The Midwest rolls out the welcome mat: Hotel sales, development on the rise

by Dan Rafter

How hot is the hotel industry across the Midwest? Just ask Ronn Thomas, senior director of brokerage services with Cushman & Wakefield|NorthMarq in Minneapolis. This CRE pro in the past 15 months has helped close six hotel transactions for his clients.

These sales have stretched from Rochester, Minnesota, to New Richmond, Wisconsin. In 2015 alone, Thomas has closed three hotel transactions. And the market is showing no signs of slowing. Thomas already and has additional properties under contract as he works closely with clients including Kelly Inns, Titan Development & Investments, InterMountain Hotels and Marriott.

Thomas says that there’s no secret to the increase in business. It’s all about the economy.

Ronn Thomas

“The economy is strong, so hotels will follow that,” Thomas said. “People are traveling. Businesses are sending their employees out into the field again. People are taking family vacations. Because of this, the hotels are doing well.”

Thomas points to his own market, Minneapolis/St. Paul. He says that a handful of new hotel projects are in the planning stage or under construction, with some ready to open in the next several months.

The Twin Cities is a strong hotel market today, Thomas said. The Mall of America in nearby Bloomington, Minnesota, always attracts travelers, and those travelers need places to stay. Then there are the Fortune 500 companies in the Twin Cities that attract business travelers.

The Minneapolis/St. Paul market is far from the only one seeing a surge in hotel sales and development. Marcus & Millichap, in its mid-year hotel report, said that the hotel business is on the rise across the country. Increasing demand for rooms had raised the annual occupancy rate of U.S. hotels to 65.2 percent at the midpoint of 2015, according to Marcus & Millichap. That is an impressive figure; Marcus & Millichap reports that this is the highest this rate has ever been, besting the prior record of 64.8 percent set 20 years ago.

CBRE in May reported that U.S. hotels saw an increase of 12.3 percent in net operating income during 2014. That marked the fourth consecutive year of profit growth higher than 10 percent. Even better? CBRE experts predict that this profit growth will continue throughout 2016.

The Minneapolis/St. Paul market is seeing a wide range of new hotel types hitting the market. Thomas said that select-service hotels are a big draw today. These differ from full-service hotels because they don’t offer services such as on-site restaurants or dry cleaning.

Because of this, they are less expensive to operate, which is attractive to owners. They also charge lower room fees, attractive to travelers. Brands in this category include Holiday Inn Express and Hampton Inn.

“These types of properties have higher margins,” Thomas said. “They don’t have the restaurant to worry. They don’t have that food-and-beverage component that involves staffing and service. They don’t have the overhead that a full-service hotel has. Consumers consider them to be a good value. They don’t have to pay for services that they aren’t going to use.”

Brand choice now requires more homework

 Owners are asking for more due diligence, increased transparency and flexible thinking than ever before when it comes to choosing a brand.

