You’ve survived the excesses of 1998, a year marked by aggressive hotel development, the roll-out of at least 6 new extended stay brands, a national decline in occupancy and an ever tightening grip on construction loans. Just as you begin to breathe a sigh of relief, the New Year brings on a whole new set of concerns for hotel investors. The combined predictions of an economic recession, a tight labor market and unease overseas, repeated headlines warning of a credit crunch, and management unrest at virtually every hotel corporation, have created an air of caution in 1999’s first quarter. On the bright side, projections of average rate growth that exceeds expense growth, and a past year of record industry profitability continue to fuel hotel investment optimism. The decision to build or not to build, acquire or not to acquire, continue as is or reposition an existing hotel requires a long hard look in 1999. Whether done internally or by an independent consultant, prudent investment requires a feasibility analysis.
Just like the Budgetel to Baymont rebirth, or the unveiling of the new Motel 6 prototype, the feasibility study has kept pace with the times. Forget your assumptions of boring, voluminous reports and routine market predictions. The modern feasibility study tells you more about a potential hotel market than just demographic and economic trends. Better yet, it’s shorter, straight to the point, and much more usable, addressing the investment issues of today’s market.
In 1998 The Highland Group conducted about 150 market and feasibility studies in primary, secondary and tertiary markets across this country and in Europe. We studied markets that were significantly overbuilt, registering three-fold increases in supply, and double-digit drops in market occupancy in just one year. We also worked in markets where significant increases in supply were being rapidly absorbed and the opportunity for development or acquisition and repositioning still existed for certain product types. Each one of those 150 markets presented a host of issues that required detailed market research and skilled analysis.
The feasibility study has adapted to the demands of the new investor. Ours is an industry focused on distribution and market share, where competitive lines between products have blurred, and where brand managers have become more adept at updating an image, shifting target markets and pumping up amenities. Not only is the average consumer overwhelmed by the endless parade of new and improved lodging alternatives, so are owners, operators, developers, lenders and hotel management.
Because of this, our clients tell us an independent market or feasibility study is invaluable. It brings fact and unemotional analysis to the discussion about an investment. A feasibility study is about managing expectations and about unearthing potential. It is a report about the market and financial potential of a project. At a minimum:
In many cases, it also goes the next step — to unearthing potential. Unearthing potential is when a good consultant finds a niche market not being served, or news of a major company entering – or leaving — the market. Unearthing potential results when a broad base of field interviews reveals a trend unknown to your competition. The smart thing about the feasibility study is that the conclusions or recommendations contained within a feasibility study are third party, independent projections. The consultant hired to conduct the study has no fiscal involvement in the project and therefore no ulterior motives or prejudices. The bottom line predictions, the strategic economic analysis and unearthed potential, should only enhance your decision-making process.
Working with clients ranging from owner-operators to franchise development staff, we found that for even the most seasoned investors and developers, initial impressions of hotel markets can be misleading. A recent feasibility study conducted in a dynamic Midwestern market, seemed on the surface an excellent investment opportunity. New business growth in the metropolitan statistical area (MSA) was climbing for the third year in a row, commercial construction proximate to the site was impressive, a lack of zoned, developable land had created significant barriers to entry, and the competitive set was performing above the market. It all added up to a “sure thing”. Further research, which included in-depth interviews with local sources of demand, area hoteliers and state and local government offices, changed the picture. Recent limited service supply additions in nearby markets (with no barriers to entry) had only just begun to show an impact on the competitive set. Large-scale road construction was projected to begin near the site, construction that would not only diminish short to mid-term access to the site, but could in the long-term create a bypass around the site. Nearby full-service hotels (previously not considered competitive) were slashing rates and bidding for low-rated group and leisure business in response to business lost to new full-service supply in adjacent markets. Demand generators in the market area had begun to consider the competitive set hotels as “secondary” and preferred to book rooms in an emerging hotel cluster north of the site – it had easier access, more surrounding amenities and a more appropriate product mix for their needs. Basically, what appeared on the surface to be a very promising site in a dynamic market, was after all a site with significant risk, in a declining, hotel market.
Prior to commissioning the feasibility study, a prudent hotel investor will begin the development process by first assessing development or acquisition opportunities in geographic locations convenient to their headquarters or in locations in which they have existing properties, market expertise or properties in feeder markets. Concentrating, rather than scattering lodging assets, especially for small to mid-sized operators, enhances operating efficiencies and encourages a higher level of property supervision. Once the geographic location is selected, a smaller market area can then be defined and selected based on the market’s perceived long-term hotel investment potential. Finally, and usually with the help of real estate developers and agents, the investor seeks suitable sites or hotel acquisition candidates, preferably with high visibility and ease of access, in a location convenient to demand generators, and with appropriate amenities for the desired hotel product.
The appropriateness of the site and the vitality of the market can be highly subjective in situations where investors are excited about new development or acquisition, or when pressure exists to “do the deal.” It makes sense to commission a feasibility study before the earnest money goes hard. The feasibility study is the “litmus test,” the tool that further evaluates risk, analyzes long-term potential, the suitability of product and site, and supply and demand in the market. It answers the three basic questions:
Not only are the answers to these questions the basis for a new hotel development study, they can be used for repositioning a tired or under performing asset.
