There are just so many hotels in any particular market—be it geographic or a niche category—that if a management company wants to grow its business, it must expand into new areas.
But how can a company decide what the right market is for them? There are many factors that contribute to finding that perfect match—from growing local economies, following a trusted partner or the addition of new, stable demand generators.
What’s most important? Research, research, research.
“Entering any market is a matter of both macro- and micro-knowledge of the economy, the hotel supply and demand, local politics, neighborhood and site history, and more,” said Andrea Foster, SVP of development, Marcus Hotels & Resorts. “The more ‘eyes wide open’ we are going in, the better. Every market has its challenges and opportunities—some greater than others—but from the due diligence period and beyond, being aware of happenings is the best way to be able to successfully address them.”
Joseph Bojanowski, president, PM Hotel Group, agreed. “Our feasibility team evaluates cities across the country to identify which markets possess the key success factors we’ve established,” he said. “That list of qualified cities is used to determine a set of targeted markets. With close to 4,000 team members employed by PM Hotel Group, we have in-house expertise in all major markets in the U.S. and most secondary markets. We leverage that in-house expertise to gain in-depth knowledge of the targeted markets, underwrite deals and, once we transition a hotel to our management, to provide both task force and permanent employment growth opportunities to high-performing team members.”
When Chartwell Hospitality considers new markets, like it did with recently entered Nashville, TN, and Alpharetta, GA, a variety of factors are taken into account.
“Chartwell typically considers market saturation, barriers to entry for competitors, the overall economy of the alternative market, general growth and demographics, established businesses and potential demand generators,” said Will Schaedle, the company’s VP of acquisitions and development. “These all come into play when comparing investment potential of two or more markets.”
Those demand generators making a market attractive include established corporate headquarters or strong leisure demands that have been proven for the market, according to Schaedle. “In addition, stable market leadership (good local government), stable job growth and things of that nature are always attractive when determining a project’s feasibility,” he added.
In the case of Nashville, the company had working knowledge of the area. “We are headquartered nearby in Franklin, and [know]the impacts of the economic growth within the area, so we felt expansion in our backyard market was appropriate,” he said. “As for Alpharetta, GA, we heavily researched the local economy and other factors necessary for successful hotels and felt a new full-service property for the market was appropriate.”
Similarly, PM Hotel Group had familiarity with the market when it expanded to New York City’s Financial District. “After operating hotels in Midtown Manhattan for almost five years, we were confident that we had the experience and infrastructure to successfully expand to additional markets in New York City,” said Bojanowski. “We knew it was the right time when we identified an opportunity that fit our skill set and expertise renovating and repositioning large, full-service hotels with partners and brands with whom we have a history of success.”
For Rick Takach, chairman/CEO, Vesta Hospitality, a new market must allow the company to achieve its targeted, risk-adjusted returns. “When we find a property that we are interested in, the market dynamics play a critical role in our decision to proceed,” he said. “In many cases, we have current or prior experience in the specific market, which is helpful as a starting point. We then complete research to understand what makes it tick. Specific factors that we consider include whether there are multiple demand generators, what the barriers to entry for new properties are and if we are comfortable with the existing and prospective supply and demand trends, all of which should support a realistic pricing model.”
Kerry Ranson, chief development officer, HP Hotels, said that markets with demand drivers that include educational and government institutions are always attractive and considered recession-proof to a certain extent. “Beyond that, we pay attention to infrastructure development and corporate investment, along with its potential for growth in jobs and hotel stays,” he said.
HP Hotels recently entered the New Orleans market. “New Orleans is interesting and challenging in that it is not a typical Top 25 MSA,” said Ranson. “For the most part, you don’t have Fortune 500 companies delivering mid-week corporate business to that city. We rely on special events, conventions and leisure business. Since
Katrina, the city has enjoyed significant economic development initiatives that include healthcare and the motion picture industry (thanks to tax-advantaged programs).”
