New Construction Hotels: Positive or Negative for the Local Hospitality Market?

 

New Construction Hotels: Positive or Negative for the Local Hospitality Market?

 

 

Looking at all the hotels around us, one might think that all the developers are oversupplying the hotel market. But like the chicken or the egg concept, the need for hotels exists due to the demand of travel.

According to the data acquired from Smith Travel Research, (STR), occupancy rates for February 2017 was around 62.9 % compared to April 2018, which is at 68.1%. Even though  there are hundreds of new hotels being built across the United States, there seems to be no fallback on national occupancy rates. That’s because hotel developers are strategically developing newer markets and different brands in other cities beyond New York, Los Angeles, and Chicago.  Competition is steep and it’s difficult to find an empty lot to build your hotel in these bigger cities and their sub-markets, but developers are finding it equally rewarding in going out to underdeveloped cities where there’s less competition and much easier to get your property built.

Not only the occupancy has risen over the last year, but average daily rates (ADR) metric has also gone up. ADR is a metric used to gauge the average rental price per room. In April 2017, the ADR was recorded at $128.75, compared to 2018’s $130.81.  Many critics and government staff speculate that increasing the supply of a product should drive its value down. In theory, it should! But as a matter of practical experience and reality, that isn’t always the case. Then what makes these hotels charge their customers more money? Not only that, but what convinces the customer that the rooms are actually worth the price he or she is paying?

 

It’s a simple answer, New Construction.

 

Newly constructed hotels includes the best of everything. The quality of the property and service are expected to be and typically are the best of that hotel class. New construction hotels are starting to go the extra mile and bringing the future to you by providing you with keyless entry to your hotel room using your mobile phone, ability to control your room’s temperature from your tv, and having fully interactive robots to obey your room service commands and toiletry item requests.

People around the world are willing to pay a higher rate in order to use these services, rather than staying at an older hotel where the cost might be slightly cheaper, but the level of service and amenities is nowhere near what a newly constructed hotel offers.

For anyone who wants to look at this subject from every critical angle, I think there is one more scenario worth playing out.  Let’s assume for one minute that supply and demand of hotel rooms are balanced, would bringing more hotels into the market at that point help or hurt the economy? As we discussed above, people are willing to pay a higher ADR if they are offered higher quality properties. So it’s safe to say that newer hotels can help increase ADR.  At the end of the day, it’s less relevant to hotel investors whether it’s ADR or Occupancy Rates that increase, they often look to a combined metric, Revenue Per Available Room, (RevPar). RevPAR is calculated by multiplying the ADR with the occupancy rate. So, technically new supply is still healthy in a balanced market, unless RevPar starts to decrease.

 

Sources:

http://www.hotelnewsnow.com/Articles/275171/STR-US-hotel-results-for-week-ending-17-February

http://www.hotelnewsnow.com/Articles/282848/STR-US-hotel-results-for-week-ending-31-March

https://hospitalitytech.com/6-mega-trends-hotel-technology

 

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Upcoming and Current Trends in Hotel Design

4 min read

 

Upcoming and Current Trends in Hotel Design

Brands like Marriott’s Moxy target the growing Millennial market in the Hotel Industry.

 

Well established hotel companies and investors are looking to stay ahead of the curve, and this is definitely the case when adapting to trends in the hotel industry.  In today’s hotel markets, Millennials are establishing themselves as a formidable force. With markedly different preferences than their older counterparts, hotel developers and investors are looking to cater to these younger travelers to ensure that they stay ahead of the curve. For many hotel flags, we are seeing significant changes in response to those preferences.

Good news for the hotel world – Millennials overall prefer to spend their money on experiences, rather than on material goods. Luckily for hotel investors, this means that hospitality is a great area of opportunity. The Millennial travel market is only going to grow more and more, and learning this generation’s preferences and how to appeal to them is essential for continued long-term success in the hotel industry. Here are some of the ways hotel’s are seeking to appeal to this group of travelers, and earn brand loyalty early on.

Interactive Social Media

Millennials are more tuned in to their devices than ever. As opposed to more traditional advertisements through commercials and print marketing, many of the most successful brands are turning to engaging their customers online. Marriott’s Moxy brand, for example, has established their own instagram account (@MoxyHotels), and encourage their guests to share pictures online using hashtags such as #AtTheMoxy. This social media wave is incredibly efficient – guest travelers who post and share their experiences at Moxy Hotels provide what is essentially free marketing. That extra boost in exposure to guests’ peers can build a rapport among Millennials as they begin to build loyalty to specific brands.

