LELAND CONSULTING GROUP

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1 Memorandum Date 24 March 2014 To From Subject Annie Gorski, City of Salem Wally Hobson, Leland Consulting Group Dave Siegel, Leland Consulting Group West Salem Business District Action Plan Analysis of the Market Opportunity for a Hotel in West Salem DRAFT INTRODUCTION This memo is being prepared as part of the West Salem Business District Action Plan (Action Plan), for the West Salem Urban Renewal Area. The project team has been tasked with delivering a set of development concepts and strategies to guide the City s actions and urban renewal expenditures in West Salem over the short-and long-term. The team is simultaneously conducting a high-level market reconnaissance for West Salem and providing traffic analysis in response to the recently approved Salem Alternative preliminary bridge design which, if constructed, will change the dynamics and development opportunities in this area over the long-term. The objectives of this memorandum are to: People Places Prosperity Revitalizing Downtowns Creating Partnerships Targeting Real Estate Success Shaping Financial Strategies Strengthening Community Enabling Sustainability & Livability Making Cities Work 610 SW Alder Street Suite 1008 Portland Oregon p f Describe the market opportunity and long term potential for hotel investment in the West Salem redevelopment area. Identify the type or types of lodging products that would be most appropriate for the West Salem location and that will take best advantage of local supply and demand conditions. Estimate the approximate time frame over which a hotel might be feasible, together with the conditions that would need to be met in order to attract a hotel developer. It is beyond the scope of work of this analysis to prepare a detailed hotel feasibility study, which would provide additional detail such as site location recommendations, brand affiliation, and a detailed pro forma financial analysis. Until a specific site is identified, and a private hotel developer is on board, it is not appropriate to prepare such a study, which has a relatively short shelf life. A detailed hotel feasibility study generally becomes obsolete, for purposes of securing a hotel franchise and financing, within six to twelve months. Market dynamics can change significantly over a longer time frame and the predictive value of a short-term view of the market is limited. KEY TAKEAWAY Without a massive public subsidy, a lodging facility in the West Salem District is not feasible under current conditions and should only be viewed as a future, following land use, not a leading land use, with respect to redevelopment of the District. The future feasibility and timing of any type of hotel in West Salem will directly depend on the pace in which the West Salem District redevelops and matures, takes on the

2 characteristics of the locational criteria outlined above, and therefore becomes competitive with other areas in Salem. The quantity, quality, and character of future redevelopment in West Salem will shape future hotel demand in the district. AN INTRODUCTION: HOTEL TYPES AND BRANDS There are many different kinds of hotels that vary in quality between two and five stars and range in size between a small bed and breakfast to a hotel with 200 to 300 rooms (or more). The size and density of a hotel is dependent on the location, land value, size of the market, and supply and demand conditions in the market. Hotels can be franchised or branded with a regional or national flag, or they can be independent without a brand. There are pros and cons for branded and unbranded independent hotels, but branded hotels with a national or international flag are far more common and usually entail less risk. The primary advantage of a brand is name recognition, which communicates an image, level of service, and price point, coupled with a national reservation system, which can result in higher annual average occupancy and average daily room rates (ADR). The disadvantage of a major brand is the upfront cost of the brand or franchise, the cost of ongoing management operations, and the control over the design that hotel companies require, which can lead to higher construction costs. Hotel companies also tend to be somewhat inflexible and dealing with these businesses requires patience and good negotiation skills. Boutique hotels tend to be relatively upscale and cater to higher income groups. Smaller luxury boutique hotels are often unbranded and are managed by independent operators. They usually contain 50 to 100 rooms, although many examples can be found with fewer than 50 rooms and more than 100 rooms. Many boutique hotels throughout the country are upscale conversions of historic structures, giving the hotel old world charm and character. The type, brand, and size of a hotel should be selected to penetrate a specific targeted market segment based on site location and local and regional competition. The larger national and international hotel companies have a multiplicity of different brands that meet the needs of highly targeted and specific market segments. Appendix A shows the wide diversity and associated brands for selected hotel companies including: Starwood Hotels and Resorts Marriott Hotels and Resorts Hilton Hotels and Resorts Hyatt Hotel Corporation Wyndham Hotels and Resorts Hotel types with selected examples of associated brands are shown in the table below. Page 2