From left to right: Glenn Squires, Pacrim Hospitality Services; Chris Flagg, Crestline Hotels & Resorts; George O’Brien, Fillmore Hospitality; and Jeff Good, Good Hospitality Services. (Photo: Terence Baker)
  • Expect more brands, owners say.
  • Have more arguments, and remember past conversations with the brands.
  • Chris Flagg: “Who likes eggs? Who prefers yoghurt? That’s two brands right there.”
NASHVILLE, Tennessee—More homework than ever is needed to clarify brands and their differentiating factors and commercial sense, according to panelists speaking during the recent Hotel Data Conference.
Moderator Chuck Pinkowski, owner of consultancy Pinkowski & Company, cited 204 hotel brands existing today, 15 of which were added since June.
That number is too high, he said.
“There are a lot of brands that existed before my time that need to go. We’re not oversupplied but under-demolished,” Pinkowski said.
Panelists said the thinking behind brand choice has changed.
Glenn Squires, owner of Pacrim Hospitality Services, said the requirement used to be to understand locations and markets before choosing flags and brands that realized the most value.
In most circumstances, after Squires’ hotels hit 70% occupancy, he said, others would enter.
“Now we look at flags that give us premium rates and the highest barriers to entry for others,” Squires said, who added long-held relationships between brands, management companies and lenders are altering, with lenders increasingly willing to work with independent properties in markets such as New York City and San Francisco.
(Recently, Pacrim disposed of its management contracts, Squires said, trimming its portfolio from about 60 properties to approximately 20, in favor of those it retained equity in. The company now has six hotels in development.)
“We’ve been working with Hampton Inn before Hilton came in, at which time reservations exploded, a clear statement of the flag’s power. … Its loyalty program was strong, which lenders like,” said Jeff Good, president of hotel management company Good Hospitality Services.
(GHS has 24 select-service properties, most held by HRC, Good’s private real estate investment trust; GHS has one property in construction.)
Good added brand choice isn’t just a case of looking at financials.
“Every flag comes with a property management system, the nuances of which have to be learned,” Good said.
Dots on the map
Adding to the brand proliferation, panelists said, is the asset-light nature of chains, which need dots on the map to win scale and revenue. Creating brands from scratch, they said, is a prime way of doing this.
“You wonder sometimes why there’s so many brands in some segments and if somewhere down the road some of these new ideas will merge,” said George O’Brien, VP of development at Fillmore Hospitality.
(O’Brien said Fillmore also has been a net seller and now has only 10 properties, with another four in development.)
Expect more brands, said Chris Flagg, senior VP of business development at Crestline Hotels & Resorts.
“Who likes eggs? Who prefers yogurt? That’s two brands right there, and brands drive rate. Brands are a vital aspect of our industry, and you’ll see a shift from hard brands (new builds) to soft brands (conversions),” Flagg said.
Flagg added legacy-chain brand additions do not bother him, as new brands reach new customer personalities.
(Crestline has 75 hotels in its portfolio, up from approximately 40 in the last year, with a goal of 100 by the end of 2015. It does not own any.)
“The brands have the power, and they’re catching up for what they did not get to do in 2006 to 2009,” Squires said.
Constantly griping at brands is par for the course, panelists said, especially if a flag announces segment competition in markets.
“We push back on every occasion. If you delay the (competition’s) project by 60 days, that’s 60 days more revenue,” Good said.
Owners also want full access to feasibility reports and impact studies, panelists added.
“Not having access hinders us, but brands won’t change. As owners, you have to shop around and look a little harder, and have (the flags) realize it’s a two-way street. Yes, we have cannibalized ourselves, but that was our decision, to poke ourselves in the back,” Good added.
Squires said guests largely choose by brand, thinking not in terms of segmentation but on their visit’s purpose.
Each panelist shared one golden nugget of advice:
  • Good: “Look at everything in a market from top to bottom. (Brands) get paid on the top line, while everyone on this panel gets paid on the bottom, so brands might be looking at the midscale market, perhaps under-represented in (the U.S.), which might not help your bottom line so much.”
  • Flagg: “Brands will always be incentivized to open rooms. They’ll get their (commission) if they sell one room, so it’s futile to go up against them.”
  • O’Brien: “Find ways to argue your point, and remember the history of your conversations with chains.”
  • Squires: “Move from brands where it’s harder to create higher barriers to entry. That might not be a problem yet, as we’ve not seen supply increase in this cycle, but there’s pent-up demand in many locations, so brands will not have problems getting franchisees.”

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5 things to know: How much CapEx do you need?