More technology

No surprise here. Going hand in hand with social media, capitalizing on technology and engaging with your customers is a major step that hotel developers need to compete with. Having wi-fi available for guests beyond just their rooms has become expected, rather than a luxury amenity. Many hotels are moving towards providing charging stations in the more communal areas of the hotel, or providing more USB charging ports in their rooms to accommodate mobile-friendly travelers. Even hotel rooms themselves are seeing an increase in the number of power outlets. Holiday Inn parent company IHG also recognized such patterns in their guest habits:

“At Holiday Inn, the first thing hotel guests can do upon entering a room is recharge their phones. When designing the new H4 guestroom, parent company InterContinental Hotels Group conducted focus groups and consumer testing to determine where to place power and USB outlets…One result is a ‘Welcome Nook,’ a place for guests to hang their coat, drop their keys, and plug in devices.”

Airbnb has developed a mobile app to  appeal to younger customers more than ever, and creating apps that facilitate check-in and check-out will give hotel brands an edge over their competition. Large companies such as Marriott already have apps that allow you to check-in to your room on your phone, and also incorporate other features such as allowing you to track and earn loyalty points. Creating these apps also offer an additional stream of revenue by opening up advertising opportunities on the app to nearby businesses seeking to appeal to Millennials and other customers as well.

Large Communal Spaces, but smaller rooms

With the increased emphasis on social media and communal experiences in general, hotel brands are seeking to develop hotel products with larger communal spaces. Larger lobbies, recreational rooms, and more open-design spaces. Some hotels, such as Hilton’s Tru brand, are now also designing their rooms smaller, with more efficiency. A hotel may remove their ironing boards and in-room bars in individual rooms in exchange for larger communal versions of them on each floor. Similar to the advantages of a dual-brand model, these design differences have the potential to save developers money, while also appealing to their younger customer base – a double win.

 

More outlets, and larger communal spaces geared toward more points of social contact.

More outlets, and larger communal spaces geared toward more points of social contact. (Source: Tru by Hilton)

It’s important to note for hotel developers and investors that while smaller rooms are efficient and may appeal to many customers seeking a more communal experience, caution should be taken especially in full-service and luxury hotels, where making rooms too small can actually be unattractive to their customers who may value that larger space and more individualized amenities. Millennials currently are largely tourist travelers looking at more budget-friendly options. Generally – keep in mind which customer base you are appealing to, and what amenities your hotel offers.

Overall

It’s important to keep in mind upcoming preferences as hotels seek to capture Millennial travelers. The Millennial generation is still growing and as the generation ages, their average income increases, and we expect full-service and even luxury hotels to start adopting some of the trends and design changes that we already see in millennial minded hotel products.

However, at the end of the day, it’s also important to continue driving the personal, human aspect of hotels. There is no replacement for quality service, and hotel developers should not see technology and amenities as a complete replacement for strong customer service and quality associates and hotel staff to drive guest satisfaction. It’s that combination of strong customer service and appealing amenities that will push Millennial interest and loyalty in the long run.

 

Sources:

Saiidi, Uptin. Millennials are prioritizing experiences over stuff. CNBC. May 5, 2016.  https://www.cnbc.com/2016/05/05/millennials-are-prioritizing-experiences-over-stuff.html

Moxy Hotels. Marriott. http://moxy-hotels.marriott.com/en

Trejos, Nancy. “Hotels add plugs, ports for device-laden guests.” USA Today. May 21, 2017. https://www.usatoday.com/story/travel/roadwarriorvoices/2017/05/21/hotels-add-plugs-ports-device-laden-guests/101863684/

“Marriott Mobile App | The Perfect Travel Companion.” Marriott. mobileapp.marriott.com

Meltzer, Matt. “How Tru by Hilton Is Trying to Win Over Millennials.” Aug 23, 2017. CN Traveler. https://www.cntraveler.com/story/how-tru-by-hilton-is-trying-to-win-over-millennials

 

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How do Brokers help you or hurt you?

2 min read

How do Brokers help you or hurt you?

Brokers are a common staple of the real estate investment world, and many people seeking to sell a property hire a broker with the hopes of finding a legitimate buyer. Brokers have been commonly associated with people looking to purchase or sell real property, but let’s take a moment and consider some of the advantages and disadvantages of hiring a real estate broker.

Advantages

In short, a broker is a person who connects those interested in selling real estate with those who are looking to invest or buy real estate, including hotels. The most obvious reason that many people choose to hire a broker is the fact that brokers have access to the Multiple Listing Service (MLS) and they are supposed to have expert knowledge about the market, saving you a lot of the time and energy that goes into finding an ideal transaction.  But is that always the case?