3 Table 1: Hotel Types with Examples of Associated Brands The various hotel types and brands shown above cater to different demographic groups stratified by income, net worth, and reason for travel. The three principal transient visitors based on the purpose of a visit include: Commercial Market Segment: Business travelers (including government and institutions); Meeting Market Segment: Conference/convention attendees; Leisure Market Segment: Individuals or families either visiting a particular location or passing through en route to other destinations. Their purpose for travel may be sightseeing, recreation, relaxation, or visiting friends or relatives. The limited service hotels fronting on freeways and other busy thoroughfares are dependent on drive-by traffic passing through the area as their primary source of business. Hotels located in downtown urban areas, away from major freeway interchanges, are usually business and/or conference hotels. These types of hotels are destination hotels where reservations are usually made in advance of arrival. Business and conference hotels are usually located in close proximity to the demand drivers. In the case of Salem the dominant drivers are State government and Willamette University. Extended stay hotels are another type of destination hotel. They cater to transient visitors who plan on being in the area for a week or more, sometime for several months. The average length of stay is 10 days. DEVELOPMENT PROCESS It is a common misconception that hotel companies like Hilton, Marriott, Hyatt, etc. develop and own their own hotels. Although historically this may have been the case, most of these companies have liquidated their hotel assets and today they only brand/franchise and operate hotels. Therefore, the process for building a new hotel is to find a hotel developer who will then: Page 3

4 Decide on the type of hotel and secure a letter of interest from an appropriate hotel company that will provide management services and a hotel brand; Find equity investors who will own the hotel; Finalize an operating and branding agreement with a hotel company; and Obtain the construction loan to build the hotel together with a permanent long-term mortgage that takes out the construction loan upon completion. The developer should be specialized in the hotel business and have a solid track record and sound financial backing. SALEM MARKET ASSESSMENT HISTORICAL TRENDS Although West Salem is located in Polk County, nearly all of the hotels in the Salem area are located on the east side of the Willamette River in Marion County. There are no hotels in West Salem and the balance of the county is mostly rural. The table below shows total lodging revenue in Marion County from 2004 through This data is based on lodging taxes collected by the State of Oregon. In Marion County during this period there were a low of 57 to a high of 61 lodging facilities reporting their revenue to the State. In 2012 there were 61 facilities. Table 2: Lodging Revenue Marion County ( ) As depicted above the hotel industry in Marion County went through a period of rapid growth from 2004 to 2007 and demand peaked in During this time the market grew at an average compound rate of 12% per year. It is unlikely the market will experience this level of growth in the next decade. In 2008 the market began to decline due to the recession, decreasing to pre-2006 revenue levels in After 2009 lodging demand again began to accelerate, albeit slowly. The annual compound growth rate from 2009 through 2012 was 2.34%. Historically during this nine-year cycle the average compound growth in total lodging revenue was approximately 4% per year, which is also the approximate amount of growth that occurred between 2011 and Thus, current trends indicate that the market has stabilized and demand is likely to increase at approximately the historical rate of 4% per annum in the foreseeable future. Page 4

5 Seasonal patterns over the historical nine-year period have been relatively consistent. Average revenue reported by quarter over the last five years is as follows: Table 3: Lodging Revenue by Quarter; Marion County (Average ) As a market area, Marion County is geographically too broad. The City of Salem is considered a more realistic competitive market area. Historical hotel trend data was obtained from Smith Travel Research (STR) for Salem to provide a more precise measurement of hotel performance over the last six years. The STR sample contains 18 hotels/motels with 1,609 rooms. It is estimated this sample represent approximately 83% of the total lodging room inventory within the Salem city limits. The following shows the lodging facilities that were included in the survey, plus the additional inventory (three hotels) that were not included. This inventory does not include bed and breakfast hotels. Page 5