Chad Sorensen, principal at CHMWarnick and president of ISHC, talks CapEx at the Hotel Data Conference. (Photo: Kerry Woo)
  • REITs spend more on CapEx than non-REITs.
  • CapEx spend varies across location types.
  • Full-service hotels 1 to 5 years old saw the lowest spend at 0.5%.
NASHVILLE, Tennessee—The standard 4% capital-expenditure reserve for hotels is not enough, according to a speaker at the recent Hotel Data Conference.
Chad Sorensen, principal at CHMWarnick and president of ISHC, presented findings from “ISHC CapEx 2014: A study of capital expenditures in the hotel industry” compiled by the International Society of Hospitality Consultants and the Hospitality Asset Managers Association.
The study covered a six-year period from 2007 through 2012. Here are five things you need to know from the research, which Sorensen shared during the “Is 4 % enough? CapEx historical trends and what the future holds” presentation.
1. More than 4% spent on CapEx
In each one of the six years, CapEx spend exceeded 4% for all properties included in the study (more than 500 hotels in the United States).
CapEx spend was the highest in 2008 at 11.6%. After 2009, there began to be a pullback in spend, where it went from 7.9% in 2009 to 5.5% in 2010. It crept up to 6.8% in 2011, and 2012 ended with CapEx spend of 9.7%.
2. REITs spent more than non-REITs
Real estate investment trusts over the six-year period spent more on CapEx than their non-REIT counterparts.
During the study period, REITs spent 9.5% on CapEx, while non-REITs spent the standard 4%. The total sample, by comparison, spent 8.3%.
On a per-room per-year basis, REITs spent $4,965 on CapEx, while non-REITs spent $1,171. The total sample, by comparison, spent $3,702.
When asked whether the numbers supported the theory that REITs typically purchase hotels that require more work, Sorensen said: “I think it’s more the model. They had it reserved to continue through the downturn. The time to do it is in the downturn if you can afford to.”
3. Location matters
CapEx spend varied across different location types, Sorensen said.
Resort hotels spent 9% of total revenue on CapEx, followed by airport hotels at 8.5%. Urban hotels spent 8.1%, while suburban hotels spent 8% and interstate hotels were at 6.5%. Small town/metro hotels spent the least on CapEx at 5.7%.
4. Mid-ADR hotels spent more
For all properties in the sample size, those hotels with an average daily rate of $100 to $125 saw the highest CapEx spend of total revenue at 9.5%.
Hotels with an ADR of more than $125 followed at 8.5%. Properties with an ADR of less than $100 spent the least on CapEx at 6.9%.
5. There are differences for full and select service
Full-service properties translate to a higher CapEx spend than select service.
The highest CapEx spend for full-service hotels was 12.2% in 2008. Select-service hotels spent the most on CapEx during 2009 at 5.7%.
Sorensen said select service is very different from full service when it comes to CapEx due to the newness of the product.
Not surprisingly, more CapEx was spent on select service as properties aged. Properties aged 1 to 5 years saw a CapEx spend of 0.8%; 5.5% for 6 to 10 years; 5.2% for 11 to 20 years; and 5.7% for properties aged 21 years and older.
Full-service hotels 1 to 5 years old saw the lowest spend at 0.5%. The highest spend was for 26- to 30-year-old hotels at 10%.

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Gaining on Bridge Lenders

As challengers emerge, lenders are changing pricing and loan-approval standards

Gaining on Bridge Lenders

As the market improves, challengers are giving bridge lenders a run for their money.

To stay ahead of the pack, bridge lenders are being forced to lower their interest rates and origination points, loosen documentation requirements and adopt tech-savvy application processes that shorten closing times.

Bridge financing, also known as private-money financing, has long been a mainstay of the commercial real estate world. In tough economic times like the recent economic downturn, bridge financing is often the only option for many real estate owners and investors. When markets improve, however, it becomes more difficult for bridge lenders to differentiate themselves and stay competitive — a problem many private lenders are facing today.

During the recession, it was not uncommon for bridge lenders to offer interest rates ranging between 13 percent and 15 percent, with 4 to 6 lender-origination points tacked on. Available lending leverage was also lower, and due diligence fees could be prohibitive: Maximum loan to values (LTVs) were around 50 percent, and loan terms often carried interest guarantees, prepayment penalties and even exit fees. When markets improve, however, the first thing bridge lenders usually do is reduce their pricing. This means that pass-through returns to investors are also reduced, making it harder for those lenders to raise capital.

Unfortunately, over the past couple of years, many new private lenders have opened their doors, offering more competitive terms to gain market share. This has caused the average private-loan interest rates on marketable bridge transactions to drop into the single digits; lender origination points to constrict; interest guarantees, prepayment penalties and exit fees to become less commonplace; and maximum LTVs to rise. Certainly, this has been great news for typical bridge borrowers who need fast capital at competitive terms. The improving market has proven to be a serious challenge for many bridge lenders trying to maintain market share while keeping a healthy bottom line for themselves and their investor bases.


