It’s generally accepted that hotel development, investment and acquisition follows three basic steps:

1. Identifying market areas that show long-term potential for hotel investment;

2. Choosing a lodging product that takes advantage of the dynamics of the local supply and demand characteristics; and

3. Searching for and selecting a suitable site.
While a host of secondary data exists today that provides primary and secondary data of characteristics of lodging markets for the benefit of hotel investors, a systematic and formal analysis of aggregate market potential can be a useful tool for various parties.

To assist in that process, we developed an objective measure in the form of the Lodging Market Potential Index. L-MPI was developed as a joint project between The School of Hospitality Business at Michigan State University and globalEDGE. The pilot version of the Index was presented at one of the general sessions of the Midwest Lodging Investors Summit in July in Chicago.

DEVELOPMENT OF THE INDEX
As a first step in hotel development, investment and acquisitions decisions, the Index enables hotel developers and investors to conduct a relative comparison of the 25 largest lodging markets (as tracked by Smith Travel Research) along several dimensions. Each dimension is measured using indicators and is weighted to determine its contribution to the overall market potential index.

Members of The School of Hospitality Business Real Estate Advisory Board were instrumental in working with The School's faculty in determining the 10 dimensions, associated indicators and their corresponding weights.

Based on feedback from John Weeman of Partners in Development and a panelist at the MLIS session, this collaborative effort is typical of The School's applied research agenda by bringing together industry professionals, academic researchers and students to create innovative and cutting-edge research and establish new professional standards for the industry. The resulting Index will publish and track these relative performance rankings of the lodging markets on a regular basis.

DIMENSIONS
Dimensions were developed based on which factors would make a particular market attractive for a hotel investment or development. The resulting 10 L-MPI dimensions were broadly divided into those that measure the health and economic vitality of the market, market consumer trends and performance of commercial real estate and those that measure the performance of the hotel market.

The three dimensions carrying the most weight (17 to 20 percent each) are hotel market performance, hotel market performance growth and hotel market supply and absorption. The combined weights of these three dimension total 57 percent. Dana Jacobsohn, vice president of development planning and feasibility at Marriott International, says these weightings are similar to those used in feasibility studies at Marriott.

INDICATORS
We identified several objective, credible, reliable and quantifiable indicators to measure the performance of each dimension. The number of indicators by dimension varied from a single indicator to four indicators. For example, the three indicators for the hotel market performance dimension are annual ADR, occupancy percentage and RevPAR. Five of the 10 dimensions have four indicators, while at the other extreme, two dimensions—tourism trends and growth in tourism—each have a single dimension: enplanements and growth in enplanements, respectively.

The final selection of the indicators was ratified by the real estate advisory board but primarily reflects the major data sources used by hotel investors and developers in their investment due diligence. As stated earlier, the sources of indicators as stated earlier included the most commonly used references from both government and private sources. The numbers used for the three indicators for hotel market performance were from Smith Travel Research.

THE PILOT INDEX
Sixteen cities included in the pilot index are all part of the top 25 markets featured by Smith Travel Research in its STR Monthly Hotel Review. Though only 16 cities are included in the initial index, the final version will include all 25 markets tracked by Smith Travel Research.

The number-one city in the Index based on the 10 dimensions and 30 indicators is New York City. Tied for second are San Francisco and Miami and followed closely by Houston. The top three markets are gateway cities, while the bottom three markets of the 16 are in the upper North Central region of the U.S., which appears to be hardest hit by the current and on-going recession.

THE TEAM APPROACH
This effort and the planned on-going efforts would not be possible without the cooperation of many professionals. Dr. Tunga Kiyak from Michigan State University's International Business Center was most helpful in designing the mathematical equations resulting in the L-MPI. Michael Kitchen, Michigan State University hospitality and real estate specialization 2009 graduate, worked closely with the faculty researchers to develop the index and MLIS presentation.

The advisory group consists of 42 individuals involved in hospitality real estate. These individuals were most helpful every step of the way. John Weeman, (Partners in Development), Phillip Hutchins (Amstar Group), Adam McGaughy (Jones Lang LaSalle Hotels), and Dana Jacobsohn (Marriott) were panelists at MLIS, where they discussed the L-MPI development process and the initial index.

In conclusion, a quote from Adam McGaughy, executive vice president of Jones Lang LaSalle Hotels and MLIS panel member, succinctly captures the potential value of this new investment analysis tool: “The LPMI is an effective tool in that it provides users with a quick gauge and peer ranking of major markets. It factors in industry standard STR data, as well as several key economic and demographic trends, providing a robust view. Moving forward, this tool can become even more powerful by expanding beyond the top MSAs to specific submarkets where users can make more informed investment decisions.”

Raymond S. Schmidgall, Ph.D., CPA, is the Hilton Hotels Professor at The School of Hospitality Business at Michigan State University. A.J. Singh, Ph.D., ISHC, is an associate professor at The School.