Disadvantages

The mathematical honesty is that although you might want the best deal possible for your own interests, your broker has the easier path to reaching a deal in which he or she gets a commission.  Brokers are even starting to offer “exclusive contracts” that allow them to get paid, even if he or she was not directly involved in procuring the end result. Despite brokers following what industry standard refers to as “duty of care,” brokers are compensated a fee for a transaction that closes, regardless of whether it’s a good or bad deal for buyer or seller.  It’s just the nature of the beast, the broker’s compensation model was designed to be an early and instantaneous event.

Are they Adding Value?

 When you’re a seller of real property (including hotel investments), you must ask yourself if brokers can do anything other than listing your property on the MLS?  They’re supposed to have a rolodex of leads and contacts they should be able to contact regardless of listing it on MLS.  Are they helping the parties reduce their transaction cost or just sitting idle and observing the process?  Many times an experienced broker can organize and initiate the legal, accounting, and transactional professionals for their clients, saving thousands of dollars at the closing table.  However since it’s not an industry requirement for brokers to have this experience or expertise, they often neglect to take this initiative for their clients.

Can they help Substantiate Value?

A good broker should be able to efficiently and articulately advocate on your behalf, essentially paying for themselves.  This means their voice should be influential in the transaction and explain why the sale should occur at a higher or lower price.  This requires a broker to have sophisticated knowledge about the property and/or the business merits of a transaction, especially facts and trends that can not be easily quantified.  Ask yourself, does a broker have this type of knowledge about your property?

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Benefits of Equityroots.com Hotel Investment Platform:

Sometimes the privileges of accessing the MLS outweigh the disadvantages, making sense for a person or business to use the services of a broker.  But many times, adding a broker to the transaction as the buyer simply adds cost to the seller and reduces your chances of getting a discount on the purchase price.  There are some instances where a broker is very useful, helpful, and worth every penny.  Unfortunately, there are probably more instances where the broker didn’t add any value to the transaction or substantiate your property’s value to the best of its abilities.

Equityroots.com depends on land-use knowledge instead of brokers to find its next opportunity.  The hotel investment platform does not pay any brokers, dealers, or commissions to source its investors.  The intent of this model is so that people can invest into real estate projects and hotels without paying commissions and brokers.  It’s pretty clear to see the advantages for investors under this model.  Our investors can build a diversified portfolio of franchised hotel assets, without paying any commissions to invest.

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IHG’s Newest Product: The Strength of the Midscale

4 min read

After a long wait, Intercontinental Hotels Group (IHG) has finally revealed their new brand, Avid. This is an incredibly important move because it targets one of the most successful chain scales in the hospitality industry – the midscale transient travel brand. According to Intercontinental Hotel Group (IHG), the worldwide hotel company wanted to provide an excellent option for midscale travelers:

With the extended-stay Candlewood Suites as the only midscale brand in the company’s portfolio, IHG was not addressing the needs of an estimated 14 million travelers who could spend about $20 billion in roomnight revenue. – Elie Maalouf, CEO of the Americas, IHG

Did you catch that? 14 million travelers who could spend about $20 billion in room night revenue. The midscale market is extremely critical to the success of hotel companies seeking to expand their portfolio, and understanding that midscale market is incredibly important to hotel investors looking to make a smart investment move.

The new Avid product by IHG. Source: IHG

Why is the midscale market so foundational?

As mentioned in one of our vlogs, there are different types of chain scales that target different demographics of travelers.

The type of amenities and price point of a luxury hotel like the Ritz-Carlton is vastly different from the available amenities and price point of an economy property like a Red Roof Inn. At your Ritz-Carlton, you’ll have a pool and a hot tub (maybe several of each). Expectations include 24/7 concierge service, a spa, and at least one in-house restaurant. In lower chain scales, you’ll find just the basics: free wi-fi, a clean room, and maybe free breakfast. The price of a room sometimes can also reflect the amenities that it offers.

RevPAR Change - Hotel Investments

Midscale scale hotels have been on the rise faster than most other chain scales, while establishing higher long-term value than economy scale products.  Source: HVS

Here’s where midscale products come into play. Midscale hotels offer a happy medium between both ends of the hotel chain scale range. Midscale hotel assets are more resistant to declines in the national economy and downturns in the hotel cycle. When people are short on money, often the first things to go are the luxury items, or the “wants”. A family faced with a tighter budget may opt out of the Ritz Carlton, and will look to more affordable products, including midscale hotel products. On the other end, midscale hotels also offer a solid standard of quality higher than their economy hotel counterparts, and travelers (especially small business travelers) will definitely pay for that nicer midscale room as opposed to an economy room if they can afford it. This ability for midscale hotel products to do well in both thriving markets and struggling ones makes them a sturdy investment that is more resistant to fluctuations in the economy.

