Selecting a New Market for Acquisitions or New Builds
By Mark Ricketts President & Chief Operating Officer, McNeill Hotel Company | August 25, 2019
A robust era for the hospitality industry has made this an exciting time for property acquisitions and new builds for a wide range of investors and related entities, including property and asset managers and site selection, land acquisition and construction specialists.
While the nation's top MSAs remain popular, many hospitality investors are looking closely at smaller markets that demonstrate newfound appeal. At the same time, in a stronger economy, we may possess the development enthusiasm and investment wherewithal to re-assess and find excellent potential in previously overlooked markets now ripe for renewal, from older ring suburbs to historic downtowns.
In making these decisions, on the market specific side, hotel entities will look at such factors as access to capital; the overall appeal and demographics of a community; existing distribution of product types and major brands; key existing and prospective demand drivers; recent and prospective market performance; barriers to entry and any special factors particular to that market.
Moreover, the hospitality entity must balance these factors with its overall growth strategy; traditional market preferences and familiarity with these markets; geographic spread; executive suite capabilities and related organizational resources; and the ability to service that property from headquarters. Being able to fill all expected staff positions at a new property, whether through retained personnel or transfers and new hires, is also a key consideration.
This article will discuss this delicate balancing act, especially in the context of organizational growth and trends that are driving the hospitality industry at the present time. The discussion can apply to ownership groups, those investing in hotels while "leaving the driving" to others; property and asset managers; and real estate developers.
It's No Secret
Today, secondary markets are no longer secondary. In recent years, as investors and developers search for opportunities, they have been drawn to smaller markets (outside Top 25 MSA) that demonstrate attractive demographics, growing economies and strong, relatively recession-resistant appeal. Not to mention available, affordable land for new builds.
It is a bit more involved than simply following the rooftops or corporate headquarters to these Tier 2 or Tier 3 markets. Regional economic trends, geography and climate, transportation access by land and air, quality of life, cost of living, and labor availability and wage rates all enter into the equation. Also, our consideration of these smaller markets, whether it's a Salt Lake City, Utah; Boise, Idaho; Springfield, Missouri;Des Moines, IA; Greenville, SC; or Asheville, NC; will help distill many of the factors that apply to most all acquisition or new build decisions.
Where are these "great" hotel markets? Certainly, they include strong suburban markets not contiguous to, but within the commercial orbit, of a major national urban center. This includes many communities that have their own excellent employers and destination attractions that can drive room nights; and many will be within a reasonable commute of a major city, further expanding the employment base. These criteria can be met along good stretches of East, West and Gulf coasts, as well as about inland cities like a Chicago, St. Louis, Dallas or Atlanta.
Heading a bit further into the hinterlands, hotel entities may prospect among smaller cities for solid demand drivers like a larger university or college, a medical center, a main or regional corporate headquarters, or being the gateway to a perennial tourist attraction. Examples of the latter include national parks, theme parks, major sporting arenas, natural springs and spas, white water rafting or hiking and mountain climbing.
These markets also typically feature excellent quality of life and attractive living and business costs. It never hurts to pore over an Outside Magazine or U.S. News & World Report Best Places to Live list! In many respects, the analysis is similar to what any major U.S. corporation would do when selecting a location for a headquarters or operations facility.
No property is an island. With all the considerations just discussed as part of the acquisition equation, many organizations will further pursue a regional strategy. There are many administrative, logistical, operational and staffing advantages to owning and managing a cluster of properties within a discrete geographical area.
Moreover, many entities will make an acquisition in a new market with the next two or three already in mind. This new presence further allows for more detailed "on-site" market intelligence, including assessment of competitors and the space in any given market for additional property types or flags.
There are also purchasing and operational advantages to having multiple properties within a defined region. These include being able to negotiate better costs from local suppliers (light bulbs to landscaping) and in staffing. It becomes possible to relocate an experienced front line staff member to help ramp up another property; or a general manager, assistant general manager, sales manager or housekeeping supervisor may be available to help cover at a nearby property when someone is out for a short period of time.
Buy or Build?
Some hospitality entities restrict their investment activity to acquisitions; others do a combination of acquisitions and new builds. Certainly, in today's environment, there are several financial and technical challenges to doing new builds. Among these factors, some financial institutions are much less apt to issue loans for a new build, as opposed to an acquisition, as construction loans for all classes of commercial real estate are being scrutinized more closely. Additionally, as some of the secondary and tertiary markets get more eyeballs looking for opportunities, it inevitably becomes more difficult to find available land for new builds or match potential brands to opportunities.
One possible approach for new builds, especially for growing hospitality entities and investment groups, is to partner with specialists in site selection, land assembly and construction. Developers may come to hotel entities with joint venture opportunities. This can be a valuable way to "outsource" risk during the complex financing and construction phases of a new build, with partial or full transfer of ownership upon completion of construction and the hotel's opening.
Acquisition costs are always at issue. When purchasing an existing hotel property, recent or intended renovations, including any existing property improvement plans (PIPs), are always an important factor. Strategically, some investors prefer to purchase properties before needed renovations, so that they can make the "value-add" repositioning decisions that fit their vision for a property. Most transactions will trigger a PIP or, at the least, consultations with the brands. Clearly, any anticipated post-purchase investment, from a new roof to an expanded lobby experience, is an important factor in deal negotiations and financing.
One post-acquisition factor gaining increased scrutiny these days is property taxes. Just as a home purchase usually triggers reappraisal and adjustment in property taxes, municipalities are being aggressive in assessing property taxes on hotel properties. Thus, existing and prospective property taxes are an important part of transaction due diligence. It can be helpful to know any given municipality's tax appraisal cycle and, also, consult with specialists in tax appraisal and negotiations.
Identifying a hotel property for acquisition or planning out a new build is one-half of the development equation. As noted earlier, any additions to one's portfolio must balance with an organization's growth strategy and existing and prospective resources.
Each organization will find a comfort level between building up capabilities and experience in its C-suite and drawing on consultants and outsourced services. Familiar outsourcing examples include reservations, accounting, revenue management and human resources services; or on-property services like a building's mechanical plant, landscaping and security.
We have already touched on some of these issues when discussing development and construction services or working with tax consultants. While the subject of its own article, it is important to modulate organizational development with acquisition strategy. In particular, any sound growth path will provide opportunities for professional fulfillment and career progression, at the headquarters level and on-site at properties.
Importantly, any acquisition will entail building the team that will manage and operate the hotel, with an eye to identifying those individuals who are ready to take on greater responsibilities and leadership roles. Practically, organizational growth provides a great time for individuals to spread their wings and be tested in new ways, taking on new positions and responsibilities. In many cases, it also offers opportunities for staff to move within a region; or, even, another part of the country. Along the way, with new markets and new experiences, an organization builds a roster of market experts, which, in turn, helping fuel the overall acquisition process.
Reputation is everything. A successful acquisition strategy relies on and is boosted by the reputation any entity holds within the greater world of hospitality and with the major brands, as well as its own sense of mission and self-confidence. In particular, the major brands can be great allies in identifying opportunities within geographic regions and within their brand portfolios. Encouragingly, even within traditionally well-defined property types, the brands are allowing select entities to customize the look and feel of properties, and their amenities, as perhaps never before.
Regardless, in an especially active marketplace, or one on the cusp of change, an important principle is to exercise discipline. Acquisitions should fit one's overriding investment strategy and work well within an organization's core philosophies, operating practices and sense of style. Pacing. Balance. Comfort level. These are valuable reminders as we pursue new markets and growth.
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