Hospital-adjacent hotels get built amid development standstill

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Mark Laport's pitch for customers isn't nearly as sexy as a photo of a beachfront cottage or a brochure waxing poetic about a suite with a skyline view.

Still, the hotelier, whose company specializes in building select-service hotels next to or near major U.S. medical centers, makes a compelling case for his properties.

"You can still be getting X-rays, chemo or other kind of treatments while you're staying at a first-class hotel next to a major hospital at a fraction of the cost," said Laport, CEO of Raleigh, N.C.-based Concord Hospitality.

With U.S. newbuild hotel development at a near standstill, one of the few niches where new properties continue to get built is the hospital-adjacent hotel market. Developers of these hotels can pitch financiers on their built-in customer base and, in many cases, make side agreements with lodging-starved hospitals that may procure assets such as free parking or below-market-cost land.

It's difficult to quantify how many hotels fall within this niche or how fast the supply is growing, but Laport and Billy Brown, president of Texas-based Benchmark Development Corp., both spoke at the Americas Lodging Investment Summit in Dallas last month about how they've shifted their focus toward hospital-adjacent lodging.

While such hotels are challenging to build because of the propensity for medical centers to be located in dense, urban locations with limited land availability, the sheer demographics of an aging population and the financial pressures for medical centers to discharge patients as quickly as possible guarantee steady occupancy rates.

This trend has dovetailed with the popularity of limited-service and extended-stay hotels. Because such hotels require less real estate than full-service properties, Brown said it was easier to sell banks on financing projects such as his company's $15 million, 112-room Residence Inn, which this year broke ground near the Dell Children's Medical Center in downtown Austin, Texas. That hotel will open next year.

Nine of Concord's 81 hotels serve medical centers, including hospitals such as the Houston Medical Center and the University of Pittsburgh Medical Center. Moreover, about 20% of the hotels in the company's development pipeline are either adjacent to or near medical centers, such as the Cleveland Clinic and Duke University Hospital in Durham, N.C.

Such projects are getting built as most developers of more typical, leisure-travel-serving hotels struggle to secure financing from gun-shy lenders smarting from the economic downturn. Despite a fairly optimistic outlook for travel demand, U.S. hotel-room supply is predicted to broaden by just 0.5% this year, according to Smith Travel Research. Meanwhile, the U.S. development pipeline in June narrowed from a year earlier, to about 296,000 rooms.

In fact, there is such a demand for such medical center-adjacent projects that some highly ranked medical centers are either funding or facilitating hotel development themselves as a way to pitch nearby high-quality lodging to prospective patients.

For example, the 1,400-bed Cleveland Clinic, which is ranked No. 4 on U.S. News & World Report's 2012-13 Honor Roll of 17 U.S. hospitals and No.1 in heart surgery, built the 300-bed InterContinental Cleveland itself in 2003. The availability of nearby rooms has continued to be such an issue that the Cleveland Clinic sold hospital-owned property to Concord Hospitality for a 60% discount off its appraised price, Laport said. Concord Hospitality will open a Courtyard by Marriott on the Cleveland site early next year.

"For sure, it has stepped up over time as hospital costs and government regulations have encouraged the medical community to get people out of their hospitals as quickly as possible," Laport said.

The key to the market? "In good times and bad times, people get sick," he said.

For hotel and hospitality news, follow Danny King on Twitter @dktravelweekly.

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