As a commercial real estate market, the hospitality industry took an especially hard hit during the recession. However, there are many indicators that hotels are increasingly becoming more attractive investments. Both occupancy rates and average daily rates have increased in the past few years and they are projected to continue to rise through 2015.

Even though Denver’s hotel market is underperforming the national average, there is still growth as shown by the 22 new hotel projects which are in the works. Jill Jamieson-Nichols reports that “As of March, revenue per available room (the average daily rate multiplied by occupancy) surpassed the previous peak of 2008, and while construction is accelerating, there is a minimal amount of new supply.” The Downtown Denver Partnership recently published a development map which shows that in the downtown area, Denver has added 2,190 hotel rooms in three different projects over the last 5 years despite the negative effects of the recession. This accounts for 4 percent of downtown construction since 2007.

According to the Lodging Industry Investment Council’s top ten issues from May 2013, 72 percent of the LIIC members feel that the next year is going to be a good time to build and develop hotels. Only 23 percent advocate for buying existing hotels rather than embarking on new projects. LIIC has a nearly unanimous belief (94%) that lending for hotel properties and projects will improve over the next 12 months. This confident view of the lending prospects for hotel investments is also reflected in an equally strong belief (98%) that hotel real estate values will also increase in the same period.

For those who are interested in investing in the hospitality market, some important points to consider when gauging the viability of a project are:

• Market demand. Recovery of markets has been uneven. It is important to ascertain that demand is back in your prospective market and that occupancy isn’t simply increasing because of discounted rates.
• Positioning. Research other hotels in the area and make sure that your hotel will be positioned to compete with them for guests.
• Cash flow. If looking at an existing property, make sure that it is running efficiently by analyzing recent profit-and-loss statements.
• Brand. Be aware of any brand standards that need to be met or maintained. If taking over an existing property, find out if any franchise agreements will be affected by the change in ownership.
• Sales and new supply. Research recent sales of any comparable properties in the area. Determine if there are other hotel construction projects scheduled and how their costs compare with yours (whether you are buying an existing property or planning your own new site).

Overall, the hotel real estate market appears to be heading in positive directions, even here in Denver. Investors can expect to see a strong ROI if they are selective in the projects and diligent about researching the market conditions.

The hospitality industry still remains one of the least popular sectors for banks and life companies to finance.  Even among private capital hard money lenders few are willing to step up to the plate and lend against this type of property.  There are a few lenders that specialize in this sector but they are few and far between.  Availability of capital for this industry can only get better since it can’t get worse.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.

Sources:

Downtown Denver Partnership. “Downtown Denver Development Map.” March 2013.

Jamieson-Nichols, Jill. “Hotel Market Strong, But Denver Demand Lags Nation.” Colorado Real Estate Journal 5-18 June 2013.

Lodging Industry Investment Council. “LIIC Top Ten Issues – May 2013.”