In addition, midscale hotels are often popular with business and corporate travelers, who make up the majority of hospitality revenue annually. Midscale products like IHG’s Avid provide the quality that many small businesses are accustomed to during business operations: wi-fi access, free breakfast, and plenty of conference and meeting space where they can meet clients and business partners.

As we’ve mentioned before, hotel investment options should always be carefully analyzed to make sure that it is an ideal investment for the market. Depending on the location, economic setting, and other market characteristics, it might be a strong option to invest in an upscale or even luxury hotel. In other markets, investing in an economy brand could be the best option. In Schaumburg, EquityRoots decided on a dual-brand model, one that combines the midscale market strength of a Holiday Inn Express combined with an amenity packed full-service Holiday Inn product with an in-house restaurant and bar component. For Schaumburg’s market, this strategy offered a strong amenity for surrounding businesses that demanded additional midscale market options.

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IHG’s launch of Avid makes this a good brand option for developers looking to offer a more consistent lodging product in markets where economy or independent properties are prevalent or in markets where Holiday Inn, Holiday Inn Express, and Staybridge products already exist and are running annual occupancy levels above 80%.  Prematurely investing in new brands before more established brands have recorded solid performance can be dangerous.  Another confusing part can be what to do if you build a new construction Avid in a market that already has older more established brands with lower cost basis.  It will be hard to sell rooms for a higher price, even if your property truly costs more to build than older properties, therefore I think it’s important to note that it is most advantageous to develop Avid only if you own the other IHG flags in the market.  Some brands like Hilton have already discovered this fact, and have created a priority method to develop newer flags like Home 2 and Tru, giving preference to the existing Hampton Inn franchisee in the market.

Sources:

Fox, Jena Tesse. “IHG launches new Avid brand to attract midscale travelers, developers.” Sep 18, 2017. Hotel Management.

“What’s driving customer loyalty for today’s hotel brands?” Consumer Intelligence Series. PwC.

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Schaumburg, IL: Investing Where People Want to Live

4 min read

MONEY magazine ranks the best places to live in the nation every year, and the Village of Schaumburg definitely set out to impress this time around, ranking 9th overall. Of course, the EquityRoots team isn’t surprised — the ranking is a testament to the type of markets we like to invest in. The Schaumburg Holiday Inn dual brand project is worth its weight for investors.

Demand Driven

Our team understands that some of the strongest performing investments for hotel investors are often located where quality of living is highest. Whenever EquityRoots’ receives a funding request, our team looks at the proposed project holistically, giving consideration to the brand, amount of funding, and nearby demand drivers that influence people to live or visit a location. Luckily, Schaumburg is abundant with demand drivers, all of which work to ensure that a new hotel development in the village will prove a fruitful investment and bigger economy.

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Schaumburg has a projected job growth of 3.0%, reflecting the village’s promising talent pool in years to come. Many of the companies opening or expanding in Schaumburg will look to host conferences and encourage business trips – which translates into increasing demand for available hotel rooms to host those business visitors. Do you like great weather? Schaumburg has on average 189 clear days every year. People generally want to be in an area that has nice weather, and that can translate to more tourists visiting Schaumburg’s parks and commercial centers, consistently driving revenue.

Many of the reasons why MONEY selected Schaumburg as the 9th best place to live in the US, or alternatively, many of the reasons why EquityRoots selected Schaumburg as the site for our dual-brand development. Source: MONEY Magazine

Other demand drivers can be physical. The Olympic Park is only a short drive from our development meaning that high school, collegiate, and team families have additional lodging options. This is a huge source of potential revenue not only from all the hotel rooms needed, but also for retail and restaurants that these teams will visit. The Woodfield Mall – the largest mall in Illinois and one of the largest in the nation – is an obvious demand driver and amenity for visitors. This benefit works both ways, creating a market where retail and hospitality compliment each other.

Woodfield Mall in Schaumburg, IL is a critical demand driver that brings in value not only through revenue generated from retail, but also as an amenity that supports local hotels and other businesses. Source: Simon Property Group

These demand drivers are also what led EquityRoots to decide that a new hotel in Schaumburg would be the perfect project. To keep up with the commercial needs of a growing Village and the chance to answer that with a high quality project, this project was designed to be healthy for the local economy in addition to the potential opportunity of profit to its stakeholders.

