Minnesota's hotel sector finally shows strength

  • Article by: DON JACOBSON , Special to the Star Tribune
  • Updated: September 11, 2011 - 8:28 PM

While occupancy and room rates are improving, business remains subject to the whims of the economy.

Minnesota's hotel sector posted impressive gains in the first half of this year, with room rates and per-room revenue showing real progress over the depressed first half of 2010, according to the bi-annual Northmarq Compass report.

The report predicted that 2012 will hold more of the same, with additional hotel sales and renovations -- and even some new construction -- in a Twin Cities market that's drawing interest from investors around the country.

"Things are really starting to happen in our hotel market," said Jen Helm, a vice president in Northmarq Real Estate Services' retail brokerage and author of the report. "Hotel properties are back on people's radar again."

It's been a rough several years. One of the extreme down cycles came during the early months of 2010, when many hoteliers were reporting their worst business in memory. Then, in a flash, that changed last summer, when the exact opposite happened: Hotel owners said they were experiencing some of the best numbers ever.

The most important measurements in the hotel business are average daily rate per room, or ADR, and revenue per available room, or "RevPAR." Both categories took substantial jumps in 2011 compared to the depressed year-earlier figures. Twin Cities' hotels posted a 2.6 percent increase in ADR to $91.26 and a 10 percent increase in RevPAR to $53.46.

Helm predicted that the local hotel market will overcome lingering weak consumer spending and job markets to equal room rates and RevPAR levels last seen in 2008, before the recession.

One thing that will help the industry reach those goals is that there has been little-to-no new construction.

"Lack of development ... [has] helped to drive the occupancy and room rates up," she said. "Now we'll start to see more hotel development happening in the metro. People are looking at good sites -- well-positioned pieces of real estate closer in to the center rather than out in the third-tier suburbs."

In the meantime, the cities' top-tier hotel properties have been changing hands and undergoing renovations, indicating confidence by deep-pocketed investors able to ride out the volatile demand spikes and bet that demand from travelers will stabilize in 2012.

Some of those major deals include:

The 533-room Hyatt Regency on Nicollet Mall in Minneapolis, one of the largest in the Twin Cities, was bought by a joint venture of Haberhill, Starwood Capital Group and Hyatt Hotels Corp., in March and will undergo a $25 million renovation.

The Sheraton Bloomington became a Doubletree, with a $12.5 million renovation in the works. The 564-room hotel was purchased for $20 million this year by Platinum Equity of Los Angeles.

In February, the 430-room former Holiday Inn near the Minneapolis-St. Paul International Airport was re-flagged as a Crowne Plaza Hotels & Suites by owner Associated Hotels, which invested $2 million in upgrades.

WelshInvest and RegencyInvest completed a major renovation of the 211-room Best Western Plus Bloomington Hotel, two years after buying the 165,000-square-foot facility next to the Mall of America.

Carlson Cos. has indicated that it plans to turn its downtown Minneapolis flagship Radisson Plaza Hotel into an upscale Radisson Blu in a major upgrade.

The big money being spent by hoteliers at the top of the market is in response to an increase in both business and leisure travelers so far this year, Helm said, adding that businesses are cautiously boosting their travel budgets while vacationers are taking advantage of discounts.

"The REITs [real estate investment trusts] are going after the trophy hotel properties and they're willing to pay a high price for them, even if they need facelifts," she said. "Travelers now expect more for their money -- five-star treatment for a discount price. Hotel owners have to meet those expectations."

Because business picked up considerably in the second half of last year, hotel consultant Ted Leines of Eden Prairie-based Leines Hotel Advisors Inc., said he expects the full-year ADR and RevPar improvements over 2010 to be more moderate than the strong gains showed in Northmarq's half-year comparison.

"They're skewed a bit because the first half of 2010 was so horrible," he said. "The 10-percent jump in RevPAR looked good because it was being compared to a very sick patient. I think we're going to end this year with RevPAR up 6 percent -- good [but] not enough make up for the losses from the recession."

Volatility in demand is a problem, he said. With the economy not sufficiently recovered to create job growth, any bit of economic news can trigger changes in travel budgets and cause huge swings in demand.

"The big hotels are benefiting from the convention business, but the smaller hotel owners are in a bind," he said. "The public is demanding upgrades but they can't afford to make them because they can't predict where demand is going to be even weeks from now."

The popularity of smartphones is making the hotel business even tougher to predict, Leines said, because leisure travelers are now booking reservations while already on the road instead of making them well in advance, removing hoteliers' ability to adjust rates.

"It's driving them crazy," he said. "It used to be that only 8 to 10 percent of business were walk-ups, and now it's 30 percent in some cases," he said. "They don't have the chance to prepare for big crowds or a drop in business."

Don Jacobson is a St. Paul-based freelance writer.

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