Guest post by Robert Habeeb
president and chief operating officer, First Hospitality Group, Inc.
When we look at the current state of the Midwest hotel market, we see a region that is transitioning in some important ways from a state of slow recovery to something closer to genuine momentum. Whether that momentum is sustainable remains an open question, but there is no doubt that—despite significant market-to-market variation—on the whole, hotel development activity in the Midwest is on the uptick.
Across the region, a number of interesting trends are emerging. Some of those trends mirror similar trend lines in the national hotel market, and some are specific to the Midwest, but all of them contribute new data points and perspectives that can help give us a better sense of where the Midwest hotel industry is headed in the months and years ahead.
The Windy City goes international
The general industry consensus used to be that the Midwest, specifically Chicago, was unlikely to ever really become a major destination for international travelers. Recently, however, major hotel brands, together with the City of Chicago, have been engaged in a concerted effort to change that impression. Their efforts are working. A recent article in the Chicago Tribune points out that while “Chicago might not be a top-of-mind city for overseas travelers, apparently word of its virtue is getting out.” Mayor Rahm Emanuel just announced that the city welcomed a record 1.369 million overseas visitors in 2012. This represents a 14 percent increase from 2012, a spike which moved the city into ninth place (ahead of Boston) in overall city rankings for international travel by the U.S. Department of Commerce. Chicago hoteliers and civic leaders have set themselves an informal goal of boosting international travel up to 15 percent of business—and if recent trends continue, that might not be so farfetched.
Overbuilding on the horizon?
Anecdotally, the strength of demand across many major markets in the Midwest continues to make for favorable conditions: particularly in Chicago where our hotels have all been at 90-percent-plus capacity this summer, with the leisure segment performing particularly well. During the last decade or so, leisure business has been a leading driver of hotel growth and success in Chicago. During that time, business travel is up slightly, but leisure travel is way up, and continues to be a major post-recessionary driver.
Despite these recent numbers and continued strong performance, there is some reason to worry that Chicago—and a few other markets in the Midwest—might be in danger of overbuilding. With a number of new hotels coming online in the next couple of years, a major question looms: How much new product can be sustained without having an impact on existing product? This ebbs and flow, as there is always somewhat of a horse race between supply and demand, and the extent to which overbuilding becomes a problem will depend largely on how fast demand can continue to rally. The current best guess from those in the know? Any serious overbuilding impact is likely about two years or so away: We will be fine for 2014, but with an abundance of new hotels coming online after that, I suspect that we will reach a tipping point.
When it comes to choosing the “right” spot for a new hotel, it is just as important to weigh the pros and cons of the larger marketplace as it is to select a great site. That is something that sometimes gets forgotten, and, as hotel development professionals “vet” markets in the Midwest, it is important to remember the old cliché about all real estate being local. It is essential to always look for hot spots in a particular market, areas where hotels are underrepresented but there is plenty of sustainable long-term demand. Great hotels will work anywhere; it is the marginal hotels that will suffer if the larger market sags.
That said, experienced professionals are always looking for new and emerging markets with plenty of diverse employers and industries to provide a strong and sustainable economic base. While some larger markets have become less enticing in recent years, we are seeing some smaller markets present more promising hotel development opportunities. Columbus, Ohio, falls into that category. Columbus has all the tangible and intangible positives developers like to see, including a strong corporate business base, its location as the seat of the state government and a massive state university in The Ohio State University. Omaha is another city that could be considered a “sleeper” market. Omaha has a solid corporate base with brands like Union Pacific, Berkshire Hathaway and Godfather’s Pizza, as well a regional military presence and a good stable demand environment. One cautionary note: Omaha might be somewhat susceptible to overbuilding—while it is a strong market, it is not necessarily a deep market.
In addition to increased ground-up development, we are seeing a lot of large-scale renovations at Midwestern hotels. The reason for this is two-fold: first, major hotel brands, which were being relatively deferential and understanding with regard to delays on capital improvements and brand standards during the recession, are now enforcing the required upgrades. Second, hoteliers have caught on to the fact that the key to attracting the leisure travelers is to give them more than a product, but to give them an experience. This is true at any point in the food chain, from five-star boutiques to economy lodging.
Consumers these days—especially millennial consumers—get bored very quickly, and they are demanding more. Essentially every hotel in our development pipeline right now has some kind of experiential element. Whether that is a historic building, a signature restaurant, unique amenities or some other kind of distinguishing feature, guests today are demanding spaces and places with a memorable and defining sense of place.
If I have a “big picture” thought, it is this: everything is cyclical. We are once again building back to the peak of a development cycle. The hotel development industry in the Midwest is a little more modulated and a lot more cautious than during the last run-up. Nonetheless, there is a definite sense that development is accelerating beyond the point at which it is sustainable. It seems like developers are announcing new projects every day. While some of this is likely the result of years of pent-up demand, it is still a real phenomenon and worth paying attention to going forward.
First Hospitality Group, Inc., is a national hospitality management, and development company serving the investment and real estate industries. The company has developed, marketed and managed more than 16 brands and 50 properties throughout the Midwest.