Hospitality & Land
Hospitality:
The face of the hospitality industry has changed radically in 30 years. In major cities, convention centers have gotten bigger and bigger, (and the accompanying hotels, too) and larger in scale. Consolidation has occurred with the major brands. Emerging as the leaders of the pack are Choice Hotels International, Wyndham Worldwide, Hilton, and Marriott.
Choice Hotels? Of course, not a known name – but its economy-minded clientele will recognize Comfort Inn, Econolodge, Quality Inn and Mainstay suites. They have popped up everywhere on the interstates. Wyndham, while itself a luxury brand, features mostly economy-class products with familiar names such as Days Inn, La Quinta, Howard Johnson's, Super 8, and Travelodge - and even the slightly tarnished Ramada Inns.
Hilton, long a luxury brand, now also features Waldorf-Astoria in that category, and has promoted next-level brands such as Homewood Suites and Doubletree. Hilton has also funded the rapid growth of Embassy Suites and Hampton Inns. Marriott, the 800-pound gorilla, has separate marketing strategies for luxury brands such as Ritz Carlton, St. Regis and Westin, longer-stay brands such as Residence Inn and Springhill, and old standbys, Sheraton, Courtyard, and Fairfield Inn.
Occupancy rates are high in the booming 2020 economy, averaging a solid mid-60s percent but the impact of Airbnb and Vrbo has been noticeable, with lobbyists working hard to quash the upstart disrupters and to subject them to the same regulations as hotel chains. Big investments made by the major chains in new brands designed to be chic, less stodgy, and attractive to Millennials and Generation Xers show the pressure felt by the iconic brands.
All told, though, with more money globally seeking stable assets, accepting lower CAP rates, the values of the good products in the hospitality industry are dramatically good, and will probably stay that way as U.S. citizens continue robust travel habits.
Land:
In 1990, there was barely ever a mention of tertiary markets by large commercial real estate developers, many of them being national. Primary markets such as the “Gateway Cities” e.g. New York, Boston, Atlanta, Dallas, Houston, Chicago and Los Angeles were everybody’s targets. Secondary markets peeked through; Indianapolis (Chicago Jr.), Memphis (Fedex), Louisville (UPS), Seattle (Microsoft, Boeing, Starbucks), Kansas City (rail from Mexico), and Denver and St. Louis, just because. Dense population is a major factor as 70 percent of the U.S. Gross Domestic Product is from consumer spending, mostly impacting retail. But, population drives all asset classes and institutional investors, many still new at investing in real estate, feel more comfortable with major metro areas.
Tertiary markets were those just beneath those mentioned, partially based on size of the trading area, partially on sheer population and prospects for growth, and all impacted by the health of the local economy, with south and western areas inching ahead of northern and eastern metroplexes. As for land needs in industrial, in the ‘80s and early ‘90s it was important to be near existing power and water for manufacturing, though labor was an increasing factor and non-union was preferred. Thirty years later, however, land needs for industrial were for large big distribution centers that could service a good part of North America’s population such as Nashville, Salt Lake City, , Orlando, Columbus, and Cincinnati. Different criteria for each was based on geography.
But, the bigger the market, the greater the demand for land at major intersections for fast food growth. (Heaven help you if you’re not on the right side of the street during commute times). It became more likely for a developer to tear down an older facility to build a new one (where land prices were so high, demo work made sense). In the older cities, it's harder to do inner-city development from a regulatory, infrastructure, and cost perspective. And for major land purchases for mega-warehouses? Hey, if you’re in Indianapolis or Columbus, where land is flat and stable, you’re in much better shape than in Los Angeles (where regulations add a good year to a pro forma), Louisville or Nashville (where soils, flood plain, or nasty topography get in the way) or Boston (where 500 years of history can turn up in an excavation. Case in point; The Big Dig, estimated in 1982 to cost $2.8 billion and take seven years, ended up costing more than $8 billion and took 15 years).
So land, at best, anywhere, is an iffy proposition, taking months to properly evaluate and incorporate into a business model that is economically viable.
Big changes in 30 years in land acquisition include properly handling Native American burial sites when uncovered, properly designing storm water and water run-off characteristics with proper retention, so as not to unduly impact neighboring properties, proper harvesting of woodlands without disturbing mating patterns of endangered avian or other species, and in many more rural areas, properly relocating family cemeteries, some of which can contain dozens of graves.
Technology has of course helped. In 1990, a project known as a “cut and fill” site with rolling topography could often end up with a need for hundreds of truckloads of fill dirt. Or, the opposite, a project might have needed to dispose of that extra dirt. Today, within minutes, a topo can be created and a design suggested, with proper runoff in the right direction – with an accurate estimate– without importing or getting rid of dirt. Moreover, with laser and GPS technology, earth moving machines can be programmed to carve up the site exactly to design without much operator input.
But, land is land. As the old saying goes: “They ain’t making any more of it." So as metropolitan areas develop, the trade offs are: pay more, take more risk away from the owner/farmer (i.e. pay dearly for an option to buy), compromise on what’s the best location, or buy an older facility and raze it properly.
It’s difficult to assess trends in land values, but in a strong economy, common sense says that the supply will dwindle and the demand won’t stop – so up go the prices. And in certain sections of the country, they have skyrocketed. Scarcity and certain land price rises have given rise to some multi-story warehouses in the U.S. for the first time since the 1950s. (One major difference: those were all freight elevator-dependent; these new versions have truck loading and unloading on every level!) We're also seeing the success in other countries such as Japan and Singapore in multi-level. Less land is needed at the exorbitant prices, but it requires much more expensive construction to accommodate truck traffic on upper levels.
What will eventually hold land prices in check will be even a mild hike in inflation, now hovering around 2 percent or lower with 10-year T-bills yielding below 1.8 percent. When both rise, today’s historically low investment CAP rates will, too, putting downward pressure on real estate vale, and squeezing profit out of new development. Land will be the first place cuts will be made in new development.