6 Table 4: Lodging Inventory; Salem, Oregon Generally speaking the lodging inventory in Salem is old. In the last 14 years, since 2000, only 369 rooms have been added to the inventory, an average of 26 rooms per year. Over half of these rooms are in the Grand Hotel that opened in the spring of Only 86 rooms have been added since 2005 (Hampton Inn in 2012). The boom time for hotel development in Salem was the 1990 s when 831 rooms were constructed which equates to approximately 43% of the total inventory. Average annual hotel occupancy in the Salem market is low, averaging only 58.5% in 2013, suggesting an oversupply of hotel rooms. ADR (average daily room rate), which is also low, is a direct reflection of this low occupancy rate. A stabilized market will generally average approximately 70% to 80% annual occupancy, at which time the room supply is unable to accommodate room demand at certain times of the year, resulting in unaccommodated demand when some individuals at certain peak times are unable to secure accommodations in the market because all of the local hotels are full. Unaccommodated demand, as it increases, eventually triggers new hotel development. High season occupancy is also important to ensure adequate facilities are available to accommodate peak demand. In 2013 hotel occupancy in Salem was lowest in January and February, 40.6% and 49.6% respectively. The highest occupancy months were July (70.3%) and August (76.2%). Page 6

7 Table 5: Salem Lodging Market Performance ( ) As shown above, in 2012 and 2013 the market began demonstrating positive signs of a turnaround. Occupancy increased nearly 7% in 2013 and beginning in 2012 ADR, revenue, and room night demand all increased significantly. FUTURE LODGING DEMAND Table 6 below shows the projected demand for additional hotel rooms in the Salem market over the next ten years, assuming the market grows an average of 4% per annum and that market stabilization is reached at 75% when supply and demand is in balance. At an average annual occupancy of 75%, peak demand in the month of August is projected to reach approximately 87%, which will still provide an adequate inventory to accommodate the market. Table 6: Projected Lodging Demand; Salem ( ) The analysis shows a demand for an additional 300 rooms over the ten year forecast period, beginning in approximately seven years (2020). Three hundred rooms will support approximately four new lodging facilities. It is possible one or more new hotel products could be developed sooner than 2020 in anticipation of a potential supply-constrained market, depending on the rate of growth in room night demand. Page 7

8 WEST SALEM HOTEL OPPORTUNITY ASSESSMENT FEASIBILITY In urban areas there are three basic types of locations that are considered suitable as sites for transient lodging facilities: Locations near transient demand generators that have brought visitors to the area. In the case of Salem the most important demand generator is the State Capitol, followed by Willamette University, conferences at the Grand Hotel, private businesses in the downtown and other major employment centers, and, to a lesser degree, the State penitentiaries. In larger cities, airports are important hotel demand generators. However, because of the smaller size and limited service of the Salem airport, this transportation facility is not a significant market generator. Locations on or near transportation corridors. I-5, Market Street, the Salem Parkway, between Keizer and Downtown Salem, and the other major thoroughfares in east of the Willamette River are the most obvious choices for hotel locations, particularly limited service hotels. Locations near restaurants, shopping, and entertainment. Downtown Salem and Lancaster Drive, east of I-5, in and around the Lancaster Mall, are currently the only locations that meet this criterion. A further consideration is access, visibility, and the quality and character of the general neighborhood and surrounding land uses in which a lodging facility might locate. Currently the West Salem study area does not meet the criteria outlined above. Highway 22, which is the primary highway between Salem and the Oregon Coast, is the only transient transportation corridor through West Salem. Access and visibility into West Salem from Highway 22 is not particularly good and the amount of transient traffic on Highway 22, from travelers who live a substantial distance from Salem and might be seeking over night accommodations, is limited. The new bridge, and better access into West Salem could mitigate current conditions to some extent. West Salem is not a significant employment center with companies or institutions that might attract business visitors or conference attendees. There are limited retail services, restaurants, and cultural facilities in West Salem, and those that do exist cater to West Salem residents. Today the character of the neighborhood is not sufficiently upscale to make the area a logical choice for a hotel. Although Wallace Marine Park, with its softball tournaments is a transient demand generator, these tournaments only take place for approximately 60 days out of the year, primarily in the peak summer months when hotel occupancy is relatively high anyway. This amount of traffic will not support a hotel without other sources of business, particularly in the low occupancy winter season. West Salem therefore is at a competitive disadvantage with respect to a location for lodging facilities, as locations east of the Willamette River are in closer proximity to the hotel demand generators and major transient corridors. Although the regional hotel market is projected to continue to grow at a relatively modest rate of 4% per year over the next decade, the market is oversupplied and there will most Page 8

