COVER STORY, SEPTEMBER 2009

MIDWEST HOSPITALITY REPORT
A closer look at the Midwest shows that things are not all doom and gloom.
Coleman Wood

When looking at how the year has shaped up so far in the hospitality sector, one thing is clear:  the Heartland’s trademarked business conservatism has served it well.  The market was not overbuilt in the past few years, so there is not the glut of empty rooms seen in other markets. Like other regions, it has taken a hit  but for hospitality professionals in the Midwest, things could definitely be worse.

“Every market has its own story on why it’s doing well or doing poorly but, overall, in the Midwest things are faring a little bit better than they are on a national basis,” says Nate Sahn, first vice president of CB Richard Ellis Hotels in Chicago.

With the Midwest being as diverse as it is, there is still some variance between markets. Being the top market in the Midwest has led Chicago to take the biggest hit. Corporate travel, conventions and tourism are major drivers for the city’s hospitality sector, and all of these activities are down this year, causing owners to drop rates to get people in rooms. Suburban Chicago hotels used to taking in visitors who could not find a room in Chicago proper are now facing declines of 30 to 50 percent, according to Sahn.

On the other hand, some smaller markets are faring relatively well. Sahn does much of his work in Omaha, Nebraska, and cites it as a perfect example of this trend. It is a destination market regionally and it is easily accessible  by air and land. It has a good tourism base, solid population growth and several Fortune 500 companies.

“It has obviously had its fair share of decline – like everywhere else in America — but it kind of operates on its own terms and is not as dependant on what’s going on nationally,” Sahn says, adding that just because the overall economy may be down, does not mean these more insulated markets are down. For example, Champaign, Illinois, is only seeing decreases of approximately 5 percent this year due to a strong local economy that runs off the University of Illinois.

The trend of successful tertiary markets can also be seen in Columbia, Missouri. While the city may not have the convention draw of St. Louis and Kansas City, it does see a lot of activity as a result of the presence of the University of Missouri — and it has insulated the market much like Champaign.

“From a real estate standpoint, we are not anywhere near what we were doing 2 or 3 years ago, but between the University [of Missouri], the University Hospital and two other hospitals we have in town, it has insulated us tremendously,” says Kurt Hollenberg, owner of local brokerage firm Missouri Land & Home. Hollenberg adds that activity here is light but it is still steady. A new Holiday Inn is under construction.

Hollenberg is also active in nearby Hermann, a niche market located on the Columbia River that services Missouri’s wine country. The small town (population 3,000) has approximately 57 bed and breakfasts that serve its wineries. This isolated market, which does not contain a single national chain, has seen room rates averaging $125 per night. When one looks at the Midwest market as a whole, it seems as though smaller markets such as these present much better opportunities than some of the larger cities.

“Some of the smaller towns that have not had anything new for a number of years are excellent candidates for a new product. It used to be that if you stayed in a less expensive hotel you were getting a pretty cheap room, in terms of finishes. Now, everyone has granite, everyone has flat-screen TVs and everyone has solid-surface countertops, so the amenity package in a smaller hotel can be comparable to what you would receive in a larger, full-service hotel in a larger city,” says Roger Summers, business development director for the hospitality division of Key Construction.

Still, the construction pipeline has slowed. Summers points out that last year, projects under way ranged from $4 million to $25 million. This year, most projects that have not been shelved are less than $10 million. Financing is the big issue  keeping many of these projects from getting off the ground, but developers are finding alternative means of funding. These include the Small Business Administration’s loan programs, the U.S. Department of Agriculture’s Business & Industry Guaranteed Loan Program and the New Markets Tax Credit program.

But projects are still being completed even in today’s market. This is being fueled partly by lower construction costs and partly by forward-thinking developers that see the recovery on the horizon.

These developers, in turn, are keeping companies such as Key in business. The hotel construction industry is highly specialized. Many developers hire hospitality contractors to come into a market and complete a project rather than pick a top contractor from the area that may or may not have experience building hotels. Key currently has approximately 15 hotels under construction in eight different states. 

“We expect six to eight starts between now and the end of the year,” Summers says. He adds that activity is focusing more on the select-service market, because companies that still must travel for business are choosing to stay in less expensive hotels rather than higher-priced, full-service hotels.

For the near-term, activity in the hospitality sector will remain sedated. Most markets are down year-to-date, and many will remain that way through the end of 2009. On the transaction side, there are still opportunities, but the current market has buyers taking their time.

An issue that many believe is inevitable at this point is the wave of foreclosed properties. Sahn does not believe that this will be the opportunity many see it to be, however. “I don’t see a whole slew of these first-class hotel properties coming to market because of foreclosure,” he says. “I see more opportunities coming to market because sellers are going to be desperate; they’re going to be in trouble with their properties because they are performing poorly and they can’t cover their debt, so they’re going to have to sell at a discount.” Sahn adds that he could be wrong, then laughs and says that it would probably be better for buyers if he is. 

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