ATLANTA—Location, location, location is a common mantra in commercial real estate. But a good location with low barriers to entry may not be the best bet in the long-term.
GlobeSt.com caught up with Shawn Gracey, executive vice president of hospitality for Key International, to get more insight into this growing sector in part one of this exclusive interview. You can still read part one: Why Select-Service Hotel Development Is On The Rise.
GlobeSt.com: What are some of the key factors to consider when purchasing a hotel property for development or redevelopment?
Gracey: Selecting central areas with high barriers to entry and strong demand generators have proven to be key. A strong brand affiliation and proximity to drivers of critical mass, like convention centers, universities or beaches, establish the property in an attractive market for stable visitor traffic.
CBRE's recent Hotels' Americas Research reported the highest GOP growth for hotels was in South Atlantic regions—such as Florida, Georgia, North and South Carolina. The area along the US coastline is one region Key International has targeted for new development. The backbone of any acquisition conversation should be a strong understanding of the surrounding market.
GlobeSt.com: What is the average range in return that a developer can expect from a limited- or select-service hotel? How does this compare to full-service?
Gracey: By following the value-oriented model of limited- or select-service hotels and engaging in partnerships with notable hotel flags, this format has predictable profit margins of 48 to 52%. In contrast, full-service, chain-affiliated properties report around 34 to 36%. The same report by CBRE noted similar results: In 2015, select-service hotels had a 44% gross operating profit, while full-service hotels had a lower GOP of 37%.
GlobeSt.com: Hotel construction lending is tight right now. Do you foresee this as a major obstacle for developers looking to build from the ground-up?
Gracey: The increase in hotel product in the pipeline has caused banks to tighten their criteria in this sector, making it more challenging for construction lending. With less lenders in the game or those wanting to be very selective with their contributions, it is generally difficult to find capital in the current landscape.
However, we are still bullish on the hospitality sector, looking for competitive markets with high barriers to entry, either for acquisitions or ground-up development. For an attractive opportunity to land at the forefront for lender consideration, it needs a developer with a solid track record, notable architect, prominent hotel flag and the support of strong fundamentals in all capacities.
(Find out why Ten-X adjusted its 2019-2020 hotel forecast).
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