With the cost of urban real estate making city-center hotels prohibitively expensive and ride-sharing services like Lyft and Uber making it easier and less expensive to access those city centers, a new trend is growing: “Suban” hotels are not quite urban and not quite suburban, either. Instead, they sit in between, growing in the outskirts of cities in areas with easy access to public transportation options.
While shying away from city centers may seem counterintuitive for many developers, there are some solid advantages to opening a hotel on the outskirts. “At the beginning, there is space and it's generally less expensive than the established city centers,” said Bill Fortier, SVP of development, Americas at Hilton.
Building away from city centers also gives a developer the opportunity to create the kind of hotel he or she wants. “When you go downtown for urban development, you are constrained by site requirements and setbacks,” Chip Ohlsson, CDO at Wyndham, said, adding that the cost of development in those downtown markets is generally 20-percent higher than outside of urban areas. “While there’s still an added layer of cost building right outside of these urban centers, you can usually get more hotel rooms in a bigger box.”
Red Lion Hotels has also had luck in and around major cities. “We can go into markets like Long Island City and Brooklyn and build the quality of product that we need, and yet put them in places conducive to business,” said Roger Bloss, EVP and president of global development for Red Lion Hotels Corporation. “Customers are seeking these markets themselves because of cost.”
Where to Build?
The outskirts of cities like Columbus, Ohio, offer good opportunities for development, Bloss said, and the fringes of Detroit are coming back. “Secondary cities are very popular,” he said. “We’re seeing a flood of new construction in Texas because of the oil belt. We used to think in terms of Dallas and San Antonio, but now smaller cities are catering to the oil market.” Because the oil industry has faced some hardships in recent years, Bloss acknowledged that those markets have seen peaks and valleys. “But most owners think it will stabilize over times. When people invest millions, they have a handle on the market.”
Hilton, meanwhile, is opening hotels in Old Town Alexandria (Va.); Portland, Ore.’s Pearl District; Oklahoma City’s Bricktown; Miami’s Design District; Denver’s Cherry Creek; and Nashville’s Vanderbilt neighborhood, among others.
When choosing a “suban” location for a hotel, Raj Trivedi, La Quinta's EVP and chief development officer, said a developer should contact the town’s economic board to see what’s in the pipeline. “Is there any business coming? A new headquarters? Any new facilities?” In Westlake, Texas, for example, financial company Charles Schwab is building a regional campus that is expected to bring 1,200 new jobs to the area, making it ideal for new hotel development. “One of the most critical components is building a relationship with the city,” Trivedi said. “Through that, the developer can extract benefits in land value or taxes or even bonds if they want to have a banquet or conference facility. Gathering information from the city to be sure business drivers are coming is critical.”
Similarly, Ohlsson said, Delta’s headquarters has made the Austin suburb of Round Rock ideal for development. “We’ve done some Wyndham Garden development there,” he said. “Austin is very expensive to build in. Corporations are pushing out as residential developers are coming in, buying office buildings and converting them to condos.” But as businesses move away from city centers, he said, they don’t want to relocate their workforce, so they remain in the general area. “That lets the suburbs generate revenue.”
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While these outlying regions may offer more space for less money, Fortier noted that as word gets out, other developers will quickly move in, increasing the competition and driving up costs. When that happens, he said, the owner will need to put more into the land, and that usually entails a mixed-use project with retail and residential components to help defray the costs.
Still, Trivedi said, construction costs are construction costs, and while land costs outside of city centers may be less expensive, the real value in “suban” areas is in the municipalities and the incentives they can offer for growth.
Sometimes, Bloss said, the biggest challenge in bringing a hotel to an outlying region is just going through the normal process. “In smaller markets, the building codes and processing steps may be different,” he said. “You may have to go to a smaller bank. It takes more due diligence and more education. And that’s where local expertise comes in and flourishes.”