The Detroit hotel market currently ranks 23rd out of 25 metropolitan areas in Michigan State University’s (MSU) Lodging Market Potential Index (L-MPI©), but the news might not be all bad, according to Steve Marx, owner of Hotel Source, Inc., a Chicago-based real estate brokerage and advisory services firm. The index also indicates that Detroit’s tourism has been steadily improving over the last five years and its hotel market supply (room inventory) and absorption (new hotel pipeline) ratio is also relatively positive.

The index was designed by MSU’s School of Hospitality Business to identify the long-term potential for hotel investment in the top lodging markets in the U.S., ranking each location along 10 key dimensions. The dimensions – which include the size, growth, and stability of the economic base; growth rate and trends of tourism in the area; hotel market supply, absorption, performance and performance growth; and performance of commercial real estate – are measured using 30 different indicators. Each dimension is then weighted to reflect its contribution to the overall market potential index. The Lodging Market Potential is based on a scale of 1 to 100.

“A low ranking in MSU’s Lodging Market Potential Index does not mean a particular market has bad investment opportunities,” says Marx. “It might mean the opposite. Top-ranked cities have more buyer competition, resulting in lower capitalization rates and lower returns on investment. Many of the low-ranked cites can offer much more attractive investment opportunities.” Perhaps surprising to many, says Marx, is that the Tampa-St. Petersberg, Fla., area and the Phoenix, Ariz., markets ranked lower than Detroit in the index.

Michael Kitchen, associate for Paramount Lodging in Chicago, who along with Marx was one of six lodging industry experts who recently evaluated the Lodging Market Potential Index for MSU, agrees that Detroit has the ability to crack the top 20 in the coming years. “In the 2011 index, Detroit ranked first in Hotel Market Supply and Absorption, which measures future hotel supply versus change in hotel demand (occupancy). This is arguably the most telling dimension in the the Lodging Market Potential Index,” he says. “What it means is that, with demand returning and few hotels in the development pipeline, a market will have the ability to begin pushing rates faster than other markets.

“As a point of reference, in 2010 San Francisco ranked first in this dimension and this year San Francisco ranked first in Hotel Market Performance Growth and first overall in the 2011 index.”

While the web-based, interactive tool was originally devised as a teaching tool for students in The School of Hospitality Business, MSU researchers think it could help lodging industry developers and investors conduct a relative comparison of the market potential of various metropolitan areas.

Kitchen also believes that reading between the lines of the index can help investors and owners make educated predictions. “The Lodging Market Potential Index is much more than just a spreadsheet full of numbers and an overall weighted ranking,” he says. “The more familiar one becomes with the index, the better they will be able to utilize it. It is a comprehensive lodging investment tool unmatched in the industry. From an advisory standpoint, I use the index to wisely judge terminal capitalization rates. More often than not, this is based on emotion rather than reason. The Lodging Market Potential Index gives me the reasoning to justify future cap rates in a market.”

A.J. Singh, associate professor in The School of Hospitality Business at MSU, and leader of the team that developed the index explains that, given the significance of the lodging industry in the overall economic success of an area, “we think this index will provide both business and civic leaders with a way to assess the attractiveness of their community to new investment.” The index was developed by Singh; Ray Schmidgall, Hilton Hotels Professor of Hospitality Financial Management in The School of Hospitality Business; and Tunga Kiyak, managing director of MSU’s Center for International Business Education and Research (CIBER).

Singh says the next step for the index will be to validate it statistically and longitudinally. “Right now, we have 2010 over 2011 comparative data,” he says. “That’s more information than we had before, but the real value of this tool will be whether it can help predict the success of various investment strategies.”

By Kathy Walsh, MSU Research and Graduate Studies