Skip Ribbon Commands
Skip to main content

Hotel secondary city investments

For hotels, secondary cities no longer a second-rate investment

As the economy recovers, investors follow business and leisure travelers who seek conference facilities and cultural amenities, often at a lower cost.

Share

​​

If you want to take the pulse of the U.S. economy, pay attention to hotels.

Investment in real estate is on the rise across all property types, from offices to warehouses, multifamily housing and medical facilities. But few sectors compare to the increase in hotel investment, which this year is expected to hit $25 billion in the U.S., up 15 percent from 2013 and the highest total since the Great Recession.

“Hotels are a leading indicator of market and property performance, and therefore of investor sentiment,” said Lauro Ferroni, Vice President of JLL Hotels & Hospitality.

As the economy slowly awoke in 2009 and 2010, hotel investors cautiously placed their capital in safe, low-risk properties in New York, San Francisco and Chicago. Those markets boast some of the world’s most renowned landmarks as well as major corporate headquarters, which draw both tourists and business travelers for meetings and conferences.

Now hotels may be leading the U.S. into the official “second phase” of recovery: into the secondary markets, according to JLL’s 2014 Hotel Investment Outlook. Last year, 35 markets posted at least $50 million in hotel transactions, totaling $11.9 billion. In 2012, just 27 markets topped the $50 million mark, with $9.4 million in transactions.

Secondary cities fueled the growth. Orlando’s hotel transactions surged to $746 million in 2013, up an astonishing $622 million from 2012. Atlanta’s hotel investments reached $431 million in 2013, a $286 million increase over the previous year. By contrast, hotel transactions in New York City and Chicago actually fell by $1.08 billion and $330 million, respectively, between the two years.

Hotel investors are looking beyond gateway cities in pursuit of promising growth opportunities in Houston, home to the nation’s most powerful oil and gas companies; Atlanta, a high-tech and a transportation hub; as well as other second-tier cities. The big prize in Atlanta: the $293 million sale of the Atlanta Marriott Marquis, the city’s largest hotel and one of the nation’s busiest convention centers.

Hotel investors are looking at where travelers want to go and why, how long they’ll stay and what they’ll do there. The conclusion: more businesses are considering cities with mounting business momentum, with travel and accommodations paid by third parties and a shorter time for sight-seeing.

“Primary markets saw the initial rebound in tourism and leisure travel. We’re now seeing positive momentum in group and convention business travel to the secondary markets,” Ferroni said.

Corporate travel, often limited to senior executives during the downturn, is once again on the move. “There’s a shift from executive-level meetings to large-scale conferences attended by employees from up and down the corporate ladder,” he said.

The Global Business Travel Association, a trade group, expects group travel-specific spending in 2014 to rise by 6.5 percent, to $124.5 billion, based on a total corporate travel volume increase of 1.7 percent.

Secondary markets, such as New Orleans, Dallas and Orlando, feature some of America’s largest convention centers. The nation’s second-largest venue, Orlando’s Orange County Convention Center, hosts more than 200 events attracting 1.5 million attendees—and adding $2.1 billion to the local economy. The city’s 1,641-room Hyatt Regency Hotel sold for $717 million in October, the largest single asset transaction in 2013.

“There are lower hotel group rates for many [secondary] markets … That has a direct impact on meeting-related costs, such as ground transportation, shorter travel times to hotel and staffing and union fees.”

Erin Reichert, Director, Worldwide Accounts for Hilton Worldwide Corporation

Some companies are looking to save money by sending employees to four days in Anaheim instead of Chicago. “There are lower hotel group rates for many of these markets, and often the cost of living is lower,” says Erin Reichert, Director, Worldwide Accounts for Hilton Worldwide Corporation. “That has a direct impact on meeting-related costs, such as ground transportation, shorter travel times to hotel and staffing and union fees (or lack of),” she said.

But today’s business travelers don’t just want to work. Reichert says hotel sales people often accompany convention bureau staff when pitching an event. “One can address the destination, convention center, airlift, weather and attractions and the other can address the specific details of the properties,” she said.

Investors pay attention to companies taking advantage of lower costs and allowing employees to extend their stays in cities like New Orleans, Dallas, Atlanta and Philadelphia, Ferroni said. “Companies want to hold conferences in locations that entice employees to attend and also offer other leisure activities following business hours and commitments because it boosts attendance levels.”


See more news from JLL