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Indiana lodging; the state of the hotel industry.

INDIANA LODGING The state of the hotel industry

The last decade has been a period of unprecedented growth in the lodging industry worldwide. Indiana has emerged with a reasonably healthy and varied stock of hotels statewide. Indiana presents an interesting case study, not only in hotel development through this last decade but of real-estate development and civic planning as well.

While downtowns from Peoria to Pittsburgh dried up and blew away, the city of Indianapolis quietly planned and orchestrated its eventual resurrection. In an extraordinary example of foresight, the Unigov legislation that was drafted in the '60s extended the city limits to contain the bulk of suburban development so that the city's tax base would be preserved.

As the urban blight of the '70s rolled over Indianapolis, the unsung sugar daddies of the city quietly got out their checkbooks. They purchased and demolished obsolete housing and industrial space and warehoused that land until the time was right for master planning. As a result of this extraordinary leadership, the city of Indianapolis is positioned today as one of the most attractive and squeaky-clean cities of its size in the Midwest, if not the entire country.

With the addition of the Indiana Convention Center, the Hoosier Dome and Union Station, Indianapolis has become one of the leading second-tier convention destinations in the nation. More than 4 million square feet of office space will open in 1989-90 in the downtown area alone.

It should not come as a surprise, then, that Indianapolis has seen the supply of hotel rooms triple since 1975, with representation from most national chains designed to fill every conceivable market niche. The percentage rate of growth in both the demand for and the supply of hotel rooms in Indianapolis has been in double digits for several years.

Other Hoosier cities have not been so fortunate. Evansville, Terre Haute, Lafayette and Fort Wayne have seen a few new properties develop. Occupancy has been generally soft, and growth in room rates has been sluggish. Gary and the Indiana lakeshore in general continue to be depressed and, with the exception of Merrillville, are served by aging, underutilized hotels.

In its favor, there have been few markets in Indiana that have overbuilt to the extent that those in other Midwestern cities or in the Sun Belt have. There have been few hotel failures, and these have been due primarily to problem locations and excessive leverage rather than market-wide malaise.

As in so many other aspects, Indiana is representative of national trends. In 1970 there were not many choices for the traveler. Towns large enough to warrant a national franchise felt fortunate to have a small, exterior-corridor motel with a swimming pool, restaurant and a small meeting room for Rotary.

Larger cities might have several of these types of motels and a major, full-service hotel - perhaps a Sheraton or a Hilton that often housed the area's fine-dining restaurant and a proper ballroom. Some of these properties, which were built in the '30s, were aging, grand railroad hotels with once-elegant lobbies, high ceilings and tiny guest rooms. These hotels generally were owned and operated by local business people and often financed by local banks.

Major cities, such as Indianapolis and Evansville, usually had several motel properties, some of which were developed to serve the burgeoning growth in suburban office space, a relatively new phenomenon. The Holiday Inn North in Indianapolis, for example, was developed when there wasn't much nearby - just a few office buildings in College Park and Interstate 465.

The '70s were sluggish for hotel development and innovation. Holiday Inn developed the Holidome to breathe life into its L-shaped exterior pool properties and to stimulate weekend demand from families and for social functions. With the deregulation of the airlines, business travel began to increase and chains such as Holiday Inn began to focus on segmented marketing and product development to court the expense-account traveler. King-bedded rooms with work areas and long phone cords were billed as King Leisures and aimed specifically at this affluent market.

But at the beginning of the '80s, something insidious was at work. During this period several forces were working dramatically to change the face of lodging in the United States:

* Inflation;

* Limited partnership real-estate tax shelters;

* Skyrocketing business travel;

* The aging of the hotels built in the '60s and before; and

* The recognition of opportunities for market segmentation in hotel development.

At the same time, real-estate syndicators began to create tax shelters based on the rapid depreciation of hotel furniture and fixtures, which were placed in limited partnerships and marketed to an apparently insatiable pool of savings and loan institutions, real-estate investment trusts and wealthy individuals.

Because hotels can change their rates rapidly and often, they represent an unusual opportunity to profit from inflation. Profits from office and industrial buildings, on the other hand, are based on long-term leases that lock in the owner's income streams for many years. As a result, hotels are attractive prospects for investment in periods of high inflation.

Business travel was also growing geometrically as the energy crisis created new centers of industry. Remember when the Sun Belt was thought to be the land of milk and honey? Atlanta, Silicon Valley and Miami all experienced explosive growth. In the Midwest things downtown were not so rosy but suburban office space development created huge markets for new hotel construction.

Business travelers during this period found they were not satisfied. They needed modern bathrooms, meeting rooms with high-tech audiovisual equipment, quiet lounges and in-room movies. They rejected shag carpet and Formica nightstands screwed to the wall. Hotel developers found out quickly that new hotels commanded a vastly disproportionate market share, even at higher room rates, because the new breed of business traveler was not nearly so sensitive to room rates as he or she was to larger, cleaner, more-modern rooms.

Finally, the industry determined that not all travelers have the same requirements. Many travelers have no need for restaurants within the hotel, meeting rooms or thick carpet. When these costly amenities were peeled away, the economics of operating hotels became very interesting. Due to lower construction and operating cost, the new product, the limited-service hotel, was substantially more profitable, even at significantly lower room rates.

At the other end of the market, all-suite hotels were conceived to create value by trading off ballrooms and fancy restaurants for larger, bifurcated guest rooms priced at a small premium over standard guest rooms. Moreover, the national franchisors discovered that they could locate these hotels adjacent to their existing middle-market hotels without excessive cannibalization of demand. Eureka!

Before you could say "Barron Hilton" the countryside was inundated with thousands of new hotels. These new hotel chains along with existing chains formed subsidiaries to develop and to operate their new products. Financing was relatively easy as lenders and investors lined up to participate in this real-estate gold rush. Independent management companies, often made up of chain-trained executives, proliferated. Ownership and management frequently were separate parties from out of town.

The result of all of this was over-building in many markets and a continuum of hotel products, each intended to meet the needs of more and more narrowly defined segments. We now have: hard budget, middle budget, limited service standard, limited service all-suite, club-court, middle market limited service, middle market ful service, first class or "business" hotels, convention hotels, luxury hotels, resorts, conference centers, megaresorts, luxury conference centers, conference center resorts - get the picture?

The hotel development boom is over. A few well-heeled developers will continue to fill in around the edges where they perceive underserved market segments. Inflation and limited partnerships for hotel investments are history (at least for the time being). Lenders and investors have become leery of hotels, and financing has become extremely difficult.

There is hope in some of Indiana's most desperate areas. In the northwest there is serious talk of both a third airport for Chicago and for casino gambling. Either of these alone would create extraordinary opportunities for lodging development.

In the '90s hotel operations will be the game. While demand is expected to grow slowly, many markets are at present below early 1980 occupancy levels and will take several extremely competitive years to recover. Look for the high level of management compensation in the hotel industry to change.

Most demographers predict an intense labor shortage in 19-to 29-year-old wage earners in the early to mid-1990s. Employees are the backbone of the hotel and food-service industries. Look for fierce competition for these workers. Also look for a change in the resistance to automation and new technology. The hotels that will survive until the year 2000 will be those that can attract and retain high-quality employees and that make use of innovative management tools.

PHOTO : The Auburn Inn: cookies and milk served every evening.

Mark Eble is manager in the hotel consulting group of Laventhol & Horwath, Chicago, an accounting firm that does market research and feasibility studies for the hospitality industry.
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Author:Eble, Mark
Publication:Indiana Business Magazine
Date:Dec 1, 1989
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