Local investors saw our IHG project as a chance not only to earn a potential return on a Class-A asset, it was also a chance to be a part of developing something that built positive value in their community. For our more recent IHG project in Schaumburg, a significant number of investors were from Schaumburg and nearby regions in Northern Illinois. When you look at different real estate investment options, you also want to consider nearby demand drivers that often provide amenities and other businesses that promote high quality of life. Instead of looking at MONEY’s rankings as a list of the best places to live, you’ll be using it as a guide to help you invest smarter.

Sources

“Largest Shopping Malls in the United States.” American Studies at Eastern Connecticut State University. April 25, 2009.

“The Best Places to Live in America.” MONEY.

 

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Bhavik Dani Featured on Midland Investments Podcast

1 min read

Midland Self-Directed IRA & 1031

Earlier this month, our very own Dealflow Officer Bhavik Dani lent his hotel crowdfunding expertise to Midland IRA, on their Midland Media: Podcast Series. Bhavik goes in depth about how hotel crowdfunding distinguishes itself from other real estate investment opportunities, and also discusses our team’s journey so far on the road to making hotel crowdfunding accessible to investors across the nation!

Check out the full podcast here.

Bhavik Dani Featured on Midland Investments PodcastInterested in learning more about hotel investments and EquityRoots’ hotel crowdfunding platform? Click below!

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EquityRoots: Democratizing Hotel Investments

3 min read

Hi. I’m Bhavik Dani, Dealflow Organizer with EquityRoots.com. It’s my pleasure to talk to you about how crowdfunding is revolutionizing the hotel industry. EquityRoots.com uses crowdfunding as a finance mechanism to raise capital for real estate assets, specifically for premium branded franchised hotels. EquityRoots combines and harnesses the buying power of the crowd to bring you investment opportunities in institutional grade investments that were once available only to REITs, insurance companies, and the largest corporations. Our crowdfunding technology allows even the smallest of investors to pool their capital right next to proven developers and industry leaders. Hotel crowdfunding is really a system in which everyday folks like you and I become the source of capital. The capital can be structured as equity, debt, mezzanine debt, and sometimes even convertible debt. This capital is fairly flexible with how a developer can use it to further grow and improve business, from renovating a pre-existing hotel development to constructing and designing an entirely new development from scratch.  The advantages of crowdfunding to investors include:

Diversifying Risk

We can diversify risk by allowing the crowd to buy fractional interests in different hotels across the country. EquityRoots allows investors to select multiple assets, affiliated with different brands and located in various geographic territories.

Institutional Grade Assets

Next, it allow hotel investors to own a piece of an institutional grade quality hotel. Let me explain a little further. The average hotel groups and hospitality groups have the ability to build a standard 80-120 room hotel in a suburb, where barriers to entry and construction costs are often lower. However, in center city urban markets – like Chicago and New York – investors often encounter high barriers to entry and substantially higher construction costs. Deals in such markets can become out-of-reach for traditional hoteliers and real estate investors. This is where crowdfunding kicks in. By pooling capital from everyone, it allows combined leverage of the crowd to pursue a higher-grade, higher-quality deal. It’s something usually reserved for institutions –  REITs and insurance companies as I mentioned.

No Middleman and Commissions

Another advantage is removing middlemen and commissions. The crowdfunding process is very clean and simple. Our crowdfunding platform doesn’t allow broker fees or commissions for buying and selling the investment. EquityRoots aims to make every penny of your dollar count in the investment.

 

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Ownership Beyond Paper

Investing in property and buildings that you can see and visit is probably one last advantage I’d like to share. Hotel crowdfunding investments are markedly different than paper stocks and bonds – paper certificates that we trade on by speculation and can never actually “see” in the same sense that you can see and visit a hotel you invest in. Real estate is an investment that you’ll always be able to see. It has real property interest and improvements on the land.

Conclusion

These are just a handful of the reasons why hotel crowdfunding is such a game changer – not only does it harness the power of real estate crowdfunding, but it also allows real estate investors new and old to gain access to those high-barrier markets. EquityRoots is hotel crowdfunding, democratized for today’s investors.

 

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Do Brands Still Matter in 2017?

5 min read

Are Millennials Blind to Hotel Brands?