It’s not solely new bridge lenders and sliding returns that make it more difficult to remain competitive. Nonconforming and small-balance commercial real estate lenders are now moving in to claim market share as well. With the return of the securitization market, nonbank lenders are once again making a run at small commercial deals (usually classified as loan sizes from $100,000 to $5 million), the bread-and-butter revenue for many bridge lenders. And small-balance lenders generally offer better rates than bridge lenders,  flexible underwriting (such as stated-income loans and credit scores down to 600) and more favorable compensation for brokers.

Yet, let’s be candid: During the downturn, bridge lenders became spoiled with many borrowers carrying A or A- classifications, as well as 700-plus credit scores and desirable collateral in primary or secondary markets. Loans to these borrowers were dramatically lower in risk and more lucrative than those of just a few years earlier. Not surprisingly, nonconforming and small-balance commercial real estate lenders are now working hard to reclaim that clientele. Local and regional banks that were previously sidelined are again vying for that loan, and for deposit business, too.


Five years ago, private lenders could not have foreseen the additional competition that tech-based crowdfunded lenders now bring to the game. Gaining ground are new commercial real estate, private lenders that aggregate their funds from small investors, as well as from Main Street institutions. They deploy capital quickly, and in a much different form than that of traditional bridge lenders.

Similar to the way many merchant cash-advance finance companies or private business lenders work, these new tech-based lenders handle the entire loan process online with minimal documentation, few third-party reports, and at a lower cost of borrowing (often involving little or no out-of-pocket cost). There are no loan committees, and no waiting for individual investors to mail checks in; everything is transacted via risk-based algorithms and at the push of a button. Although only a handful of commercial real estate lenders currently employ this system, you can be assured it’s a sizable wave in our future.

There’s no way around it: With challengers at all corners, the traditional bridge lender — one that analyzes each page of a loan package, presents it to a loan committee and then returns a decision only after intricate due diligence has been completed — could well go the way of the dinosaur.

Staying in the game

Can the traditional bridge lender stay in the game? My answer is: Yes. But a few things need to happen first.

To begin with, bridge lenders’ margins must continue to contract, and underwriting criteria need to expand.

Look at it this way: If a small-balance lender is willing to make the same loan that a bridge lender will, but at 7 percent instead of 11 percent, which lender do you suppose will win the borrower? By the same token, small-balance commercial lenders considering borrowers with B and C credit scores and underwriting with no tax returns are pushing private bridge lenders back to D and E credit borrowers, and forcing those lenders to pare back their documentation requirements.

Finally, private lenders seeking to service bridge-loan customers will need to get more tech-savvy, if they want to compete. Are you advertising quick closes and ease of execution, yet still requiring clients to mail in original documents and e-mail large PDF packages? Are you expecting borrowers to pay you thousands of dollars in out-of-pocket costs that your cyber competition no longer requires? If so, your days may be numbered.


Noah Grayson is managing director and founder of South End Capital Corp., a direct lender funding private money commercial real estate loans up to $5 million nationwide, and offering SBA, business and bridge loans up to $20 million in participation with third-party investors. Reach Grayson at or (888) 268-7778 extension 5.

Right brand, location matter in financing game

With business booming in the hotel industry, investors are gravitating to branded hotels in large markets.

The High Line Hotel in New York City in located in a renovated former seminary. Russell Shattan of MCR Development said its development represented a unique opportunity for his company. (Photo: Courtesy of The High Line Hotel)
  • Year-to-date dollars spent on hotel deals is already approaching the 2014 total.
  • Investors are gravitating toward Marriott and Hilton brands.
  • There are opportunities for savvy investors with independent and secondary market hotels.


NASHVILLE, Tennessee—Not all hotel investment opportunities are created equal. So making sure to target the right criteria can make all the difference for those seeking financing, even in today’s buoyant market.

