Mr. Roedel, III

Development & Construction

Location: Five Crucial Points to Address When Selecting a Hotel Location

By Fred B. Roedel, III, Partner & Managing Member, Roedel Companies, LLC

This is a fun topic at a time when few if any parties have actually been seeking new locations. But as the economy improves and the hospitality industry begins to see some light at the end of the tunnel, it is nice to think investors and operators are actually talking acquisition and growth again. There is the old saying that the key to successful real estate investing is 'location, location, location.' This statement has stood the test of time, but the areas we investigate within a location are what really make a difference in our investments and their ultimate success. The five areas our firm focuses on when reviewing new locations are; the basic market, the physical site, the competitive set, demand and brand availability.

Marketplace

One of the first areas to evaluate is the make-up of the current market. We look at all kinds of markets within our strategic targeted growth areas and ask the following basic questions:

  • Is there an opportunity due to lack of supply?
  • Is the current supply of hotels newer construction or older, and if older, how old are they?
  • What is the makeup of the existing hotels, is there a potential opportunity with a brand or a particular segment within a brand?
  • Is the market a mature marketplace with a track record of success, a developing market or a new and developing market?
  • What do we think the barriers to entry for future development are?:
    < high real estate prices
    < difficult zoning
    < architectural review standards
    < abutters
    < historically difficult approval process

Our company took advantage of a situation like this approximately 6 years ago. We identified a location in an aging stagnant market. Our evaluation indicated that the age and condition of the existing supply provided a key opportunity. In addition there were few raw land sites. We developed a focus-serviced product that has become the number one performing hotel in the market because there were customers that wanted to stay in this particular marketplace but did not consider many of the existing hotels acceptable options.

Location

Once we identify an opportunity we begin to look at the basic elements and physical attributes of the site. We review things like;

  • Is it adjacent to, or near a major road or highway and can we see it from that major road or highway?
    < There are still a significant number of travelers who make a lodging decision based on the hotel options they can see while traveling
  • Could a traveler easily and logically get to it after they saw it from the main roadway?
    < Not everyone has a GPS and, believe it or not, GPS' do make mistakes
    < If we put ourselves in the travelers position, driving late at night, tired, we need to make sure the ability to get from the primary road to the hotel's driveway is easy and logical
  • What are the physical elements of the site?
    < Is it able to accommodate a well laid out site plan? (shape, dimensions, overall size, topography)
    < Is it flat or will it require an increased effort on the site work?
    < Are the basic utilities available and close to and/or adjacent to the site?
    < Are there any other existing conditions that could derail the project economically or otherwise?

Competitive Set

The third area that needs to be evaluated is the current competitive set. Look at a number of factors including the types of hotels and the segments they are targeting. What is the age and generation of the properties and the location of the existing hotels versus the location of the current and future demand generators? When you look at a new location from this perspective, you may determine that what was a B site previously has developed into an A site. This was one of the key factors in our development mentioned above. The market had two areas of hotel development, one in the downtown area and a newer one around a regional airport in that city. The downtown had undergone a tremendous redevelopment of its own, travelers wanted to be in that area if possible and that became our opportunity.

Here are some of the basic things to think about and research when evaluating the competitive set in a targeted new location

  • Is the area comprised of older hospitality product?
    < When were the hotels built?
    < How were they built - wood or concrete?
    < Do you think they could be re-developed, and if you think some are redevelopment candidates, do you think any of the current brands you prefer to franchise would consider one or any of them?
  • How big or small are the other hotels?
  • We complete a brand evaluation - do we think the current competitive set properly and fully matches the market opportunities?
    < Is the age or condition of the set such that it can or cannot accommodate the ever advancing brand initiatives and standards?
  • What segments are represented - older, full service products that drive higher rates but are subject to higher fixed and direct operating costs?

Demand

A key element in any location evaluation is fully investigating the current demand and the key demand generators within a market. Take advantage of all the various information sources available like Star reports to understand the history of a market. Get in a car and drive around, personally see and witness activity that would indicate the strength and the potential of a market. Compare the activity with the segment you are considering for the location. For instance, if you are considering an extended-stay product, does that vision match up with the travel patterns of the activities in the area. Is the market more suited to limited service economy or would a focus-service product with or without food be a better fit?

Brand Availability

We always look at markets and the current mix of the brands and the respective segments represented and we look at it in three levels. The first is whether a brand even has presence, is Hilton, Marriott, IHG, Choice or your preferred brand even represented. The second level is what segments of these brands are in the marketplace. The third level then is what the condition of the current properties is. Opportunities can exist within a particular location and market in a number of ways:

  • The brand and segment you are considering are not represented and you have an opportunity by providing a 'better fit' product
  • There may be an opportunity to develop a current generation hotel if there is an older property that cannot meet the current brand standards and is coming to the end of its current license period

Investment Risk

The final crucial point to identifying a successful location for a new hotel is the risk analysis. As we all know hotels typically trade on multiples of revenue and/or EBIDTA, but decisions and conclusions based on your own evaluation, most likely including some form of the areas mentioned above, will be crucial to the final assessment and return of the investment. To develop a risk analysis that has a high degree of reliability, one that you and your team can feel good about and be excited about, consider all phases of the investment:

  • The time and cost to design and receive both municipal and brand approvals
  • The acquisition of the site
    < In a perfect world you do not want to take possession of the property until the action above has been completed
  • The time and cost to construct the hotel
  • The economic return projected from operations
  • The strategy and reliability of the exit
    < Over your investment horizon, will this hotel maintain its uniqueness or become just one of many hotels competing in the same segment?
    < How might the barrier to entry evaluation play over time?

Don't be afraid to include outside parties to improve your assessment if you do not have the capacity within your firm or from existing relationships. Local engineering firms can assist in the evaluation of the time, cost and critical factors involved in completing the municipal approval process. Likewise, local or regional construction firms can provide insight into the current cost factors to improve the reliability of your development estimates.

The process I have outlined here does not change much if we are evaluating a raw land site for a new development or an existing hotel for redevelopment. The basics are the same and I hope the areas I have addressed here will assist you with your future opportunities.

Mr. Fred Roedel is a Manager of Roedel Companies, LLC along with his brother David. He shares the responsibility of developing and implementing the annual strategic plan of Roedel Companies. He also shares the responsibility of approving the final design, budget and timeline of any asset developed. Mr. Roedel is President of ROK Builders, LLC, the wholly-owned Construction Management subsidiary of Roedel Companies. In this capacity he is responsible for developing the strategic and annual plans of ROK Builders. Mr. Roedel, III can be contacted at 603-654-2040 ext. 105 or FredRoedel@roedelcompanies.com Extended Bio...

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