Do brand preferences still matter in the Millennial generation? This question comes up because Millennials have shown an emerging taste for untraditional, decentralized, and independent local providers of goods and services in what is commonly referred to as the “sharing economy”. The sharing economy has undoubtedly made an impact across multiple industries.  Sharing economy leaders like Uber and Airbnb are estimated to grow to $335 billion by 2025. This significant growth leaves many hoteliers and investors alike wondering how the hotel industry will continue to change moving forward. Many are also asking if hotel brands matter at all? After all, Millennials seem to be happy with online travel agents (OTA’s) where brand loyalty doesn’t matter, or online platforms like Airbnb which reveal a preference for more communal, local, and location-authentic lodging experiences.

Are Millennials Blind to Hotel Brands?

Despite higher preferences than their older counterparts, Millennials still show strong preferences for branded hotels.

The travel and hospitality marketing firm MMGY Global launched a study hoping to answer questions about these changing hospitality preferences among American travelers. (You can check out the full article here.) Peter Yesawich from MMGY Global has some great insights worth checking out, and below is a snippet of that report:

MMGY Global

Source: MMGY Global

Highlights from the Study

Our team at EquityRoots also wanted to take a look at the study results to find a conclusive answer on whether or not hotel brands will still matter into the future.

In short, yes – brands still matter, and investing in the right hotels can still lead to a fruitful real estate investment.  It’s true that Millennials still show more interest in a shared economy, especially compared to other age demographics. Knowing this, are hotels still solid real estate investments? Yes, of course they are. Millennials’ preferences are still similar to their older counterparts, including high preferences for full-service flags like Hilton, Marriott, and IHG (77%) as well as all-suites properties (70%). Looking at cumulative interest across all age groups, we see that big brand hotels are still preferred by a vast majority.

The rise of the sharing economy doesn’t take away from brand loyalty. Let’s take a look at our Millennial Airbnb travelers as a case-in-point. Bed and breakfast operations have existed way long before Airbnb (and even before the rise of hotel room standardization in products like Hilton and Holiday Inn). However, brands like Airbnb and HomeAway are streamlining alternative lodging, gaining strong loyal users. Even though Airbnb users are staying in different hosts’ accommodations from trip to trip, many Airbnb users continue to use only the Airbnb platform to find those rooms. In other words, they are familiar with the brand Airbnb and choose to book through there the same way that many travelers today maintain degrees of loyalty among the Hilton or IHG or Marriott. Despite the huge variance that might exist on Airbnb’s platform, users have come to Airbnb repeatedly with some sense of standardization and expectations.

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Hotel Brands Continue to Evolve

The question now becomes “how do current hotel brands adjust to capture the sharing economy audience?” It’s a question that hotels are already taking steps to answer including by:  

– Developing new hotel products like Marriott’s Moxy, Hilton’s Tru, and IHG’s Avid that target the emerging Millennial preferences

– Partnering with Airbnb to provide food and beverage solutions

– Offering “local experiences” and trips that are commonly utilized by the sharing economy.

The hotel investor can rest at ease. Hotel products from strong, established hotel brands aren’t going away anytime soon. Corporate travelers and companies still prefer lodging with hotels, considering hotel brand benefits such as loyalty points and more established quality standards across a wealth of hotel franchise locations. If anything, the hotel industry is thriving, continuing a trend of growth since 2010 as hotel demand increases faster than hotel supply. On top of this increasing demand, hotel companies continue to innovate and appeal to travelers, whether it be through adopting new food and beverage options, creating more communal living arrangements or utilizing the latest technology to provide travelers with instant check-in and other amenities. As the hotel industry continues to evolve, hotel investors will need to keep a fresh eye open for both strong performers in the present day, as well as potential performers in the future.

Sources

“2017 Set to Bring Modest Growth for U.S. Hotel Industry.” Zacks Equity Research. Jul 17, 2017. NASDAQ. 

“Global Portrait of American Travelers.” MMGY Global.

Moyer, Liz. “Hotels, Feeling the Pinch of Airbnb, Promote Local Experiences.” May 29, 2017. The New York Times. 

Simon, Elaine. “Food-and-beverage an opportunity for hotels, Airbnb to partner.” Sep 22, 2017. Hotel Management. 

Yaraghi, Niam and Ravi, Shamika. “The Current and Future State of the Sharing Economy.” Brookings India. 

 

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Keeping Chicago Competitive: The Hotel Supply Wave

4 min read

A Wave of Supply

Chicago’s hotel market is preparing for a supply wave. In the next few years, the Windy City expects to add an additional 12,000 to 13,000 new hotel rooms to its arsenal. To many, this isn’t shocking news. Hotel developers and operators in Chicago have enjoyed a steady climb in RevPAR since 2009. However, in 2016, we saw Chicago’s first decline in RevPAR in 6 years, a sign which some say is reason to worry about the incoming hotel room supply.