Speaking at the 2015 Hotel Data Conference, a panel of investors and developers discussed what sort of acquisitions and new building projects are the most likely to attract attention.
Michael Murphy, head of lodging and leisure capital markets at First Fidelity, said he’s confident the hotel industry will see continued growth in investment.
“Barring anything external, I think we’ve got a lot of runway,” Murphy said. “This is a 2.5% growth economy that is tepid at best. If we had legs in this economy, can you imagine what we could accomplish?”
Data supports the idea that the money spent on hotel deals in the United States will see a significant increase this year. The amount has been trending upward since bottoming out in 2009, growing from $12.7 billion in 2012 to $18.5 billion in 2014, according to the 2015 Transactions Almanac from STR Analytics, sister company of HNN.
That latest total is likely to be dwarfed this year, with $17.7 billion already spent on hotel deals by early August. The price per key also has grown to $256,000 this year from $219,000 in 2014.
Brand choice matters
Russell Shattan, senior VP of MCR Development, said there are two clear favorite companies for investors if you’re thinking about building or buying a branded hotel: Marriott International and Hilton Worldwide Holdings. Shattan said that’s due to Marriott and Hilton doing a better job than other major companies in capturing a wide variety of travelers.
“They’ve done a little better job of developing a higher end appeal while building the sort of pu pu platter of options that will get you a room in small markets,” Shattan said. “The same guy who will get off the highway in Topeka, Kansas, and stay at a Hampton Inn or a Fairfield Inn & Suites will do that in San Antonio and Encino, California, and North Dakota. And he’s going to gather up all those points and cash them in at the Ritz-Carlton in Paris.”
Murphy said you’ll get a similar take from most major financiers.
“If you’re talking to a lender and ask the top three brands you want to finance, without pause they say Marriott and Hilton,” Murphy said. “Then you get that pause. That’s not to say others aren’t financeable. But Marriott and Hilton are top of mind.”
Competing for investment as an independent
Kate Henriksen, senior VP of investment and portfolio management for RLJ Lodging Trust, said the prospect of investing in independent hotels can be scary to publicly traded companies like hers.
“You can make a case for indies in big markets,” Henriksen said. “But part of keeping consistent to investors is we want to keep it simple. Our story is we’re a brand company. Things aren’t always going to be operating at record occupancies. You want that brand to protect you when things aren’t so robust in the industry.”
Although Shattan’s company is similarly brand-driven, executives recently purchased the High Line Hotel, a 60-room boutique hotel in New York City, proving independent hotels aren’t being completely overlooked. Shattan said he was introduced to that property by someone he knew, which he noted is sometimes a forgotten piece of the investment puzzle.
“It’s a good time to be a hotel investor and a hotel owner,” he said. “Relationships are a big part of this business. Nothing we do is rocket science, and being known helps in buying.”
The impact of location 
The good health of the hotel industry extends far beyond the top 25 markets that draw the attention of institutional investors. But Shattan said there are myriad opportunities in secondary markets for those willing to look.
“The unsexy markets are not getting attention from developers or financiers,” he said. “That’s been a helpful thing for us. “
Henriksen, by contrast, said her company made it a focus to sell off properties in smaller markets because, on average, they carry lower revenue per available room than properties in larger markets. But Shattan said that’s not as big of a motivator for his company, which is privately held.
Shattan said his company bought 18 Marriott-flagged properties in markets such as West Monroe, Louisiana, which he said have been extremely successful in part because they lack competition and interest from big investors. He acknowledged those investments outside big markets carry different risks.
“Where that might challenge us is on the exit,” Shattan said. “We find these markets sexy, but will the rest of the industry or whoever is our ultimate buyer? I don’t know. Time will tell.”


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US hotels enjoy ‘fundamentals of a lifetime’

ADR and RevPAR might be projected to mellow going forward, but industry champions still remain optimistic that the U.S. hotel industry will continue its recent impressive growth amid the best fundamentals ever seen. – See more at:

Smooth sailing ahead for the U.S. hotel industry is the forecast of industry champions (from left to right) Amanda Hite, STR; R. Mark Woodworth, PKF Hospitality Research; and Michael Deitemeyer, Omni Hotels & Resorts. (Photo: Terence Baker)

