As hotel investors become more comfortable with the idea of expanding their hotel portfolio in this flourishing environment, there are many things an investor takes into consideration before purchasing one. Most hotel investors simply want to know one thing: what are the numbers? While average daily rates (ADR’s), occupancy and revenue per available room (REVPAR) are important metrics, it is also important to understand how the hotel is achieving these goals. To understand how the hotel investment is achieving goals, an investor should look at the market place and understand the economic drivers of the area.
When putting a potential hotel acquisition under the microscope after analyzing the STR reports, gross revenue, P&L’s and NOI, Mr. Buyer must understand what the economic drivers of this hotel are. In a perfect world this hotel might be a part of a retail development near a hospital with a destination theme park down the road, and for good measure lets add a mix of local food fair and a good night life. Unfortunately, this perfect world only exists for select few hotels in the world. Many hoteliers will settle for combination of one or two of these drivers and still have a very successful hotel. The key here is to understand exactly what kind of market your hotel is a part of and what the volatility there is.
It is important for hotel investors to dig beneath the surface of the deal to really understand how the market place operates. For example, if you are looking at hotel in an area where the main economic driver is the oil and gas industry and you have just learned the price of oil has just dropped from nearly $100 per barrel to under $50 in the last 6 months, this may be a red flag. An investor may want to make sure this industry stabilizes before going through with the hotel investment.
Another example, is when a hotel property is located near a destination beach where seasons come into play. An investor must understand the varying market place. A hotel may be at 95% occupancy with average daily rates over $250 per night during the summer months but, during the off season may only be able to produce a 30% occupancy at a third of the nightly rate. Investors can reap significant reward while the market is great, but must be in tune with the hotel economic drivers to sustain a successful hotel investment.
Knowing what new economic drivers are in a market can give investors a competitive edge in purchasing land for an undervalued price. For developers, it will allow them to move into a good market place and identify/secure a quality brand, increasing the likelihood of achieving the desired return on investment. Right here in Pensacola, Florida, Navy Federal Credit Union has a 602,000 SF facility with another 342,000 SF under construction. Navy Federal made a commitment to growing from 3,100 employees to 10,000 employees by 2028. This campus is near an under-served interstate junction that only consists of a single service station. With developers in the wings this could be a good opportunity for a hotel investor to jump in the market place with great upside potential. For great local knowledge with good national reach, contact your hotel expert. Click here to read my other hospitality related blog posts.
About Bryan Morelock – Based in Pensacola, Bryan has gained significant knowledge of the retail and restaurant sectors for over five years. More recently, he has focused on honing his skills and working with clients in the hospitality sector, which he is particularly interested in. Click here to read his full bio, or if you would like to contact him, you can call him at 850-434-7500, or email him at [email protected]
Photo Credit: “Las Vegas – Circa 2014: Treasure Island Hotel And Casino On Circ” by David Castillo Dominici Source: freedigitalphotos.net