By Chris Cobb | Associate
Welcome back to the Big3 with CC, your weekly real estate investment source. Well, Army beat Navy last weekend in football and while I am upset about it, tip of the hat to Army for a good game and congrats on getting the Commander-in-Chief’s trophy for the first time since 1996.
Hospitality, a sector seldom talked about in secondary and tertiary markets. When they are discussed, it’s usually about the high-end part of the spectrum, in an expensive vacation setting like Four Seasons. Mid-range hotels are becoming more attractive in the investment game and here is why:
Risk vs. Reward
In the realm of commercial real estate investments, hotels are a roller coaster ride. As one may expect, the peaks and valleys for the high-end hotels are far greater than the peaks and valleys for the mid-range hotels. Through the third quarter of this year, 686 hotels in secondary or tertiary markets whose selling prices are publicly available were sold in the U.S., according to Lodging Econometrics. Those properties had an average sale price of $134,204 per room and an average room count of 127. Much to my appreciation, Daniel Marre, co-chairman of the hotel and leisure practice Perkins Coie LLP, uses baseball to compare each group. High-end hotels are like the player that swings for the fences: tremendous upside but the probability of a strikeout is much higher. The mid-range hotel, such as a Courtyard Marriot, is like the player who tries for a single or double; safer and higher probability. It also becomes a game of prestige vs. profit.
Abundance in Secondary & Tertiary Markets.
Take a market like Pensacola, FL or Mobile, AL. One can beef up their portfolio with multiple mid-range hotels scattered throughout the market rather than one or two prestigious hotels located on the world’s best white-sand beaches. During a favorable market, the higher end hotel will outperform the mid-range ones in spades, however, as stated before, you run the risk of hitting a much lower trough. It is also important to take note of the location of each type of hotel. The mid-range hotel has more locations near interstate highways or higher trafficked areas which may maintain a more stable flow of income.
The Experts Agree.
High net worth investors and commercial REITs are moving away from the high-end hotels. Mike Cahill, CEO of Hospitality Real Estate Counselors, a consulting firm based in Colorado says family offices (investors) in secondary and tertiary markets like Cleveland, Denver, and Omaha typically feel comfortable buying stable cash-on-cash lodging assets—either on their own or in conjunction with other investors—in non-gateway markets scattered around the country.
When it concerns real estate, invest yourself.