By Terence Baker
Reporter, Europe


NASHVILLE, Tennessee—The United States hotel industry is enjoying, according to Amanda Hite, president and COO of STR, “the best fundamentals I’ve seen in my lifetime.”
Speaking on Day Two of the Hotel Data Conference in Nashville, on a panel titled “Encore!!! Encore??? Presenting the latest forecasts,” Hite said she expected the U.S. metrics party to continue into 2016 and 2017.
Hite added the industry going forward will see mellowed occupancy, but at levels that remain healthy. Revenue per available room will track in the same direction, driven by average daily rate.
“We have more rooms to sell, and we are selling more rooms,” Hite said.
Her fellow panelists sported smiles, too.
“It’s a great time to be in the business,” said Michael Deitemeyer, president of Omni Hotels & Resorts.
“The segment we’re in, upper upscale, is pretty expensive to build, so there are some restraints, but we feel very optimistic and show great growth. It will moderate at some time, of course, but group demand has returned, which we’ve waited for for a couple of years,” Deitemeyer said.
“I’ve been surprised group has taken time to rebound, although we know business has found other ways of meeting. … Corporations are willing to pay now,” Deitemeyer added.
“Although we’re happy with the way rates are moving, they still have not been spectacular, which is to do with how people buy now and increased distribution channels. (My) hotels that a few of my legacy properties that are not in multi-use developments and have low barriers to entry,” Deitemeyer added.
“ADR is good, but considering we are sold out not as high as it could be. RevPAR growth, strong into 2017, will slow a little, but still be around 6%, well above the all-time average,” Hite said.
R. Mark Woodworth, president of PKF Hospitality Research, said events that usually exist to bring about a downturn are not as marked as they have been before precious cycle dips. Chief among those, he said, is that corporate profits are at an all-time high but the real estate market is not growing as much as one might expect because of that business growth.
In light of the outlook for lower inflation in the U.S., Woodworth said PKF had been the most optimistic of the companies tracking hotel data.
“But still we underestimated market improvements. I expect we will see some meaningful ADR growth rates,” Woodworth added
His one concern—shared by the other panelists, who agreed there is little they could do about it—would be the sudden emergence of an unpredictable demand shock.
Another concern is in the realm of foreign exchange, with the U.S. dollar unlikely to remain at its current level of strength forever, Hite said.
In euro terms, STR data showed that ADR in Boston in year-on-year numbers grew 32.2%, in Miami by 33% and in Chicago by 34.2%.
Conversely for the same period, Paris ADR fell 14.9% and Rome’s by 16.5%.
Data!!! Forecasts!!!
Demand for the U.S. market continued to be driven by transient customers, despite much of the recent conversation being given to the aforementioned return of group, Hite said.
Panel moderator Stephanie Ricca, editor-at-large at Hotel News Now, said 60% of demand in 2005 was transient, a percentage that has increased to 65% today, or 160.3 million roomnights. Group stands at 84.7 million roomnights, a 3.8% increase in the last 12 months. Transient, which has not increased in the last 12 months by quite that percentage, still is increasing, panelists added.
Deitemeyer said perhaps there is a need to back off group a little.
“Yes, transient has stabilized, but it’s still there,” Deitemeyer added, believing the higher percentage of forecasted growth still will come from that guest segment.
Supply is not a worry, Woodworth said.
“The peak of the cycle usually is characterized by a rapid increase in development, but now, although we are seeing some, it is nowhere close (to that of previous cycles),” he said.
The numbers from STR, PKF and PricewaterhouseCoopers as of June 2015 back up Woodworth’s statement. Hite said STR had seen no need to update these numbers for the HDC.
“Lots of things are keeping supply down, principally commodity costs. You cannot build something of the type that we build without some type of subsidy,” Deitemeyer said.
“Anything (beneath) upper upscale you can build today,” he added.
According to STR data, 66% of pipeline is in upscale and upper midscale and often includes product from new brand launches.
Panelists said the proliferation of new brands, both from legacy chains and newcomers, is a concern but also educational.
“Existing players will learn from this innovation, but it is interesting to point out that pipeline is about two-thirds of what you’d expect at this point of the cycle,” Woodworth said, who added that because rates still have not recovered in real terms, if there is “a shock to the system, we have a cushion now, and we’ll be far more prepared.”

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