9 likely not be sufficient additional demand to justify new hotel construction for another seven to eight years. Once the market is stabilized, West Salem will still be at a competitive disadvantage to the rest of Salem. The Salem CBD is in a better location to capture commercial and meeting business generated from government, institutional facilities, and private business. The Grand Hotel in the Salem CBD should have adequate capacity to serve the demand for conferencing business far into the future. West Salem also cannot compete with the limited service hotels clustered in and around the interchanges on I-5 and other major thoroughfares carrying the bulk of transient traffic through and into the area. This competitive disadvantage is further exacerbated by poor access and visibility into the study area from Highway 22, the primary thoroughfare for any transient traffic passing through West Salem. PRODUCT RECOMMENDATION Without a massive public subsidy, a lodging facility in the West Salem District is not feasible under current conditions and should only be viewed as a future, following land use, not a leading land use, with respect to redevelopment of the District. The future feasibility and timing of any type of hotel in West Salem will directly depend on the pace in which the West Salem District redevelops and matures, takes on the characteristics of the locational criteria outlined above, and therefore becomes competitive with other areas in Salem. The quantity, quality, and character of future redevelopment in West Salem will shape future hotel demand in the district. Assuming future redevelopment of the West Salem District results in the area becoming much more competitive, with respect to lodging facilities, it is possible there could be a niche hotel product that could circumvent overall market demand. The hotel product that would be most suited to the neighborhood would be a destination hotel where rooms are booked in advance, rather than a hotel that depends on exposure to transient traffic in the area. An extended stay hotel may be the most logical choice for West Salem. Access and visibility from a major thoroughfare will continue to be a problem for a hotel in West Salem, but extended stay hotels tend to be a destination hotels with reservations booked prior to arrival. The average length of stay for this type of lodging facility is 10 days, which is a much longer stay than other types of hotels. Upper tier extended stay hotels cater primarily to white-collar business travelers. However, a future need for a more economical lower tier extended stay hotel could develop as the area transitions into a more attractive urban environment. Currently there are only two extended stay hotels in the Salem market; Marriott Residence Inn; 640 Hawthorne Ave. SE (upscale class; 90 rooms) Crossland Economy Studios; 3535 Fisher Rd. NE (economy class; 129 rooms) There could be a future for a midscale class extended stay hotel product that would not be directly competitive, with respect to price point, to either of the two extended stay hotels shown above. Page 9

10 APPENDIX A SELECTED HOTEL GROUPS AND ASSOCIATED BRANDS Starwood Hotels and Resorts Sheraton Four Points by Sheraton W Hotels Aloft The Luxury Collection Le Meredian Westin Element by Westin St. Regis Marriott Hotels and Resorts Marriott JW Marriott AC Hotels by Marriott Courtyard by Marriott Residence Inn by Marriott TownPlace Suites by Marriott Marriott Execu Stay Fairfield Inn and Suites Springfield Suites by Marriott Ritz Carlton Bvlgari Edition Autograph Collection Renaissance Hotels Gaylord Hotels Hyatt Hotel Corporation Hyatt Park Hyatt Grand Hyatt Hyatt Regency Hyatt Place Hyatt House Andaz Hilton Hotels and Resorts Hilton Hotels Waldorf Astoria Conrad Hotels and Resorts Doubletree by Hilton Embassy Suites Hotels Hilton Garden Inn Hampton Inn Homewood Suites by Hilton Home2 Suites by Hilton Wyndham Hotels and Resorts Wyndham Grand Wyndham Garden Hotels Tryp by Wyndham Wingate by Wyndham Hawthorne Suites by Wyndham Microtel Dream Hotels Planet Hollywood Hotels Ramada Worldwide Night Hotels Baymont Inn and Suites Days Inn Super 8 Howard Johnson Travelodge Knights Inn Page 10