Why the Southeast is so attractive for hotel investors

Savannah, Ga., has a nice mix of growing demand from both business and leisure travelers.

In the final months of 2016 and into 2017, hotel investors and developers are shifting their focus to meet anticipated changes in demand and are closely watching additions to supply. And the Southeast is proving to have a set of demand drivers that make it an attractive investment opportunity for developers. Here's what to expect and some guidance on how to benefit, deal and manage it all.

Finding the Right Formula

When considering hotel development or acquisition, investors seek a market with strong room night demand generation and macro-economic drivers that will support revenue-per-available-room goals, especially since RevPAR growth is expected to flatten out in the coming year and into 2018. The anticipated slowdown in RevPAR growth is largely due to nearly seven years of 5 percent to 6 percent compound growth in RevPAR following the recession and the anticipated additions to supply as new-built hotels come online over the next two years and beyond. Additionally, debt markets are tightening causing owners and developers to be more conservative in their underwriting.

With these concerns in mind, many hotel investors and developers are looking toward Sun Belt cities where there are markets with strong growth and new demand drivers, such as new sports arenas, that can supply more demand. Over the next 24 months, southern cities will host four major national sporting events (NCAA College Football Championship 2017 in Tampa, 2018 in New Orleans; Super Bowl 2017 in Houston and 2019 in Atlanta; PGA 2017 in Charlotte). Similarly, Turner Field, the home of the Atlanta Braves, is moving from downtown Atlanta to Cobb County. That change is expected to draw more businesses and tourism to already-developed Cobb County, providing an ideal investment environment.

The Atlanta Braves will begin play in SunTrust Park this upcoming season.

Strategic Growth

Investors looking for market share gains and stronger yield are coming to Atlanta and other thriving southern cities at this phase of the cycle to capitalize on diverse economies and demand compression. State capitals are good bets for diverse environments that will allow a new hotel to thrive because they often house major convention centers, large universities, attractions, sports stadiums and cultural centers coupled with excellent transportation networks of airports, interstate highways and rail.

This trend holds true for other booming Southern capital cities like Columbia, S.C., which is expected to see even more growth with the proposed expansion of its convention center—presently the smallest in the state. Throughout this year, hoteliers will be closely watching whether their expansion plans are approved as there will be a need for new hotels to accommodate incoming conventioneers. Savannah, Ga., is another prime example with its expansion of its port to accommodate the new generation of super-Panamax ships transiting the existing and new Panama Canal.

Suburban vs. Central Business Districts

Surrounding areas of major city CBDs continue to evolve through the redevelopment of close-in sub-markets that in years past have been more marginal areas. This has led to a rise in hotel developments in areas that previously were not viewed as viable hotel markets. Investors are particularly interested in these areas because they are growth stories for millennials who are seeking live/work/play markets that generate new demand. Atlanta is a good example of this trend. In recent years, eastside and midtown Atlanta have become much more desirable areas with major redevelopments, such as the Beltline and Ponce City Market, dramatically improving the fundamentals for hotel development.

Investors and developers interested in areas that are undergoing revitalization have also begun to explore historic restoration of existing buildings rather than build new. Considering market economics, such as restrictive zoning, taxes and possibly tax credits, cost of construction in dense historical areas, anticipated time to complete the project and possible potential construction delays, investors often choose to rehab properties as a more cost-effective option. This shift has led to a significant rise in the number of branded boutique hotels —IHG's Indigo and Kimpton, Marriott's Aloft and others—which have been able to produce more standout properties by reducing guestroom and public space sizes in favor of unique or higher-end finishes. Meanwhile, independent boutique hotels are popping up in smaller, in-fill markets, such as East Atlanta/Midtown where a flag may be less important.

The Hotel Indigo Atlanta Midtown

For investors who are looking for markets with less barriers to entry, the suburbs can offer an attractive alternative, but need to be paired with strong economic drivers. Much like revitalized areas in major cities, suburbs have also undergone a major transformation over the last few years. As referenced above, Turner Field’s move from downtown Atlanta to Cobb County is a great example of the opportunities available in suburban areas. A major attraction, such as a new stadium, paired with many of the amenities available in cities, makes the suburbs a viable option for investors.

Within booming suburban areas, there has been a recent trend of revitalization of shopping malls. Some malls have morphed into destinations that provide easy access to restaurants, movie theaters and other entertainment options. In such areas, where there are few boutique hotels, smart investors are more likely to invest in large and reputable hotel brands as this can reduce risk.

In addition to capital cities and emerging suburbs, southern cities along the Alabama, Georgia and South Carolina coast will also be major players next year. Cities, such as Savannah; Charleston, S.C.; Mobile, Ala.; Tampa, Fla.; and Wilmington, N.C, combine growing demand from both business and leisure travelers and make for attractive investment options.

What and Where to Buy in 2017

As the Sun Belt growth story adds more chapters, investors are putting together a robust growth strategy entering into 2017. By identifying capital cities, strong second cities such as Charlotte, Charleston, Savannah and others with diversified economies, and emerging suburbs with highly sought-after attractions, hoteliers can effectively manage strong hotel product growth and leverage a thoughtful, strategic approach to expanding in the right markets.

Sam Winterbottom is an executive managing director in the hotel investment sales group at Newmark Grubb Knight Frank. He has been with the firm since 2009.