March 19, 2019
Mention the words “Opportunity Zone Program,” and what could come to mind are billions being funneled into projects ranging from renovation of run-down retail, to construction of affordable housing. In reality, the Opportunity Zone Program impacts all real estate — including hotels.
A recent article in “Hotel News Now” pointed out that, on the one hand, Opportunity Zones provide a great benefit for investors and developers wanting to build, or owners and managers wishing to upgrade their facilities. At least, as long as those properties are situated within the government-mandated Opportunity Zones.
And, that is the issue, especially for those in the hospitality industry. Because the zones are typically within low-income areas, this could mean fewer demand drivers in the area for hotel projects. At least, over the short-term.
Jan Freitag, senior vice president of lodging insights at STR, noted that hotels in urban areas don’t generate their own demand. Rather, they piggy back on the demand created by offices or other generators. In other words, putting a hotel in an Opportunity Zone, in and of itself, likely won’t generate a whole lot of revenue.
However, building or redeveloping a hotel in an Opportunity Zone, in which offices or other demand generators have been built, might. Basically, the benefit of this type of hotel development would likely take place during a second wave, after other demand-generator real estate is built and operational.
“ . . . if you can find a location that is close to a demand generator, or close to non-Opportunity Zones so you could still take advantage of the tax breaks, but with the expectation the market will grow in your direction . . . I could see local hoteliers taking advantage of this,” Freitag told “Hotel News Now.”
And, that is for the primary markets and urban cores. Freitag added that, development too early in secondary and tertiary markets without established demand drivers, could be hugely risky, “as severe as foreclosures,” he said.
Those demand drivers can include the following:
- Commercial demand, consisting of business travelers and high-volume corporate accounts.
- Meetings and groups, such as conventions, seminars or trade-association shows.
- Leisure segment, which focuses on vacation or holiday travel. However, leisure demand depends on the amount of disposable income.
One developer, Peachtree Hotel Group, is designing and building properties situated within Opportunity Zones. Two of the under-construction projects are in St. Louis and Plainfield, IN. The company began the projects before awareness of the Opportunity Zone program. It was a fortunate coincidence that the developments were in the designated zones. “Most were there because they stood on their own,” Peachtree Hotel Group CEO Greg Friedman told Hotel News Now. He added that, even had the Opportunity Zone program not existed, the projects would have made sense for the company.
For comments, questions or concerns, please contact Amy Sorter