Size Does Matter in Hotel Purchases, Development

Thinking small is becoming a bigger trend in hotel development and acquisitions in secondary and nearby top-tier markets, mostly due to consumer demand for upgraded amenities and modern operations, as well as the willingness of lenders to book smaller debt for the less-expensive properties.Much of the drive in acquisitions is new standards in operations and services that upgrade the meaning of limited-service, such as expanding social amenities for guests during evening hours and increased free breakfasts, 24-hour stores and other services. The modern business traveler watching the bottom line wants the amenities found in a mid-scale full-service hotel, from full business and fitness centers to wireless internet.A recent Ernst & Young’s Hospitality Investment Survey shows that while the luxury segment will continue to outperform other sectors in ADR growth, “the other distinguished segment is mid-scale, without food and beverage, which benefits from relatively low construction costs, accessibility to a wide-franchise market and higher operating margins with comparatively lower execution risk.”

The Providence Group LLC, headquartered in Duxbury, MA, is a full-service hotel management and consulting company. Providence president Jed Heller tells GlobeSt.com that the upside in new management for the right properties is modern efficiencies large third-party management companies can provide. Providence also provides construction management for renovations to reposition properties where it has management contracts. Heller says he is “focusing solely on small to mid-sized hotel management opportunities.” An example is the 70-room Sanhurst Hotel in Fort Pierce, FL, flagged as a Holiday Express. It was ranked fifth out of seven hotels in RevPar for 2006 in its market. EOY 2007 shows the hotel’s RevPar rise from 43% to $55%, while reducing costs and spending, and came in number one in occupancy and RevPar in ’07 in the Fort Pierce area.

Privately held Merrill Group of Cos. LLC of Las Vegas is building a 109-room, four-story hotel suites in Vernal, UT, to open 3Q 2009. It’s the same area where Merrill has just opened a large Lowe’s Home Improvement-anchored shopping center.”We stumbled by Vernal by accident,” says Carol Dvorak, director of project management for Merrill. “We went there to build the shopping center and couldn’t get a room and had to stay 20 miles away….We did a study and found the market needed another hotel. We closed on the land and (we) are now building. Merrill is bullish in this sector. People need to travel in all markets and you have to check out your small-town markets.”It’s these emerging markets that many are eyeing for limited-service products. Vernal is 175 miles east of Salt Lake City and is an emerging tourism destination, with what Merrill says is in need of growth in retail, restaurants and hotels.

Portsmouth, NH-based Lodging Econometrics recently predicted that hotels with 200 rooms or less, with top brands being done by well-established developers, “will be the most attractive to finance during the current turmoil, either (by) local institutions or a declining number of national lenders.” Most agree, but even Merrill, with a non-hospitality portfolio of six million sf in shopping centers and retirement communities and dozens of hotels, says financing for small hotels isn’t as easy as some pundits predict.”We’re finding it hard to finance, period…I think everyone is very concerned about the whole loan market,” particularly with reports that the debt crisis is now spilling into retail and other real estate sectors, he says.

“Investigate, investigate and then investigate. If the market is good, the hotel can sustain a hard time” and lenders can be sold on the deal, says Dvorak. She adds one caveat: “The right management is critical. It will make or break you.”An example of the bullishness in small hotel development is the recent announcement by InterContinental Hotels Group (IHG) that it is opening its 125th Staybridge Suites, this one in Fort Wayne, IN. At $9 million, the 358,000-sf property will have a total of only 84 suites. IHG also has a Candlewood Suites and six Holiday Express hotels in the Fort Wayne market. The Staybridge development works out to about $107,000 per key, not cheap for secondary markets. But the price is driven by the amenities now demanded by the small, limited-service-seeking guest. The old-fashioned, roadhouse hotel is no more. The property has an indoor pool, basketball court, so-called Sun-Downer receptions for guests during evenings, a large, state-of-the-art business center, free laundry service and a 24-hour fitness center.

REITs are also jumping into the small-hotel fray. Supertel Hospitality Inc., which owns 125 limited service, economy and extend-stay economy flags, completed a 10-portfolio purchase with seven properties in Kentucky, two in South Dakota and one in Wisconsin for $21.8 million. The 10 hotels combined have 734 rooms. General Electric Capital Corp. and existing credit lines funded the portfolio purchase.”All of the properties we purchased were attractively priced and in line with our investment criteria,” says Paul Shulte, Supertel’s chairman, president and CEO in a press release. “In the past year our primary management company, Royco Hotels, has spent a significant amount of effort in building an appropriate infrastructure to maximize returns on our existing portfolio and to better absorb our acquisitions,” he says. “They have added key senior level staff, put new operating and training systems in place and are expected to be fully up-to-speed with these changes by the end of this quarter.”