On a recent hunt for historical real estate perspective, I fell down the rabbit hole while reading through newspaper archives on microfilm at Jones Memorial Library. In my research, I stumbled across an article on the front page of the May 6, 1984 issue of Lynchburg News & Daily Advance with the headline “Oversupply of Hotel Rooms Seen” written by Jon Hiratsuka.
In a four-year span, the Lynchburg area had seen the addition of 547 hotel rooms, including the 172-room Lynchburg Hilton, the 131-room Days Inn, and the 244-room Radisson Hotel Lynchburg, which took the hotel supply from less than a thousand rooms in 1980 to about 1,400 hotel rooms in 1984.
This led many local hotel operators to believe that new supply was outpacing actual demand. Sound familiar? History has a way of repeating itself, so let’s take a look at what has changed and what hasn’t in 33 years.
“Hey, what’s up with all the new hotels?” is the subtext for the 1984 article cited above and has become a frequently asked question again in our market as hotel construction continues. In Lynchburg, three hotel projects are currently underway: a 114-room Residence Inn on an outparcel at River Ridge Mall; a 104-room Homewood Suites next to the Hilton Garden Inn on Wards Road; and a 115-room Virginian Hotel historic renovation project in downtown Lynchburg. A 112-room Hampton Inn & Suites and a 97-room Comfort Inn & Suites were completed on 29 South near the airport in the last three years. Adding these 209 recently completed rooms to the 343 new hotel rooms in the pipeline, the total increase in supply is 552 hotel rooms in a four-year period. But it’s not just Lynchburg; other local areas are seeing activity as well. Two proposed hotel projects have been kicked around in the Town of Bedford recently, while the 56-room Appomattox Inn & Suites was constructed near the new American Civil War Museum and historic battlefields last year. In nearby Farmville, construction is underway on a 106-room Tru by Hilton and a 96-room Holiday Inn Express, while the historic Hotel Weyanoke directly across from Longwood University in the downtown area will be renovated and expanded into a 70-room hotel.
Choosing a location for a new hotel remains a key question for any hotel developer. The obvious follow-up question is whether any land is actually available at a feasible cost in their desired location. Of the three new hotel projects that came online in the early 1980s, two chose locations convenient to River Ridge Mall, Liberty University (or Liberty Baptist College at that time), and major highways, while the Radisson represented a landmark project utilizing a mix of private and public investment with the goal of revitalizing downtown. How does that compare with what is in the pipeline today? Two hotels are being constructed in the Mall/Wards Road/Liberty University area, while the third is a landmark project utilizing a mix of private and public investment with the goal of revitalizing downtown. So, yes—what’s old is new again.
Branded or Independent
Another big decision for a new hotel is whether it will be a franchise or independent. Choosing to be branded has both benefits (brand recognition, a reservation system, support, training, and marketing) and costs (upfront fees, ongoing royalty fees, and money that must be spent refurbishing and refreshing the hotel periodically to meet brand standards). Embedded within the branding decision, a hotel must also choose what tier or segment of the market it wants to serve, e.g. economy, midscale, upscale, or luxury.
There is one quote in the 33-year-old article mentioned above that feels particularly dated, “When a person comes to Lynchburg, he has a perception of the type of property he wants to stay in. If he is a Hilton man, he goes to a Hilton… People don’t shop rates that much.” While this so-called “Hilton man” would make Don Draper proud, I am more of a Hotwire.com man myself, which means that all I do is rate shop. Brand loyalty still exists, but the internet has made shopping rates so easy that competitive rates within your tier are not optional.
Lastly, branding decisions aren’t forever. Independent hotels may make the decision to take up a flag, while branded hotels may rebrand or drop their affiliation. The Lynchburg Hilton built in 1980 eventually deflagged and is now the independent Kirkley Hotel, while the historic Virginian Hotel project will be added to the Hilton Curio collection. The downtown Radisson is now the Holiday Inn and the Days Inn is now the La Quinta Inn.
Measures of Success
What does success look like? The two most important inputs are still average daily rates and occupancy rates. A popular hotel metric for comparing properties is RevPAR (Revenue per Available Room), which is calculated by multiplying a hotel’s occupancy rate by the average room rates. For example, an average room rate of $100 and occupancy of 60% equal a RevPAR of 60.0. How do you get this hard data? While anecdotal evidence along the lines of “Hotels are slammed on these weekends, but dead on those weeks” is always available, the STR (Smith Travel Report) is the go-to source in the hotel industry for market data and trends in occupancy levels, room rates, and operating expenses. Potential oversupply could show up in the data as declining occupancy rates and room rates, which could give a hotel developer pause even in a growing market with strong demographic trends. If they still move forward with a new project, the hope is that oversupply is only a temporary state that will soon relent as demand catches up and that their older, poorly maintained, and inconveniently located competitors will feel the effects of increased supply more acutely than their bright, shiny, new hotel.
By Billy Hansen