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San Francisco, New York, Oahu Rated Tops For Lodging Market Potential

L-MPI Uncovers Differing Performance Drivers for Each City

San Francisco, New York City and Oahu top the latest Lodging Market Potential Index, a ranking of the 25 largest lodging markets in the U.S. by long-term potential for hotel investments. The three cities maintained their ranking from the last publication of the L-MPI. However, in analyzing the three cities, the drivers of their ranking differed slightly based on the dimensions and related indicators of performance.

While all three scored very high in terms of hotel market performance (occupancy, room rate and RevPAR), other underlying indicators influencing market ranking differed between these markets. In the case of New York, its large economic base, market consumer purchasing power, tourist trends and commercial real estate performance had a very strong impact on its ranking. On the other hand, the city continues to add hotel rooms to the supply, most of which seem to be well absorbed.

For San Francisco, in addition to its market performance, the city’s overall growth in hotel market performance for the past five years, market consumer purchasing power, tourism growth and commercial real estate performance were key influencers on the index scores.

The underlying factors influencing Oahu’s ranking were its very strong market performance growth for the past five years, strong commercial real estate performance, limited growth of new hotel supply and a relatively stable macro-economic environment. It’s also notable that Oahu moved up in ranking from 7 in 2010 and has maintained its overall rank of 3 since last year.

The Lodging Market Potential Index as a systematic and formal analysis was developed in 2009 as a joint project between The School of Hospitality Business, MSU-CIBER, and globalEDGE to identify aggregate market potential and ranking for major lodging markets in the U.S. Faculty researchers from The School of Hospitality Business at Michigan State University have published the index annually and presented it at investment conferences for the past three years. Based on user feedback, the index is recognized by those in the hotel investment community as a reference tool for the long-term market potential for hotel investments.

Beyond the Top Three
When it was first covered in the Index in the spring of 2010, New Orleans ranked a dismal 22 in overall market potential, an obvious aftermath of Hurricane Katrina in 2005, which devastated the city’s economic base and tourism infrastructure. However, by the summer of 2010, the city’s ranking improved to 17, which it maintained until last year. However, New Orleans is definitely on a very strong comeback trail as its market potential ranking has propelled it to the 4th place in the overall L-MPI ranking. This surge has been strongly influenced by a very strong growth in its economic base, tourism traffic and market performance.

Boston maintained its ranking in the top five markets; however it slipped from 3rd in the summer of 2010. The market’s primary drivers are a strong base of consumer purchasing power and a high relative growth in hotel market performance for five years. However, its hotel market supply absorption and weakening commercial real estate market have an impact on its ranking and something market watchers may want to monitor, as they may be red flags. A parallel case market watchers may want to compare is Denver, which was ranked 4 on the index last year but has since dropped to 9, influenced by lower hotel room absorption and a weakening commercial real estate market, despite having strong tourist growth numbers for the past five years.

Houston has also enjoyed a major resurgence. It was ranked 21 in 2011 but rose to number 7 in 2012. While its hotel market performance is still relatively low, it has shown marked improvement in hotel market performance growth, commercial real estate performance and hotel market supply absorption. All these point towards a resurging market. Nashville has moved up in ranking from 14 to 8 in 2012, mainly due to constrained hotel supply and strong performance in real estate markets. This has helped its long-term market performance growth ranking. Furthermore it should be noted the summer floods of 2010 would have impacted the city’s performance in 2011, when its ranking dropped from 10 (in 2010) to 14 in 2011. Therefore, the 2012 market rank appears to be closer to its 2010 rank of 10.

Downward Movement
Several lodging markets— Denver, Los Angeles, Chicago, Seattle, Washington DC, Philadelphia, Minneapolis and Dallas—had negative shifts in their ranking, ranging from -1 to -5. However, two markets, Norfolk and Anaheim showed major negative shifts in their ranking of -8 and -9 respectively. In the case of Norfolk, this was surprising as we reported an improvement last year from rank 25 (2010) to rank 15 (2011). However, this year Norfolk ranked near the bottom at 23, a change influenced by a low growth in tourist arrivals. In the case of Anaheim, all market performance and underlying indicators turned negative in 2012, hence a drop of nine points in its ranking from 12 to 21.

More on the L-MPI
The School of Hospitality Business publishes the Lodging Market Potential Index annually. The overall scores and city ranks are a function of the 10 dimensions and 30 indicators. We have attempted to analyze a select number of cities to illustrate a way to interpret the index. A detailed review of all the cities in the index is available at the L-MPI website. The interactive feature of the Lodging Market Potential Index allows you to rank each city based on the ten dimensions identified that impact the overall ranking.

A.J. Singh, Ph.D., ISHC, is an associate professor in The School of Hospitality Business at Michigan State University. Ray Schmidgall, Ph.D., CPA, is the Hilton Hotels Professor at The School, while Meghan Clark is an L-MPI Project Research Analyst.

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