He continued, “As a result, there are intricacies to the market that you must understand in order to deliver room nights. Moreover, for a while, the hotel inventory wasn’t updated, especially in the luxury segment. Now, we are seeing an influx of upscale, luxury brands and developments, which opens up opportunities to drive rates, as they had been depressed for some time.”
The city has also seen developments designed to help diversify and grow the visitor pool. “A new $1-billion terminal is going to open at the end of the second quarter on the north side of the Louis Armstrong New Orleans International Airport, which will improve access to I-10 and open up the airport as more of an international travel hub,” he said. “Also, we have seen an influx of big-ticket chemical plants along the I-10 corridor in the last year, which should bring thousands of travelers, including the vendors that will supply the plants. This is a new traveler that didn’t previously exist.”
McNeill Hotel Company recently entered Salt Lake City-West Jordan in Utah and Twin Falls and Boise in Idaho. “These non-gateway West markets are increasingly appealing to corporations setting up a new headquarters or second locations, attracted by the lower living and business costs, combined with a great quality of life and, as a result, are areas with strong economic indicators and population growth,” said Mark Ricketts, president/COO of the company.
Secondary and tertiary markets often require more research. “As with most operators, we are driven to continue growing our portfolio in top MSAs,” said Jarrad J. Evans, SVP, business development & strategy, Benchmark. “However, when reviewing secondary or tertiary market opportunities, we focus on identifying and evaluating sustainable demand generators, supply and demand balances, and consistency of lift, thus attempting to enter markets that are as well insulated from any future economic shocks as possible. Further, we love operating in the value-add space, so when there is demand in a market for a higher-quality experience than currently supplied, we love working with partners on renovating and repositioning assets with greatly enhanced service models to offer a differentiated product.”
Entering new markets can also be dependent on relationships with already-established partners.
That is how PM Hotel Group entered the Austin, TX, market. “We connected with a great local partner and had identified Austin as a market that met the criteria that we see as key success factors: diversity of demand drivers in both the corporate and leisure segments; demographics of the workforce; population growth; volume of growth in the technology and life sciences sectors; and cyclicality of revenue compared to other markets we manage in,” said Bojanowski.
When Hotel Equities entered the Canadian market in 2018, it did so because it was invited by brands with whom it previously worked. Brad Rahinsky, president/CEO of the company, said that they approach each region the same way. “The process is relatively agnostic to region,” he explained. “We identify the white space, assess the opportunity and then deploy resources and talent against that opportunity. We have learned how critical it is to get ‘boots on the ground’ resources in place to ensure maximum results as quickly as possible.”
Aimbridge Hospitality also recently entered the Canadian market and hopes to expand its presence there. “Our decision to enter the Canadian lodging market was based upon our acquisition of a management company that had an institutional high-quality resort (the Westin Whistler) in its portfolio,” said William P. Stadler, EVP/chief investment officer with the company. “We are currently leveraging this management contract to secure additional third-party agreements across Canada.”
“For domestic markets, we tend to follow the capital,” he added. “Outside of the U.S., we typically consider M&A opportunities where we can combine local knowledge with our best-in-class systems and operational expertise.”
Interstate Hotels & Resorts often works with an investor when it enters a new market. “We align our vision with the investor, so our clients’ needs largely determine the right time for us to go into a particular market,” said Greg O’Stean, chief development officer, Interstate Hotels & Resorts. “When entering a new market, we typically work with investors and developers that have experience in that market, such as Borealis Hotel Group in the Netherlands. There, we collaborated with an established developer and enhanced our above-property corporate support, opening a regional corporate office in Amsterdam.”
Exploring opportunities outside of North America requires a different set of requirements. “In addition to all of the business reasons one would suspect (e.g., tax and employment law implications, etc.), we want to ensure we can service our properties with the proper level of senior attention, as well as have the capability to fully deploy the strength of our systems and services,” said Benchmark’s Evans. “We have been very thoughtful and careful regarding international expansion. While we maintain several international operations and partnerships today, in order to grow more aggressively on other continents, we are focused on evaluating more scalable platform options versus one-off growth opportunities, but that would not preclude us from taking on a one-off asset for the right opportunity.”
