Thanks to an overload of online reservations and loyalty programs on the hospitality scene, investing in a hotel location involves different considerations than it did a generation ago. That means a prominent spot along the edge of a busy highway isn’t the prime real estate it once was, and brand loyalty plays a big part in a consumer’s decision about which hotel to patronize. It also means hotel companies and development firms have reworked the game plan when it comes to site selection.
Still, choosing where to open a hotel is “not rocket science,” says Stuart Laurie, IHG’s director of Franchise Sales and Development for Canada in Mississauga, Ont. Certain considerations don’t change, including access, visibility, an area’s growth potential, proximity to complementary retail and a ready supply of potential customers. As a franchisor, IHG executives regularly put themselves in the customer’s shoes when considering a site and ask: would we stay here?
And, where is here? Sometimes a build-from-the-basement initiative can make more sense than an acquisition; sometimes, it’s precisely the opposite. The decision depends on a multitude of issues: does the brand in question allow conversions, what is the physical state and location of the hotel, and what is the quality of competing hotels in the region? But the essential consideration when wrestling with the build-or-convert conundrum is a site’s relevance in a market. If demand generators have moved away from a hotel, the product left behind may now be obsolete.
In some of the larger markets in Canada, a modest new construction project can cost more than $3 million before a shovel is even put in the ground, and the price per key is $100,000 and up, says Eric Watson, COO for MasterBuilt Hotels in Calgary. “And yet in a few of these same markets you can pick up existing hotels with definable operating results for under $40,000 a key. Does it make sense to develop new when you can buy a resale property for so much below replacement cost?” he asks.
But sometimes it can cost more to retrofit a property than build new, notes Brian Flood, VP, CBRE Hotels, Valuation and Advisory Services in Toronto. Examples of this persist in Southern Ontario, the Maritimes and the lower half of B.C., where the economics are extremely tilted toward buying existing hotels instead of starting from scratch, adds Manlio Marescotti, VP, Lodging Development, Marriott International in Mississauga, Ont.
But, a hotel’s construction, layout, mechanical systems and plumbing, or the existence of hazardous materials, may exclude it from being adapted. And hotels that have been grandfathered might prove too costly for the retrofit option. “They might have asbestos or other structural issues,” says Charles Suddaby, VP and practice leader of the Hospitality and Gaming Group from the Toronto office of the global real-estate firm Cushman & Wakefield. “Better to demolish the site and start again.”
That said, since hotel operators are competing with other commercial developers, land is more expensive than ever before. “So where there may have been three hotels in a market before, now all of a sudden there are five or six, with developers infilling to steal business from the original three,” says Suddaby. “That, in turn, has forced up the value of development land for hotels. And now I wonder at what point the developers really start to back away.”
Suddaby cites “a very rough rule of thumb” dictating the pricing of a hotel room, explaining that investors should spend approximately $100,000 in a market that can support a $100 average room rate; that generally equates to a $1-charge-per-$1,000-spent ratio. It’s a reasonable guideline that might steer a developer away from laying $250,000 on a property that can only attract a room rate of $110 a night.
So, if a new build is the answer, consider the best location, rather than the best price. “When you’re looking for a hotel location, you can’t risk being second choice or [being] passed by,” explains IHG’s Laurie. “If you took a B location over an A location, there’s the risk of someone coming into the A location and adding supply — so better to pay for the A location.”
Watson agrees. “Start with the market first. If you don’t have a good, strong market, there’s probably no point,” says the COO for MasterBuilt Hotels. “[MasterBuilt] will go anywhere in search of the best returns. And if we don’t believe we can fill Monday-to-Thursday night at a really strong rate, we won’t do construction.”
Finding a piece of land that is a specific size is another hurdle in today’s jammed-to-the-gills market. It means an hotelier developing a limited-service hotel that requires a minimum of two acres might find himself scratching his head over an A location on five acres. That, says Laurie, is why it’s not uncommon for developers to build two hotels on one piece of land — each with a different set of experiences. Such “combination deals” are more common in urban environments where land prices are higher and it’s necessary to maximize the available square footage — but they require a fair piece of capital to carry them.
Yet, trying to shoehorn a project into the wrong site is among the most common mistakes a hotel developer makes, says Cushman & Wakefield’s Suddaby. “You probably don’t want to build a resort, whose aim is to allow people to relax and escape from their urban life, right beside a railway track or a landfill,” he offers.
Often, the difference between a good site and a great one depends on the intangibles. “In the discussions I have with our franchisees and developers, I’m always concerned [about] what’s beneath the surface,” says Laurie. “Is the site ready to go? What are the soil conditions? Does its foundation support the building’s weight load? Is it ready for development permit approval? Is the city prepared to work with us?” In his opinion, a great site is flat and zoned and doesn’t need a lot of work. So, construction crews can immediately pour slab and start building. Alternatively, an operator may have to wait for approvals and pay carrying costs.
To avoid this, find out if a site is poised for growth by talking to existing property owners and hotel consultants in the area. Then stick your head into the city’s planning department. “There’s a wealth of information there,” says Laurie. “You can find everything you need to know, whether it’s [about] projects that have already been approved or projects that are [pending approval].” Poll the market’s demand generators, too. “People don’t think about that, but just walking into a company in the immediate area can reveal a lot about it,” says Laurie. “I’ve done that on numerous occasions when I’ve had some doubt. [I’ve] asked, ‘Would your people stay in this location?’”
“Demand generators are the most important consideration,” agrees Marriott’s Marescotti. If there isn’t critical supporting infrastructure such as a restaurant, he suggests buying a slightly larger site and carving out a restaurant pad on the premises. Draw from a larger area if the access to your site is good (close to a highway, for example).
“Fundamentally, you have to dig down and understand who’s going to generate room demand for your hotel,” says CBRE’s Flood. “The old full-service hotels that had rooms, an indoor pool, lots of meeting space, a big restaurant, a fine-dining room and maybe a disco don’t exist anymore.” Today’s hotels are much more targeted. As such, hoteliers need to focus on building in the midst of the right demand generators for the hotel in question.
It’s also important to consider the current and future competition in a particular geographical area. “A market can go from performing well to being oversupplied in fairly short order,” says Flood, pointing to Grand Prairie, Alta., as well as the Calgary and Winnipeg airports as examples. Unfortunately, building may be underway before it’s determined that other hotels are entering the market. But, that, after all, is part of the real-estate game.