It is common knowledge that in order for a lodging operation to be successful, market conditions that contribute to that success must be in place well before the operation opens its doors. While these conditions may be primary to the operation's success, there are secondary economic factors that should also be present before the property is operational.

Overview

When I managed the operational division of a lodging feasibility consulting firm in the Boston area, having a market that could produce hotel room growth was foremast on the minds of my teammates and me. However, the groundwork for creating that growth had to be identified before any bricks were planted in the ground. It was incumbent of me to first single out key economic indicators that could contribute to that lodging growth in the short and long term. In my role as a manager of an accounting firm that specialized in lodging feasibility study projects, I was responsible for preparing over 300 of these studies over a four-year span for clients and customers in the Boston metropolitan area.

I will now delineate the key economic indicators that must be in place before recommending any hotel company invest in that market in the following discussion.

General Market Analysis

The purpose of a general market analysis is to outline an areas characteristics and to review the economic trends in the immediate site area that will reveal indications of overall economic stability as they relate to the lodging industry generally and specifically.

In addition, united states government statistics, various issues of buying power resources for the area as well as county and state publications are vital sources of economic statistical data. Analysis of this data provides a broad measurement of the economic health of an area.

In economic comparisons, an areas standard metropolitan statistical area (SMSA) is more meaningful than those for cities or townships. Therefore, one can rely more readily rely on the SMSA than other tangential urban or rural data. It should be noted that an SMSA consists of areas that have a population of at least 50,000 people throughout the nation. For example, the greater Los Angeles SMSA is the largest in the western US and second most populous in the nation. There are over 300 SMSA's in the nation at the current time.

Retail Sales

Sales for services and/or products in an area can be identified as a strong or weak producer of revenue for those products or services by examining their growth or decline. In terms of dollars and cents, the strength of an area can be measured as to how the growth has climbed on a percentage basis. For example, a retail sales growth of at least 75% over a five-year period is a strong indicator of an areas economic stability and shows sustained increases from year to year. This is particularly significant if an areas retail sales growth outpaces the growth for the county or state in which the area examined resides.

Effective Buying Income

A good measure of potential commercial activity in an area is what's referred to as the effective buying income. (EBI) The EBI is defined as personal income from all sources after taxes. By displaying an areas EBI in quantitative terms, one can grasp the economic strength of an area when personal growth is on the upswing. For example, you can compare the area's growth with the county and state in which it falls within. If EBI is greater than those two, income generation is significant and can be related to lodging growth as well.

Employment Characteristics

Total employment and the distribution of labor among various industry groups are significant measures of the commercial/industrial activity generated within an area. The type of industry growth is vital to understanding how an area sustains labor intensity when compared to the county or state it is in. Growth over a five-year period is a fair assessment of the labor the area can be measured by and could contribute to lodging growth as well. Below are the non-agricultural industry divisions that all areas of the nation fall into:

  • Contract Construction
  • Manufacturing
  • Transportation and Public Utilities
  • Wholesale and Retail Trades
  • Finance, Insurance and Real Estate
  • Services
  • Government

Each of these industry divisions would be scrutinized for their number of employees and its ratio to the total of all divisions. For example, you can single out the dominant industry division simply by recording its percentage breakdown compared to all divisions. An ideal industry posture of an area would be well served if the majority of employees were associated with the finance, insurance and real estate division since this growth represents wealth accumulation which bodes well for lodging development.

Industrial Growth Patterns

The need to examine an areas industrial growth pattern reveals significant results as to where and with whom this growth is attributable to specifically. A five-year historical review of this pattern will suggest what industries are growing the fastest and showing room for growth. Part of this examination would involve the land on which this industry can expand. Are there industrial parks not yet leased or utilized that can attract industry growth. You can identify those areas of industrial growth that are in various stages of development. The data need to identify growth areas can be broken down as to their development name, stage of development, approximate square footage and total acres.

Transportation

The first thing that must be examined with regard to an area's transportation pertains to roads and highways. It is significant if the area is served by access and visibility positives pertaining to interstate highways and exit and entry ease by motorists. One measure that is associated with traffic volume on these highways pertains to average daily traffic counts. (ADT'S) ADT's identify the volume of traffic a road or highway experiences over a period of time. The higher the ADT the better. Although ADT counts are not solely attributable to hotel room demand, they do reflect the importance of existing roads and highways which serve the general area and the site in which a hotel may be constructed.

An example of this traffic volume can be demonstrated by presenting the following table pertaining to a study I did in the Boston, MA area:

Yearly Traffic Count Location from 2018 to 2022 and Percent Variation:

  • I-495 Beltway traffic went from 47,100 in 2018 to 53,800 in 2022 which showed a 14.2 percent increase.
  • Route 3A to Route 38 traffic went from 39,200 in 2018 to 44,600 in 2018 showing a 13.8 increase.
  • Route 133 to Town Line 6 traffic went from 8,500 in 2018 to 10,760 in 2022 showing a 26.6 percent increase.

Air Passenger Traffic

An examination of the main domestic and international airport that serves the area must be examined with regard to passenger growth. An interview with the airports general manager is a must so that the following information can be obtained:

  • Airport expansion plans
  • Number of airlines presently operating and planned
  • Yearly growth of enplaned and deplaned passengers for a ten-year period
  • Airlines with nearby hotel room contracts

Urban and Suburban Revitalization Efforts

It is imperative that an examination of the adjacent and nearby cities be taken that singes out improvements that will have a positive effect on the proposed lodging project. An interview with the city planner and local architects should be conducted which can identify improvements to the area such as traffic flow, street repaving, building rehabilitation and city-sponsored projects that compliment existing businesses and commercial enterprises. Regional improvements will also need to be examined that will enhance both community stability and the probability of attracting large numbers of tourists. Categories or programs that could be identified are the following:

  • Commercial Business District Revitalization
  • Transportation and Parking
  • Public Facilities
  • Housing
  • Industrial Development
  • Parks and Recreation

Conclusions

From the fact-finding material uncovered about the area generally and specifically, you would need to place a stamp of approval or dismissal on the effect these findings reveal. Notes should be made as to the area's economic health as well as the overall commercial and industrial characteristics that would generate a substantial amount of support for the eventual development of a lodging facility down the road. This conclusion would lend support for the level of demand a hotel would require in order to sustain its existence for a very long time going forward.

Further, this conclusion should provide the basis for an assumption that the proposed lodging property would be operated by a competent, professional management company with an aggressive sales and marketing team. It is imperative that the development team all conclude that the go ahead light for this project is unanimously in favor of and that this message is communicated to the owners and developers who are chief negotiators for the success of the operation. I have been in too many meetings to number that had the decision makers not be in agreement as to the location, market or direction the project will take. This has caused many projects to be shelved thereby delaying the start of the operation and therefore losing important timing as to the overall way the project gets a jump on the competition.

Reprinted from the Hotel Business Review with permission from http://www.hotelexecutive.com/.

James Downey
Professor
+1 561 237 7858
Lynn University