more existing hotels under franchise agreements. Rebranding is usually cheaper than new construction.

These companies offer marketing programs and loyal customer base.

Major hotel chains are involved:Marriott (Autograph Collection)Hilton (Waldorf‐Astoria Collection)Choice (Ascend Collection)IHG – Hotel Indigo 9

The Grand Bohemian Hotel in Asheville, N.C., is among the independent hotels in Marriott's Autograph group.

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Future Trends:

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Small Boutique Hotels and Inns (Adaptive Reuse)

Many existing downtown buildings offer:

original character and architecture

Spaces to create unique rooms and suites

Can command higher room rates as they are destinations

28‐unit Retro Suites in downtown Chatham, Ontario combines historic elements of the downtown district with modern amenities.

Business Travel

J.W. Marriott, Jr., chairman and chief executive officer of Marriott International, said, corporate room nights in North America rose 16 percent in the first quarter as business demand strengthened dramatically.

Trends in 2010 point to slow recovery in business travel. Same‐day business trips, coach‐class air, upscale lodging at mid‐scale prices, free breakfast, and free high speed Internet access are important.Source: Ypartnership/U.S. Travel Association, October 2009 travelhorizons(TM)


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Meetings Travel

Meeting planners face tight budgets and low attendance during the economic slump. Some of the changes they are making include shorter conventions and going to less‐expensive cities.

Companies, associations and non‐profit groups' spending on meetings, conferences and trade shows constitutes about 12% of total travel spending. And last year, spending fell by 15% compared with 2008, according to the U.S. Travel Association.

Source: Meetings Cut Back to Bare Minimum, April 13, 2010, USA Today


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Leisure Travel

Examples include: Visiting Friends & RelativesTourists (visiting local attractions)Wedding, reunions, social and sporting eventsPass through on highway

Trends in 2010: A recent survey revealed that many leisure travelers are now more inclined to stay in less expensive hotels, drive rather than fly, and look for deals on the Internet. Perceived "value" is key.Source: Ypartnership/U.S. Travel Association, October 2009 travelhorizons(TM)


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U.S. Pipeline Top 10 Markets by Number of Rooms in Construction:

US Hotel Occupancy Trends

Sources: Smith Travel Research Global (“STR”) (2004 to 2009); PricewaterhouseCoopers (2010). 2010 data is as of January 25, 2010.


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US Hotel Average Room Rate Trends

Sources: Smith Travel Research Global (“STR”) (2004 to 2009); PricewaterhouseCoopers (2010). 2010 data is as of January 25, 2010.


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US Hotel Revenue Per Available Room Trends

Sources: Smith Travel Research Global (“STR”) (2004 to 2009); PricewaterhouseCoopers (2010). 2010 data is as of January 25, 2010. RevPAR, which is calculated by multiplying average room rate by the average occupancy rate.


$52.95$57.51

$62.03$65.67 $64.47

$53.71 $52.90

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

2004 2005 2006 2007 2008 2009 2010E

2. Why Downtown Lodging Makes Sense

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We can help developers and community leaders (planners, tourism officials, others) understand the benefits of concentrating hospitality establishments downtown

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Why Downtowns Lodging Makes Sense

Proximity to Demand Generators

In many communities, the downtown area is geographically closer to sources of lodging and dining demand than suburban locations.

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Sense of Place

Downtowns often have a character and sense of place that cannot be replicated by suburban, highway‐oriented locations where many hotels and restaurants have traditionally located.


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Sustainable and Green Development

With growing concerns over the economy, energy and the environment, downtowns are becoming more attractive locations for hospitality development. Downtown locations are often logical places for infill development.


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Adaptive Reuse of Buildings

Downtowns are positioned to reuse historic and unique buildings that can become “one‐of‐a‐kind” lodging, dining and visitors experiences.


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Mixed‐Use Environment

Downtown tourism services create synergy with other downtown uses. They provide a steady stream of visitors that patronize other nearby retail, services and entertainment establishments day and night.


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Critical Mass

Clusters of hospitality businesses create a critical mass of lodging and dining choices. These businesses often help each other by creating locations with numerous alternatives for the consumer.


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Alternative Dining Places

Downtowns offer spaces and places for dining and entertainment simply not available at the regional mall. Establishments ranging from coffee shops to bistros can line streets and sidewalks, courtyards, riverfronts and other uniquely urban settings.


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Experiential Retail

Unlike the national brands found in major shopping centers, downtown retail is unique and has the potential to become a destination by offering stores that entertain, celebrate local artists and educate.


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3. Downtown Hotel Development Examples

Types:

Renovations, Adaptive Reuse and New Construction

Chains and Independents

Limited Service to luxury

Local Ownership to Outside Investment

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Sheboygan, WI ‐ GrandStay

Completion Date: 2009

Residential Suites with fully‐equipped kitchens

71‐unit hotel

located downtown just blocks from Lake Michigan

Downtown Hotel Examples

GrandStay is an extended stay hotel chain with locations throughout the Midwest and beyond

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Ithaca, NY ‐ Hilton Garden Inn

104 rooms on upper floors

Part of mixed‐use project with office and retail space below

Benefits from the Ithaca Commons, a successful pedestrian mall with shops, galleries, restaurants.