In 1998 we completed a project for the owners of a mountain resort. Beset by on-going maintenance problems, faltering sales and dissatisfied guests, we were called in to provide a strategic improvement plan, one that covered among others, accommodations, amenities, image, customer service, and sales programs. We approached it as we would a feasibility study, basically answering the three primary questions – what (who) is the market for this resort, what is the best product for this market (improvements), and what are the possible financial results of a new and improved resort? We conducted interviews with all hotel management and front of house staff. We interviewed past guests, meeting planners and meeting attendees, as well as potential guests and potential meeting planners. We interviewed management of competing resorts and toured their facilities. We toured comparable resorts in other markets. We evaluated the trends in the local economy to determine the effects on the resort (i.e. recruitment issues, shifts in employment, population migration, etc) and we even analyzed five years worth of weather statistics to gauge the effect of rain, heat and cold on changing visitation. The resulting report provided a model for a resort that guests really wanted, and gave ownership a step-by-step plan on how to get there. We defined a program to build occupancy by creating leisure and amenity packages that targeted the untapped niche markets of soft adventure enthusiasts and historical and cultural enthusiasts. We also helped them address a trend in shortened family stays by overhauling the recreation program. This is the new “usable” feasibility study.
Choose a consulting firm or individual consultant that you trust, or one that has been recommended to you by at least two or three sources. You must also determine the type of study you need – is it for internal purposes only or will it be presented to a lender? Is this a public document, one that will used in a bond offering? Is a brief, to-the-point letter all you require? Depending on your needs, each study will be slightly different. You should therefore ensure your consultant is familiar with your requirements. Interview your prospective consultant. To get the most value from your investment in market analysis, select a consultant who listens and understands your concerns. You should feel comfortable discussing the market and projections with your consultant. Once the study has been commissioned, the essential topics that will be covered in your feasibility study are:
Site Analysis:
This section addresses the basics of access and visibility, proximity to demand generators, proximity to amenities and a neighborhood analysis (surrounding land use). Site analysis also includes the pros and cons of your site versus your competition, it recommends building orientation and signage, it assesses any potential threats to access, such as road work, intersection lighting, or adjacent construction that may change traffic patterns.
Market Analysis:
This section creates a picture of the local economy through graphic representation and the associated analysis of historic and projected economic and demographic data. The market analysis details trends in population, employment, retail sales, traffic counts, airport enplanements, commercial property statistics, tourist visitation, housing construction, stability of government or military installations, and any new business development that could impact the site. Today’s market study must not only present these figures, it must also draw conclusions about statistics and relate them to impact on hotel demand. Some statistics, such as convention center trends, are more relevent to full service hotel than limited service hotels. Your feasibility study should be very focused on the market conditions that will most likely affect your proposed product.
Supply Analysis:
Crucial to any new development or repositioning strategy is the analysis of existing hotels and the determination of a competitive set. This section analyzes market share, scope of amenities, historic and projected occupancy and average room rate, rack rates, fill patterns, market position and changes in supply. Keeping track of changes in supply – both rumored and actual –during a market building frenzy can be quite a task! A recent feasibility study we conducted in a Southeastern metropolitan market determined that almost 1,100 new rooms were due to enter a market currently comprised of just over 500 rooms – a 200 percent increase in supply in just over one year. Additional supply analysis, such as corporate apartments, are typically included in this section for extended-stay hotel studies.
Demand Analysis:
This section determines the level of accommodated, unaccommodated and latent demand in a market, based on four primary demand classifications: commercial transient, meetings and group, leisure and extended stay. Occupancy patterns and projected sources of demand growth are also included here. How do you analyze an emerging market, with no historic demand patterns and no competitive set. The Highland Group conducted a study in a Florida market with just this set of concerns. We concentrated on latent demand, and conducted demand interviews in feeder markets and adjacent markets to ascertain how much business could be developed for this new location.
Forecasting performance
Finally, the section most investors turn to first – a forecast of performance. This must be derived entirely from conclusions formed in previous sections of the study. Performance is based on positioning, proposed amenities, rate, and target market and must be detailed as such. If a hotel is expected to exceed market performance, than your consultant should provide a sound basis for such an assumption.
These essential elements of a feasibility study add up to one thing – a clear, impersonal, fact-based analysis of a market. The best feasibility studies draw on the market expertise of your consultant and give you options – if your product is not right for the market, perhaps another product is, or if your site is poor, there may be another location for you to consider.
Ask yourself the million dollar question – “if my competitors have a feasibility study to work from, can I really afford to “go with my gut instinct?” Probably not.
Kim Kukler is a consultant with The Highland Group, an Atlanta-based hotel investment advisement firm. She has a background in limited and full-service hotel sales and marketing, with experience both in the U.S. and Australia. Her consulting expertise includes feasibility and repositioning studies for diverse property types such as state park hotels, seasonal resorts, extended-stay hotels and limited service hotels in secondary and tertiary markets.
