Why hotels in university towns are recession-proof

Developing hotels in college towns turns out to be a smart investment. College towns also provide constant demand for hotels: accommodating prospective students and housing visiting parents and other academics, to name just three.  

It's why developers see college markets as an intelligent play and also why there has been a rush of branded and independent hotels sprouting up in these evergreen markets. 

Recession-Proof

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There is strong financial incentive to develop hotels in and around colleges and universities. While other markets are to susceptible to the ebb and flow of the local and national economy (think hotels in energy markets when oil foundered), college towns have a consistent flow of traffic regardless of the overall economy.

“Colleges are economic forces in these towns, and work hard to generate revenue year-round,” said Alexandra Jaritz, global head of Tru by Hilton. Tru opened its first three college-town properties in Auburn, Ala. (Auburn University); Tallahassee, Fla. (Florida State University); and Madison, Wis. (University of Wisconsin-Madison), earlier this year.

Kerry Ranson, CDO of Georgia-based management company HP Hotels, called university cities “recession-proof” towns. “Universities offer many different opportunities for hotels, from select-service or select service with F&B, and then also full-service with meeting space.” HP manages hotels in several university markets, including the Hotel Indigo by Mississippi State University. During the global financial crisis, he said, some of the company’s top 25 hotels took a hit—as did many across the world. The college-town properties, however, were more “steady-as-she-goes,” Ranson said, citing strong occupancies. And while rates may not have shown solid growth, the stable occupancy rate kept everything on the level.

College-town operators can also look beyond room revenue for growth. “You have faculty meetings, conferences, public-private research and some startups, which are great for business as well,” said Charles Snyder, VP of business development at Charlestowne Hotels. Charlestowne Hotels has properties in eight college and university markets, including the Hotel Indigo Tuscaloosa by the University of Alabama, with several others in the pipeline.

Academic Brands

The demand for hotels in college towns is strong enough that some companies are launching brands catering exclusively to this market. In 2014, Chicago-based AJ Capital Partners launched the Graduate Hotels brand targeting this market, discovering a gap. “We started to notice that there was this white space in most of the university markets across the country,” said Tim Franzen, president of Graduate Hotels. Previously, the model for these markets had been select service on the outskirts of town, making it difficult for guests to really explore the neighborhood. “We did some research on how these markets perform versus big city centers and we really liked what we saw in terms of the market performance and how they weathered recessions,” he said.

The first Graduate Hotel opened in Athens, Ga., in 2014. Four years later, Graduate Hotels has 10 properties in its portfolio with the Graduate Iowa City due to open in June and the Graduate Seattle slated for later in 2018. The brand aims to have 25 hotels by 2020, and ultimately wants to be in 100 markets in the next 10 years.

Another entrant, Study Hotels, launched 11 years ago in New Haven, Conn., to serve the Yale University community, and expanded into Philadelphia last year for the University of Pennsylvania and Drexel University. A property is in development by the University of Chicago, and another four or five are in the pipeline, said Paul McGowan, founder of Study Hotels. “The markets that we're looking at have very high barriers to entry,” he noted.

Like Graduate Hotels, McGowan wants his properties to be close to the action. “Universities tend to protect the land at the core of their institution—for good reason—and that's precisely where we want to be. We don't want to be on the perimeter. We want to be in the middle of the action. We want our guests to be able to walk out the front door and be on the campus and experience all that the campus has to offer," he said. After more than a decade in New Haven and a strong first year in Philadelphia, he said, Study has attracted interest from several other universities that recognize the value.

Shoulder Seasons

While college towns offer economic-proof business, revenue can drop when school lets out. “University markets are very cyclical,” McGowan said. “You have deep and wide troughs where the university is not active, and it impacts your occupancy.”

The Tru hotels by Florida State University and University of Wisconsin-Madison are both located within their respective state’s capital, Jaritz noted, which can attract both business and leisure travelers throughout the year.

To find a steady balance, Study Hotels has sought out markets with other demand generators—research centers, medical and corporate business, among others, McGowan said. “The demand that's generated by the university is significant and helps to bolster our business across the board, but we're able to fill in those shoulder periods and soft periods with other businesses. And that's the ultimate mix for us.”

Franzen, to his surprise, found that summer can still be a busy season for Graduate Hotels. “As a matter of fact, those are oftentimes our busiest seasons,” he said. “The peaks for us are really in the months of May, September and October, but June, July and August are very busy months because most of these universities are 24/7 operations. They have graduate programs and research programs that are going on all summer long.”

Sporting events, orientations and visits from sales reps also keep the hotels occupied when school isn’t in session, he added. While there are always exceptions to the rules, and not every market performs equally at all times of the year, many of the brand’s properties perform seasonally alongside most of the top 20 or more metropolitan statistical areas across the country.

The Right Fit for the Right Market

Snyder believes college markets are best served by lifestyle and boutique hotels. These properties are “underserved," he said. “We think that lifestyle properties really appeal to the wider array of travelers that are visiting these destinations.” Independent-spirited and standard branded hotels both have their place. “Brands have a few more guidelines to follow, but they also add a lot of value in the distribution space,” he said. “When you look at the development process, particularly in the way we work with a variety of owners, it's a very owner-centric process. So the difference between a private project versus a public project will influence our decision making.”

“It's still a market-by-market situation,” Ranson said. “To get in some of these niche [markets], you absolutely could do some unique soft-brand opportunities and not have to go branded. But I think if you were to truly look at some of the ones that are off the beaten path, I think you'd still have to do a branded [property].”

Working with the university itself can also be different from working with a typical owner. “Universities are different than a typical private investor,” Snyder said. “They tend to have a more long-term outlook, and they're not as driven by the capital markets. We work hand-in-hand with them to determine what would be the best product for their stakeholders and for their community. And sometimes that includes looking at adding additional amenities to a project—additional meeting space or public space for students, faculty and alumni.”

McGowan plans to keep Study Hotels in urban markets, where he believes the demographics can support the full-service model that the brand puts forward. “We're trying to play to that upscale, upper-upscale tier and want to stay in that realm,” he said. “It's the customer that responds best to what we do and where we feel most comfortable.” Those markets, he acknowledged, require “a little bit more investment” and can help sustain a property during the slower periods of the academic year.

“We've been working on a couple of deals on ground-lease structures that allow us to get into the market with a lower initial investment,” McGowan said. “We make the improvements that we need to make to put the right product in the market and then we, in turn, give the university the comfort of knowing that we know how to execute on the development side. We know how to operate. We're in this for the long-term. We expect to put a hotel on their campus that will be there for the next 30, 40, 50 years and become part of their culture.”