By this point in the recovery cycle, the hotel industry's winners and losers in the pandemic are clear to see: Extended-stay hotels thrived without stumbling, while many hotels located outside of the urban core markets managed to contain costs and gradually return to profitability.
However, in the midst of the summer months of 2020 and 2021, an interesting thing happened. All across the U.S., tertiary markets experienced a boom in bookings from drive-up business. Hotels served guests a much-needed break from the monotony of the pandemic, and reminded many travelers about what is hidden in their backyard.
The question then remains: Can tertiary markets sustain themselves following their brief time in the limelight? In the short term, many of these destinations are positioned to remain successful while their luster is fresh in travelers’ minds, but this will become more of a challenge as urban hotels become more active.
Bookings Overflow
Clearly, tertiary markets present an opportunity for new business in the post-pandemic hospitality landscape, but sustaining this business over a long period often comes down to the effectiveness of a property’s marketing team. Every market is only as good as its location, with secondary and tertiary markets relying on their proximity to large cities or other travel destinations to provide consistent bookings. Tertiary markets can create new business in 2022 and beyond by finding ways to redirect bookings their way when the increased desire for travel overflows.
A great example of this is the moment taking place within the suburbs outside of Detroit. Travelers across Michigan would typically be returning to the urban core for both leisure and corporate travel, but increasingly are choosing to disperse to suburban destinations which have grown popular during the rise in drive-up travel that took place during COVID-19. Without all of travelers’ interest focused in one place, hotels outside of Detroit are experiencing one of their more active periods in years.
The challenge facing these tertiary markets is that they typically lack depth, and while there is often some room for additional room inventory, it may be limited. Developers should do a significant amount of investigation into a tertiary market to ensure it can support more rooms, or they risk creating a vacuum where none of the hotels in the area can succeed.
However, when the timing is right, there is potential for a hotel to grow alongside a market and propel itself into long-term success. When we developed the Hampton Chicago Dearborn, it was the first property to be developed in the area in six years. Over time, this area continued to see success, and today every corner of the market is rich with urban development.
That of course does not count urban markets out. The incredible growth in these markets since the first urban select-service hotels were introduced 25 years ago demonstrates the long-term viability of lodging in the major metropolitan area.
The question then becomes: Where’s next?
Construction Conundrum
The hotel industry grappled with fears of oversupply for years before the pandemic, and as more hotels continue to come online, these concerns will gradually return. Despite these fears, major markets such as Chicago have commenced with new hotel construction, even as urban hotels struggle to reach capacity. With so many rooms already available, and construction unlikely to cease, developers would be smart to scour secondary and tertiary markets for any available opportunities.
Tertiary markets also typically provide cost savings during the development process. The cost of shipping materials to a city center project is high and growing, with the cost of materials and the value of labor rising in equal measure. Cities also often come with additional considerations such as unionized labor, as well as the increased cost of storing and transporting materials in the event of disruptions. Tertiary markets also allow developers to deploy different construction methods or even materials in ways that can save on costs, such as different ways to build out of lumber versus an increased reliance on expensive steel in cities.
While supply-chain challenges are felt in equal measure across the U.S., the same cannot be said for the availability of labor and the demand for rooms. Some states were able to open earlier for leisure or corporate business than others based on COVID-19 mandates, which has affected their ability to provide construction service in some cases. Leisure travel demand has grown consistently in states such as Florida without relying on a heavy concentration on major cities.
Additionally, travel trends have impacted major markets in different ways, and factors such as the availability of transportation and the variety of nearby events or destinations outside of city centers all affect the ability of secondary and tertiary markets to sustain demand over long periods. Markets near university campuses, historical destinations and corporate offices are all examples of sustainable sources of hotel bookings.
Hotel developers across the U.S. are watching trends to see if urban hotel performance will improve, and when. In the meantime, travel is picking up and there are ample opportunities for new construction to meet demand where it is available. The major cause for concern at this juncture is whether or not the shift away from a focus on urban destinations will subside and set in motion a new business cycle — or if the industry will stay the course, truly setting a new normal.
Bob Habeeb is founder and CEO of Maverick Hotels and Restaurants.
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