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Do you have what it takes for the motel biz?

From the Ground Up

If you own property near the intersection of a four-lane highway, you might have just what a motel developer is looking for.

It’s hard to drive 50 miles on any four-lane highway in Mississippi and not see a relatively new, mid-sized (40-60 unit) motel. Most bear a national name brand and are in the mid-price category. When economic times are good, new motels sprout up like red clover along the interstate. In this column, we will discuss some things to be aware of if a property owner is considering a motel development and what things a consultant looks for when doing a motel feasibility study. In our discussion let’s use as an example a site that is located in a community of approximately 25,000 residents near an interstate highway.

To begin with, it should be noted that most motels are built and operated by franchisees, not the motel chains. The name brand motels are in the franchise business, not the real estate business. It is the local developer who will be the property owner, who will secure financing for the project and who will be responsible for the success or failure of the motel. The franchisor provides training, branding, a reservation system and general product support. In my opinion, it would be foolish for an individual to own and operate a mid-size, highway motel independent of a national franchise.

The motel business is strongly influenced by the national economy. When the economy is good there are more travelers on the road. Business travelers are making calls and attending meetings, vacationers increase in number and trucks are delivering more products. A motel feasibility consultant will first begin by reviewing national economic trends.

The consultant’s next step is to gather local data on economic trends of the local community and on the motel industry in the area. The Department of Transportation can provide traffic counts in the area. The local traffic counts should be compared with national economic data. Typically, there is a strong correlation between interstate traffic counts and the national economy (gross national product, for example). Often there will be an above-average increase or decrease that needs to be explained. For example, when the Olympics were held in Atlanta and the World’s Fair was held in New Orleans, there were above-average traffic counts on Interstates 55 and 20. Although the local economy should also be looked at, it typically will not be given as much weight if the property is at the interstate exchange. It is quite possible that an interstate highway exchange with three motels is two miles away from a sleepy little town that hasn’t otherwise grown over the past few years. Nevertheless, if the local community influences the motel traffic, its economy should be analyzed. The most important local data can be found at the State Tax Commission. That data is sales tax collections by hotels and motels. A review will reveal what the trends are in the motel segment of the local economy.

Now for the legwork. The consultant will analyze the existing supply of motels to determine condition, occupancy rates and market share. Condition is best determined by actually spending the night and making observations. Determining occupancy rates is a little trickier since most motel managers are probably going to tell a consultant where he or she can go if asked to reveal the motel occupancy rate. One way to determine the occupancy rate is a late night parking lot survey. The consultant actually counts the vehicles in the lot, making note of whether the tag is local or out of the area. This will provide a good idea of whether the motel is pulling customers from the local area or the interstate. Circumstances vary for each study, but generally there is one room occupied per vehicle. Therefore if a parking lot has 40 cars at midnight there are probably 40 rooms occupied. If the motel has 50 rooms, then the occupancy rate for that date is 80%. A good survey will include numerous surveys on different nights of the week.

Now it’s time to determine market share. This is done by adding all of the occupied rooms at each motel and comparing the number to the total rooms. For example, if there are 120 occupied rooms in the area, and Motel A has an average 40-room occupancy rate, then Motel A has a market share of 30%.

Estimating demand is more art than science. There are two fundamental questions to be addressed. First, if there was no increase in the total number of rooms occupied, how many rooms per night would a new motel capture? Secondly, how much increase in total rooms demanded would occur if a new motel were built? Naturally, the type of motel and price of rooms would need to be factored in. Such analysis is beyond the scope of this column.

The consultant will then prepare a pro forma analysis and test feasibility. By the way, feasibility is determined by the client, not by the consultant. One client might require a certain cash flow or return on investment that is different from another client’s requirements.

Consultants who perform feasibility studies play a vital role in the process of developing a motel property. And with today’s hot economy, look for the motel construction boom to continue.

Phil Hardwick’s column appears regularly in the Mississippi Business Journal. His e-mail address is hardwickp@aol.com.

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