I-94 Corridor From Detroit to Ann Arbor Piques Hotel Investors’ Interest
Even as hotel operators continue to report steady gains in revenue per available room (RevPAR) nationally, Wall Street execs have begun to downgrade the lodging outlook, painting an entirely different picture.
This disconnect is rooted in fears that the year-over-year growth in RevPAR is not sustainable in the current climate and that a spate of high-profile mergers and acquisitions among national operators must dictate a lower assessment of the industry.
In spite of these concerns, demand continues to outpace new supply, both of which are occurring at a strong clip. Though industry observers may point to tepid occupancy as a concern, robust increases in average daily rates are leading to continued growth in RevPAR nationwide.
How does Detroit stack up?
Similar to the national hotel industry, Detroit is registering these same trends. On one hand, the market has recorded an increase in supply and a decrease in occupancy. On the other hand, average daily rates are steadily rising and RevPAR is growing overall, a sign of a strong hotel market.
STR’s April 2016 report on the U.S. hotel pipeline indicated 1,046 rooms under construction in metro Detroit, or approximately 2 percent of the existing supply. This supply increase is at the lower end of the top 26 hotel markets in the United States. By contrast, supply growth in similar-sized markets such as Dallas, Denver, Minneapolis, Seattle and Miami is 6 to 7 percent of existing supply.
I-94: corridor of opportunity
With these positive market fundamentals in Detroit, Southeast Michigan’s I-94 corridor should be the next investment focal point. The corridor is anchored by two of Michigan’s major growth submarkets, downtown Detroit and the burgeoning Ann Arbor market, and home to an international airport and Dearborn’s expanding automotive hub.
Hotels located in this corridor have an opportunity to capitalize on three of the area’s strengths: the redevelopment of downtown Detroit and its expanded convention center, the nation’s leading automotive epicenter, and the expansive footprint of one of the country’s top public universities.
Convention center is key
Hotel occupancy in the downtown Detroit market has increased consistently since 2013, with the majority of full-service hotel properties operating at 60 to 70 percent occupancy as of year-end 2015, according to STR. Average daily rates in the downtown market are reaching $150 for full-service properties in 2016, a new normal with the growth of the upscale boutique segment in the city.
The multi-year, $279 million renovation of Detroit’s convention center, Cobo Center, was completed earlier this year. The effort to expand and upgrade Cobo has been key to the efforts of the Detroit Metro Convention & Visitors Bureau to attract more conventions to the city.
The renovations are already providing a remarkable return on investment with 85 events hosted in 2015 compared with 35 in 2010, a gain realized while the center was under construction. The convention center now operates with 400 event days each year, double its pre-renovation amount of 200 days, and 2016 is on track to finish above that record.
Convention center events are typically booked at least one to two years in advance, so the ability to offer twice the number of event days bodes well for the future. According to the Destination Marketing Accreditation Program, meetings of 1,000 or more attendees make up the largest major meeting segment nationally and were the strongest rising segment during the period 2013-2015.
These positive trends for large conventions and meetings paired with the increased capacity in downtown Detroit will bolster the hotel fundamentals in the downtown area and spread along the I-94 corridor.
Dearborn is hub of activity
Key acquisitions in the Dearborn area point to improvements in the market for area hotel properties. The 772-room former Hyatt Regency in Dearborn traded hands in January. An offshore investment group that has properties in the Toronto area acquired the property.
The new owners plan to bring the hotel and convention center back to its four-star quality, and a renovation of the hotel will put the property on track to fill the 62,000 square feet of meeting space. That means a boost in events for the local market.
Ford Motor Co. recently announced plans to purchase nearly two blocks of real estate in west downtown Dearborn. Although specific plans have not been released, redevelopment of the sites into office and retail space is expected.
The redevelopment will help support Ford Land’s campus transformation plan and is expected to be a boon for further hotel investment in the area. Ford Land’s commercial real estate holdings comprise more than 5 million square feet of office space in Dearborn and Allen Park, Mich.
Through April 2016, the hotel occupancy rate in the Dearborn market was down 2.1 percent on a year-over-year basis, but the average daily rate was up 3.5 percent, according to STR. With the growth of the Ford campus, hotel fundamentals should continue to register long-term positive gains in RevPAR.
Thriving college town
The growth of Ann Arbor, home of the University of Michigan and its exceptional talent pool, is desirable for high-tech and R&D companies that continue to look for space to expand. That in turn positively affects the surrounding communities.
The health of the university and these growth prospects continue to boost an area-leading hotel market. AJ Capital Partners recently converted The Dahlmann Campus Inn into one of its Graduate Hotels, which are independent boutique properties localized to their respective university settings. This investment upgraded and modernized an aging property while adding some unique local touches to appeal to the local target market.
The Ann Arbor hotel market finished 2015 with upwards of 10 percent year-over-year growth in average daily rate, according to STR, proving the continued strength of this submarket.
Average daily rates are poised to continue to register positive growth while occupancy is still healthy with year-round demand.
Attractive investment scene
Wall Street’s uncertainties regarding the lodging market have lowered hotel industry expectations, and it’s having an impact on hotel pricing. Last year was a banner year for hotel transactions in terms of deal volume and pricing. As the industry outlook changes, expect acquisitions to increase in hotel markets that have significant long-term growth potential with supply increases still low compared with existing supply.
Hotel investors looking at opportunities along the I-94 corridor can capitalize on these aligned fundamentals as a result of downtown Detroit’s evolution, Dearborn’s auto-centric growth and Ann Arbor’s expanding footprint in concert with hotel room supply growth near 2 percent, one of the lowest of any hotel market in the country.
These market indicators provide for a compelling hotel acquisition scenario in the submarkets along this vital economic corridor of Detroit.
— By Jeremy Allen, senior associate, Chandler Hotel Group. This article originally appeared in the July 2016 issue of Heartland Real Estate Business.