Additional 700 car garage build nearby

Very strong business and group market on weekdays and leisure travel on weekends


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Cornell University served as catalyst with an interest in invigorating the downtown core

Appleton, WI ‐ Copperleaf Hotel

CopperLeaf Hotel, opened in January of 2004 with 73 rooms

32 suites feature hot tubs, electric fireplace, 32 inch HD television and I‐Pod docks

The Black & Tan Grille offers upscale dining and features contemporary American cuisine

The hotel spa offers a full range of relaxation services and beauty regimens


The CopperLeaf is located in downtown Appleton near the Fox Cities Performing Arts Center and close to Lawrence University

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De Pere, WI ‐ Kress Inn

46 rooms

Located near St. Norbert College

First floor conference room for 20 with videoconferencing and audio/visual equipment

Adjacent to the F.K. Bemis International Conference Center


Kress Inn is a member of Choice Hotel’s Ascend Collection.

Holland, MI‐ City Flats

56 uniquely designed rooms

Environmentally friendly custom décor and furniture. Provides cork flooring and hypoallergenic bamboo linens

iPod® Docking Clock/Radio, IP Color Touch Screen Phones

CityVu; Bistro, a unique rooftop dining


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Hotel developed by Charter House Holdings and opened in 2008

Beloit, WI ‐ Beloit Inn

54 keys/38 suites

Boutique hotel

Restaurant and meeting space

Condo ownership

Owned by local investors and community leaders

City Participated with TIF, land, streetscaping, parking, and cleaned up of riverbank


Developed and managed by Inn Development and Management (IDM Group, LLC)

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Wausau, WI ‐ Jefferson Street Inn

100 units (26 suites)

Designed to fit needs of community

Significant meeting space

Condo ownership

City worked with management and consulting firm to develop property

Hotel has notably changed and enhanced downtown retail


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Development consulting and management by Inn Development and Management (IDM Group, LLC)

Dubuque, IA ‐ Hotel Julien Dubuque

$33M renovation/restoration

133 rooms

Restaurant and 15,000 SF of meeting space

Current building built in 1914. Hotel on this site since 1859

High level of service

City participate with TIF. State and Federal Tax Credits, New Market Tax Credits, and Energy Credits


Development consulting and management by Inn Development and Management (IDM Group, LLC)35

4. Downtown Hotel Development Challenges

Downtown vs. Edge‐of‐Town DevelopmentAdaptive Reuse IssuesDemonstrating Downtown’s Return on Investment

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1. Land costs are typically higher in downtown areas. Also, more than one property may need to be assembled for a downtown project.

2. Because they have a history of use, downtown properties often present complex title issues.

3. Downtown projects often require a complexity of permits and may pose conflicts with requirements and historic preservation guidelines.

4. Redeveloping a downtown building often involves a change of use, which triggers additional review under local zoning (setbacks or parking).

5. Downtown construction often involves demolition of existing structures. With a higher chance of environmental hazards or other complications.

6. Downtown building projects often bring complex construction challenges. It will cost 25‐50% more to build downtown.

7. Suburban buildings can be bigger and more easily meet the standardized requirements of a chain. Parking is more restricted downtown.

Source: Vermont Forum on Sprawl 37

Downtown vs. Edge‐of‐Town Development

Adaptive Reuse Issues

1. Narrow rectangular floor slabs with column spacing able to accommodate rooms 12 to 15 feet wide are needed.

2. Office buildings built in the 1960’s and 70’s have large square floor plates that do not allow light in the middle of the building.

3. Fitting the guest room module into existing window modules may prove challenging.

4. Floor to ceiling heights will impact guest room ambiance and HVAC requirements.

5. The building must be able to incorporate public space such as lobbies, meeting rooms, and public dinning. Other space requirements include spa, pool, fitness and storage and mechanical.

Downtown Hotel Suburban HotelRooms 120 120Occupancy (stabilized) 64% 60%Average Room Rate (stabilized) 100.00$ 80.00$ RevPar (Stabilized) 64.00$ 48.00$

Room Revenue 2,803,200$ 2,102,400$ Total Revenue (1.2 times Room Rev) 3,363,840$ 2,522,880$ House Profit (from Operations @ 38%) 1,278,259$ 958,694$ Income After Fixed Charges (@30%) 1,009,152$ 756,864$

Land and Improvements (per room) 15,000$ 7,000$ Construction (per room) 70,000$ 64,000$ Furn, Fixture and Equip (per room) 13,000$ 13,000$ Soft costs (per room) 20,000$ 16,000$ Total Investment (per room) 118,000$ 100,000$ Total Investment Hotel 14,160,000$ 12,000,000$

Loan to Value 70% 70%Equity % 30% 30%Equity $ 4,248,000$ 3,600,000$ Return on Investment (IAFC/Equity) 24% 21%Payback Period years 4.2 4.8

Demonstrating Return on Investment

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5. Analyzing Market Potential in Your Downtown

“Show Me the Numbers”

Help lodging industry developers and potential investors recognize untapped market opportunities related to a downtown location.

