Hotel performance, development rev up in Motor City

Posted on February 8, 2017

Sources said Detroit is making a comeback with its acclaimed F&B scene, adaptive-reuse hotels and corporate business.

DETROIT—Historic buildings, an acclaimed food-and-beverage scene, and business from major sports and the auto industry: All of these factors combined make now a good time to be a hotelier in Detroit.

Chris Green, COO at Chesapeake Hospitality, said he was pleasantly surprised when he visited the Detroit Airport Marriott. Chesapeake assumed management of the hotel in October 2016.

“When we do our pre-takeover procedures, we do really deep dives into the hotels and the markets and what’s going on,” he said, “and what we found, because it really wasn’t on our radar prior … (we found) there’s really a lot going on in Detroit, and quietly, Detroit is making a big comeback.”

Michael O’Callaghan, EVP and COO of the Detroit Metro Convention & Visitors Bureau, said hotels in Detroit are “highly dependent on corporate base” because there is an “office for every auto company in the world” in or near Detroit. He added that there has been a greater number of leisure visitors who want to know what’s going on in the city.

The Shinola Hotel in Detroit, Michigan, broke ground on 31 January and is slated to open in 2018. (Rendering: Kraemer Design Group)

“The number of visitors has grown consistently since 2009,” O’Callaghan said. “(Our) most recent study shows visitor counts have increased from 14.176 million in 2013 to 19 million in 2016.”

In year-over-year comparisons for December 2016, occupancy in Detroit rose 0.3% to 65.7%, according to data from STR, Hotel News Now’s parent company. Average daily rate increased 3.5% to $97.43, and revenue per available room rose 3.8% to $64.04.

Green added that corporate transient business is growing in Detroit.

“And what that means is either sales people or representatives of major companies are traveling to the market,” he said. “You see these big consultancy firms, and that’s because business is either about to take place or is taking place or they’re revising strategy, but when you see that happening in markets, that’s kind of a leading indicator that you’re going to have a wave of new business.”

December 2016 pipeline data from STR show a total of 6,611 rooms in 63 projects coming into the Detroit market. There are 1,662 rooms in 16 projects under the in construction phase, 3,039 rooms in 29 projects in final planning and 1,910 rooms in 18 projects in the planning phase. Detroit has an existing supply of 42,833 hotels, and of that number, 1,258 hotels have recently opened.

Historic renovation opportunities
Historic renovations via adaptive reuse have become a popular option for hotel developers in the market, said Bob Kraemer, principal at Kraemer Design Group. KDG is the architect and historic consultant for the Shinola Hotel, which is scheduled to open in fall 2018.

“(Historic renovation) is a new thing, but right now, (it’s an) extremely popular direction,” he said. “There’s probably four or five historic building conversions that are being converted into hotels.”

Examples of historic renovations in the city include the soon-to-open Foundation Hotel, the Aloft Detroit at the David Whitney and the Element Detroit at the Metropolitan Building. Kraemer said all of these projects have a couple things in common.

“The developers like the adaptive reuse of historic buildings because of the historic tax credits that are available, so there’s a large financial incentive to do it,” he said. “Because it’s a commercial use, oftentimes there are other tax credits that may be available as well.”

The 130-room Shinola Hotel will have 17,000 square feet of F&B and activation space, according to Dan Mullen, EVP at Bedrock Detroit, the company developing the hotel. The hotel, which is scheduled to break ground on 31 January, is both an adaptive-reuse and a new-construction project.

“A parking lot that was a surface lot right behind the building, we’re going ground up on and connecting it over through a beautiful enclosed bridge,” he said. “For us, it was about finding a great location for a hotel, but that’s coupled with beautiful architecture that helps speak to the brand.”

Mullen could not give the exact total cost of the project, but he said that approximately 20% of the construction cost was covered by historic tax credits.

Demand drivers, submarkets
Hoteliers have found success in developing boutique hotels via adaptive reuse in Detroit, but they’ve also found opportunities in Detroit’s F&B market.

“Hoteliers are realizing there is a very, very strong food-and-beverage market in Detroit,” Kraemer said. “… You’re seeing it almost every week that a new restaurant’s opening. They’re all very unique, but they’re not national brands. … Those in fact don’t last, but there are all of these unique, truly homegrown products, and they do very well.”

John Murray, president and COO of Hospitality Properties Trust, said Detroit and most of its submarkets see business from the auto industry, tech companies, health care, education and sports. HPT owns hotels in markets around Detroit including Ann Arbor, Southfield, Troy, Warren, Farmington Hills, Novi and Utica.

“The hotel landscape is generally good, although you always have to watch for supply growth,” he said. “There has been fast growth in the tech sector with research and development on many computer systems related to cars and trucks to help them offer more bells and whistles. … But government, education, health care, retail and other demand drivers like sports and entertainment continue to drive visitation.”

Kraemer said there also is a lot of excitement surrounding Detroit’s professional sports teams because a new arena is being built for the city’s NHL team, the Detroit Red Wings. With the recent announcement that the Detroit Pistons NBA team is moving back from the suburbs, all four of the city’s major sports teams will be located downtown.

Other opportunities
With everything that’s happening in the city, sources said, it’s clear that Detroit is a market of opportunity for hoteliers.

“The hotel folks are certainly seeing opportunity,” Kraemer said. “And it’s opportunities that in other major cities don’t exist because those flags are already there. So from a brand, we keep on hearing, they love the idea of Detroit because there’s opportunity. For instance, there is no extended-stay property in downtown Detroit. You can’t think of a major city that doesn’t have an extended-stay property.”

Green said people in the city have made it easy for Chesapeake to be successful as a new management company in Detroit.

“The people are great,” he said. “Solid, hardworking, hospitable, friendly people. You would think that in a city like that you would have trouble finding good people; nope, (there are) lots of great people.”