Searching for success in recession

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We see daily news articles telling us an economic recession is coming. We are hotel experts, not economists, and it is difficult to argue against this prevailing view. However, economists generally label recessions after recovery has begun, and it may be many months before it becomes official. Further, this possible recession may be generated by an imbalance of supply, demand and capital—not the collapse of financial markets like the 2008 recession. The last 18 months in lodging real estate have been characterized by low inventory, high prices and a focus on high-performing drive-to leisure markets in the Southeast. With discretionary spending slowing and many markets reverting to stabilized historical operating levels, the question for clients and customers becomes, “Where do I find high-quality investments in this part of the market cycle?”

The answer for many is to search for opportunities in historically stable markets that have a long track record of performance and are not as cyclical (or expensive) as beach towns, golf destinations or major metro markets. These markets are where the previous generation of hoteliers honed their skills in expense management and marginal profit making, and many still own assets in these markets for good reason.

These tertiary markets center around university, healthcare, manufacturing or interstate demand (and preferably two or more of these). They are typically cities with a population of 25,000 to 100,000 and are usually rural or suburban and not located in a major metro area, but that is why they are still growing and typically have lower property taxes and personnel expenses.

University markets are constantly innovating and expanding, and many also have the benefit of extremely high occupancy periods around orientation, graduation and collegiate sports seasons. Larger incoming classes lead universities to expand offerings, bringing new residents to the area. These markets usually have attractive food and beverage offerings and dynamic communities.

Large healthcare markets are often paired with university markets, which feed medical, nursing and other students into the labor pool. With an aging population in many places in the U.S., the need for healthcare services is increasing. A hotel acquisition focused on healthcare may be beneficial in rural areas where patients must travel further from home and require overnight stays.

Certain manufacturing markets have fallen on hard times in the U.S. in recent decades, but now these markets are diversifying and developing new industrial bases. As manufacturing reshores to the U.S., there will be a need for contractors to complete renovation projects and, eventually, there will need to be employees. Choosing the right market will take research, but it could pay off for many years as the surrounding community grows around your investment.

Interstates should be seen as a secondary demand generator because they do not necessarily draw room nights without an additional reason for travelers to stay in a particular market. Perhaps it’s halfway between two major cities or near a major distribution hub for shipping products; either way make sure there is consistent demand in the market.

This also means that it is a very strong time to sell a property in one of these markets. In August, Mumford Company listed two properties in a midsize, mid-Atlantic city with great results for the seller. The city has a population of 25,000, is within a 30 minutes drive of three universities, with two interstates nearby that brought several distribution centers to the market. Nearby, a major health system ties into a public university in the region. The results were a very competitive bidding situation with many written offers in a matter of weeks. While another market or property may not have all the aspects above, two or three demand generators and a history of consistent revenue performance will generate a lot of buyer interest in the current market cycle.

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Provided by Carter Willcox.