Demonstrate market potential through projections of occupancy and average room rate

Demonstrate financial feasibility through financial projections

Sample Financing Methods

Understand Return‐on‐Investment Considerations

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http://www.uwex.edu/CES/cced/downtowns/dma/15.cfm41

Downtown Market Analysis Toolbox – Univ. of Wisc.‐ Extension

Tools to Assess Market Demand and Supply

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Downtown Market Analysis Toolbox – Univ. of Wisc.‐ Extension

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Assess Market Area Business and Tourism Activity

Examine the following market area characteristics and include all information relevant to a new property in your community. Use several years' data to identify trends.

Business and Economic Characteristics

Tourism and Recreation Characteristics

Transportation Factors

Lodging Market Analysis

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Assess Lodging Demand

Based on local business and tourism activity, you should identify what market segments of overnight guests visit your community. These market segments typically fall into four categories:

Business

Leisure

Group, and

Other


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Assess Lodging Competition (Supply)

The operating performance of existing local competition is a key indicator of market potential. Conduct interviews with area hotel operators to determine:

Occupancy*

Average Daily Room Rate*

Strengths, weaknesses and competitive position related to location, facility and service

*Smith Travel Research lodging reports can be customized for your geographic area. They can provides key performance measures, in aggregate, on your market area.


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Assess Your Proposed Location

Analyze your location using the factors listed below. Be sure to consider other location criteria that may be applicable.

Description of Immediate Area

Proximity to Demand Generators

Traffic Volume

Accessibility

Other Issues ‐ Site size and social, political and environmental concerns related to downtown


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Refining Your Hotel Concept

Affiliation ‐ independent or chain

Product Category ‐ limited or full service

Room Type and Number ‐ standard rooms and suites

Amenities and Facilities ‐ restaurant and lounge, function facilities, recreation (pool and fitness center).

Market Segments to be Served ‐ business, leisure, group and other categories.

Expected Price Range ‐ peak and slow periods


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http://www.uwex.edu/CES/cced/economies/tourism/index.cfm

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Tourism Business Development Toolbox – Univ. of Wisc.‐ Extension

Tools to Assess Financial Feasibility

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Tourism Business Development Toolbox – Univ. of Wisc.‐ Extension

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Historic Rule‐of‐Thumb Used in Industry ‐ For each $1,000 of construction cost per room, there should be $1 in average room rate. This works under some conditions – typically larger hotels achieving satisfactory occupancy levels.

Return on Investment Analysis

Cost Per Room Mid‐Market Economy

Land 25,500 13,800

Building 68,700 48,800

Soft Costs 11,400 4,500

FF&E 10,000 8,500

Pre‐Opening 4,100 3,000

Total 96,100 63,900

Typical Development Costs per Room:

Source: HVS 2009

City Grants‐ A downtown Des Moines hotel project receives $2.4 million in City. The City will provide annual aid of $240,000 for 10 years as part of the renovation of a downtown landmark building for use as 95‐room Hyatt Place hotel.

Municipal Loans‐ A long‐stalled hotel development plan in Menomonee Falls, WI resumes construction work thanks to $17.7 million in bond financing from the Village. That amount, will be repaid to the village by an investment group that plans to build a 135‐room Radisson Hotel.

Recovery Zone Bonds‐ The Williamsport, PA Industrial Development Authority approves a tax‐exempt recovery zone facility bond to bring a new Marriott Hotel downtown. The bonds come out of the American Recovery and Reinvestment Act.

Sample Financing Methods

Many financing methods need to be considered ranging from TIF to state and federal tax credits.

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Summary Take‐Away Points

1. Trends in the Hotel Industry ‐ More select service, trendy, residential and boutique concepts are possible in our downtowns. Travel has begun to pickup again. Development will follow.

2. Why Downtown Lodging Makes Sense – Developers and community leaders need to recognize the reasons why downtowns have potential as a place for hospitality and tourism.

3. Downtown Hotel Development Examples – Downtown hotel development can take many forms: adaptive reuse, new construction, chains, independents, limited service, boutiques.

4. Challenges to Downtown Hotel Development – There are added challenges building downtown rather then on the edge of town.

5. Analyzing Market Potential in Your Downtown – Be able to “show me the numbers.” Assemble information to support realistic projections of occupancy, average rate and cash flow.

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For More Information:

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Bill Ryan (608) 334‐7735E‐mail: [email protected]

Bill Way(612) 961‐8276Email: [email protected]

Website: www.downtownhospitalityadvisors.com

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