Market consultants and policymakers point to a potential oversupply problem as the source of their worries.  Under basic supply-and-demand principles, these critics essentially say that if there are too many hotel rooms in a market, then the price of each hotel room in that market will, on average, decrease.  There will be more hotel rooms than Chicago needs to accommodate its visitors and with more hotel rooms than hotel guests, the argument is that each hotel will get a smaller piece of the pie. We believe that these claims are blown out of proportion and fail to acknowledge any of the upside. While the argument is fairly simple and logical, the critics are erroneously oversimplifying the market and overlooking the micro and macroeconomic consequences. Our business team at EquityRoots wants to make sure investors and hotel owners are not oversimplifying Chicago’s market and then making assumptions on those generalities.

Keeping Chicago Competitive: The Hotel Supply Wave

A robust supply of hotels are critical in establishing continued economic growth in Chicago.

Other regions in the United States outside of Chicagoland (San Antonio, New York, and Seattle, to name a few) have similarly seen the development of new hotels in their respective markets. These brand new hotels attract additional business and travel, and keep their cities competitive in the hospitality market. Cities that fail to upkeep their hotel inventory can lose out on significant business opportunities and city revenue. This includes Chicago, which stands to lose much ground to other established and on-the-rise metropolitan areas. If Chicago wants to remain a world-class city that is capable of handling large conventions and attracting major corporations to set up shop, it needs to keep things fresh with updated hotel products.

The Chicken, or the Egg?

If you’ve been watching Netflix recently, you might have stumbled upon “The Founder,” which takes a look at the entrepreneur Ray Kroc and his role in making McDonald’s a worldwide brand. For Ray Kroc, business growth is a supply and demand issue. Which comes first, the chicken or the egg? Ray Kroc believed that new supply attracts new demand, building the McDonald’s restaurant empire on this theory.  

Likewise, EquityRoots.com believes that the threat of oversupply is overhyped, particularly for the newest hotels to enter Chicago’s market. While it is true that there will be more hotel rooms available in Chicago from a sheer numbers standpoint, the newest constructed hotels will drive others to improve. Newer hotels that are slated to open in Chicago – including a Cambria hotel in Chicago’s Loop and a dual-brand IHG hotels in Schaumburg – introduce updated and upscale venues with cutting-edge floorplans that appeal to old and new visitors to the city. Modern additions including rooftop venues, new technology, and newer beds are likely to attract the majority of incoming travelers, and this is a standard that corporate travelers have come to expect in other markets across the country. This means that the pressure falls to older hotels to reinvest and renovate, especially those that are 20 years old or more. For example, developers are already spending about $20 million to renovate the Talbott Hotel in the Gold Coast in order to keep the asset competitive. Other older Chicago hotels are also expected to renovate and update their rooms and designs to avoid the risk of becoming outdated. Chicago’s hotel room supply will continue to be updated.  Increased expenditure and capital improvements will ultimately raise an owner’s basis, driving rental rates higher to obtain the same return.  As a result, the entire market responds by increasing average daily rates.  The supply of total rooms will go up, but so will quality.  This gives all hotels the edge in competing for corporate and leisure travelers. As a whole, competition will drive up the quality of hotel services and products offered in Chicago, which lead to positive experiences and can encourage even more travelers to visit the Windy City and drive demand.

Moving forward, Chicago is expecting more travelers, which is great news since the number of conventions and meetings held last year in 2016 was atypically low for the Windy City. When you couple that with high-publicity events like the Chicago Cubs’ World Series win last year, EquityRoots.com expects that the future still remains bright for Chicago’s hotels.

 

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So, what caused the 2016 decline?

If it wasn’t primarily oversupply that pushed Chicago’s downward RevPAR dip in 2016, what was the source? Chicago is facing microeconomic issues.  For starters, the city’s current lodging supply is outdated compared to other cities.  It’s also worth noting that Chicago was in the running as a host city for the 2016 Summer Olympics. During the bidding process, corporate travelers shied away from booking in Chicago because the Olympics typically creates a lot of traffic, congestion, and delay in the way of a busy work/meeting schedule.  A number of conventions and businesses avoided booking travel to Chicago during the time frame that the 2016 Olympics would be occurring, opting to hold their conferences and meetings in other cities like Detroit, Indianapolis, Las Vegas, or Minneapolis.  When Chicago wasn’t awarded the 2016 Summer Olympics bid (which went to Rio de Janeiro), the city got a 1-2 punch. The city not only missed out on the opportunity to capitalize on a huge wave of tourism for the games, but also was hurt by the void of typical corporate travel avoiding the market. As 2017 and future years pose more typical operational years, we believe the hotel industry will continue to improve in Chicago.