Becoming established in a new market can also make it easier to move into other similar markets. “Once we have a base established, we typically look for growth opportunities within the greater region,” said Mike Deitemeyer, Interstate’s president/CEO. “For example, in the Netherlands we went from Amsterdam to The Hague. In the Russian Federation, we went from Moscow to Sochi. Out of the U.K., we expanded into Ireland and Western Europe. As we scale up, we enhance above-property support, adding localized corporate teams in major hubs to support our hotels and provide localized owner services.”
No market exists in a vacuum—nor does any relationship.
HP Hotels recently returned to the Dallas market after observing a rebound in the energy market. “Our strategy is to realize synergies in having a cluster of properties under management and benefit from relationships that we already have in place in the energy industry,” said Ranson. “These relationships were built with oil and gas companies in other markets such as Oklahoma City. For example, one of our big customers in OKC is headquartered in Dallas, giving us great confidence going into this market.”
Despite all of the research and efforts put into finding new markets, it doesn’t always go as expected. “Our team had a great learning experience in downtown Kansas City, MO, which quickly proved to be a difficult-to-develop market,” said Schaedle. “Around 2014-2015, Chartwell set out to deliver the downtown area’s first ground-up hotel since 1985. It took more than a year and a half to gain final city approvals, and our team had to delicately navigate local politics and the city council process to achieve development rights.”
He continued, “During this time, the market had the undertone of requiring financial incentives from the city to build a hotel. We determined our hotel did not need incentives and developed the project without assistance. This was a large feat for the market, and it generated much discussion from the local development community. Since we proved the feasibility of a success without incentives, several other developers in the area have followed our lead, which we think is pretty neat. We feel like Chartwell helped generate good growth for Kansas City by leading the charge on hotel development without local government incentives.”
Once a market has been entered, companies work to establish roots so that they can thrive.
“We want our properties and the management teams to be active in the communities where they exist,” said Takach. “At a minimum, this includes involvement in the chambers of commerce, convention and visitor bureaus, and similar organizations, but should also include support of other community-based organizations. We support community programs where we can help good causes through donations of time, money and/or use of facilities. This helps get a property and team established in an area, and we continue this involvement throughout the entire time we are in a market.”
Foster echoed this thought. “First, our general managers are ‘mayors of the market’ and they engage and stay connected in the communities in which we operate,” she said. “After all, the markets we are in must be vibrant and desirable for our guests and customers to visit, for our associates to live and work, and for businesses and organizations in our communities to thrive. We are part of the fabric of our markets. Second, we stay engaged in the happenings within our markets, to be informed of opportunities to engage further in the hotel market. We have multiple properties in several markets, as there are varies synergies to be found in this approach.”
“We take great pride in leading the markets in which we operate, so we are constantly challenging our property teams, home-office support and vendor partners to stay ahead of the competition and advance our business plans,” said Evans. “Given the battle for talent, we are also continually focusing on attracting the best talent possible to drive success at our properties. Further, when operating multiple properties within a similar market, we work with our ownership groups to identify and maximize as many cost-saving and efficiency strategies as possible, whether that be through complexing operations, cooperative market efforts, combined procurement strategies, etc.”
Expanding to new markets can also provide opportunities for current employees—helping them stay with a company—especially given the current labor situation. “Our current associate base at Marcus benefits from our growth to new markets, as it presents opportunities for relocation for those who are interested in new places and challenges,” said Foster. “We develop much of our property leadership from within the Marcus Hotels & Resorts family, and in other situations, we source from outside those who are great fits with our company culture. This combination has shown to be a very successful strategy in the ongoing war for talent in our industry and beyond.”
Rahinsky echoed this sentiment. “The benefit for current associates is additional growth opportunities,” he said. “A big draw for folks to enter the hospitality business is because they can literally go just about anywhere and find work. Expanding our footprint gives us the added benefit of offering our associates the opportunity to go and grow in their careers while staying with [us].” HB