Chicago needs to stay competitive to keep up with other leading primary markets in the United States, including New York and San Francisco.

Chicago needs to stay competitive to keep up with other leading primary markets in the United States, including New York and San Francisco.

Staying Competitive

Freezing free market activity and slowing down updated prototypes will push Chicago laps behind in a race against other cities. America and capitalism thrived on encouraging innovation and progress.  If Chicago were to halt new development for fear of oversupply, it will have comparatively lower quality lodging than other cities, which will make it more difficult to attract travelers and other demand drivers to come here in the first place. We are seeing incredible market strength in cities like Seattle, NYC, and Boston – cities that happen to offer the latest and greatest hotels and amenities.  Chicagoland needs to put pressure on the status quo, create pressure to improve, and bring in the latest and greatest facilities so that we can attract more businesses and travelers to come here.

Sources

Gallun, Alby. “Hotel market falters after six-year run.” Crain’s Chicago Business. Sept 26, 2017. 

Gallun, Alby. “Will the downtown hotel market bounce back in 2017?” Crain’s Chicago Business. Jan 30, 2017. 

Hoisington, Alicia. “Oversupply concerns loom over Chicago.” Hotel Management. Mar 6, 2017. 

Ori, Ryan. “Talbott Hotel to shut down for $20 million renovation.” Crain’s Chicago Business. Dec 8, 2016. 

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Limitations on Funding for Development Proposals

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Limitations on Funding for Development Proposals

What are our limitations on funding?

Many times we get inquiries about what types of deals EquityRoots.com funds. We fund a variety of deals: opportunistic turnarounds, acquisitions, new developments. However, we do have some qualifying criteria to ensure that our hotel investors have the highest quality crowdfunding projects available to them. All projects must be franchised with one of the big three brands. This includes Marriott, Hilton, and IHG. Why is it that we are only picking these three? It’s not to say that other properties and other franchises do not make money or are that they are poor investments. These properties do have the potential to perform well and earn returns, but the three big brands that EquityRoots has identified have proven track records of customer service, brand standards, and a sense of predictability that corporate travelers have come to expect. It’s the hotel brands that we feel comfortable investing behind and sharing to our hotel investors on our hotel crowdfunding platform. They have strong brand support that includes a robust central reservation system working to fill your guest rooms each night.

EquityRoots.com also likes to look at the type of transaction. New development hotel projects from the ground up tend to have longer planning times and disposition periods, but they also tend to draw in higher revenue than a comparable pre-existing hotel upon stabilization.  It’s no secret that new hotels often become market leaders, but hotel investors must endure 18-24 months of deferred returns during planning and construction.

Alternatively, existing asset acquisitions are also an attractive proposition because you’re ready to recognize a return on your hotel investment the day after closing.  Existing stabilized assets also allow hotel investors to see exactly the income that they’re buying, whereas new development deals are based on projections.

 

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Are there any dollar amount limits on funding?

In short – no. Traditionally, potential real estate investor bases are often limited by their location. EquityRoots’ platform allows sponsors to reach a larger investor base, using technology to enhance how they source capital. A Hampton Inn in New York City will have no problems raising capital online. It’s strong brand and larger sized market will allow this project to draw not only local investors in New York, but also investors from outside New York State. Our technology department focuses on effective quality search algorithms to make sure that investment opportunities are available to local investors. Interested hotel investors that may be researching how and where to invest in hotels online may find themselves directed to EquityRoots.com’s platform. You don’t have to live near an asset to perform due diligence and invest. With that said, we would expect the New York City Hampton Inn would raise quite a bit more capital than a La Quinta Inn in Albuquerque, New Mexico.

Looking beyond the deal itself

Oftentimes, the sponsor behind a hotel crowdfunding deal matters just as much as the merits and location of the deal itself. Although we don’t set funding limits, we often push project sponsors to contribute at least 50% equity, requiring them to share a significant stake in the success of the project.  This way, both passive hotel investors and project sponsors both share a mutual, financially backed interest in the success of the deal. Other factors matter too, and we look at each submitted project holistically before presenting the hotel crowdfunding opportunity to our hotel investors. In general, the better the flag, brand, sponsor, and market size – typically improve the outcome on the capital raise.

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