Municipal Hotel Development: “Cities Are Looking for Genuine Meeting Places”

Municipal Hotel Development: “Cities Are Looking for Genuine Meeting Places”

In smaller cities, hotels play a crucial role as part of the local infrastructure. Tina Froböse, Managing Partner of Select Hotel Consulting, and Uwe Mantik, Senior Advisor at the municipal consultancy Cima, explain how municipalities and operators come together.

According to Bulwiengesa, around 13,000 new hotel rooms were created in Germany in 2023, some of them in medium-sized and smaller cities. In recent years, large hotel operators have systematically expanded their presence in smaller and medium-sized cities in Germany. This is a result of the decentralized structure of Germany, with many economically strong regions and smaller cities spread across the country. Additionally, large hotel brands need to grow to remain competitive in the global market. Especially in times of rising operating costs and shrinking margins, the focus is not only on operational excellence and digitalization but also on achieving economies of scale and centralization through growth.

Not Every Municipality Gets Its Desired Hotel

In major cities, there is a competitive environment for prime downtown locations between various types of real estate: offices can often be more profitable than hotels depending on location and quality, and more residential units are being planned to create a mixed-use city center. International hotel chains have discovered municipalities around large cities and popular vacation destinations over the past few years. These chains focus on the declining number of family-run hotels, often due to a lack of succession planning. However, this doesn’t mean that every municipality will get the hotel it desires – many cities tend to have unrealistic expectations in this regard.

Local politics still lacks substantial understanding of the economic requirements of hotel operators. For instance, hosting two to three major events annually, with low occupancy for the remainder of the year, is typically insufficient to persuade an operator to invest in a location. However, a qualitative shift has been observed in recent years: since 2010, the focus of consultations has primarily been on whether municipalities need a new hotel. Today, however, the focus has shifted to qualitative and digital hospitality concepts, the revitalization, and redevelopment of existing properties. Popular vacation destinations are already dealing with the issue of overtourism and are focusing on high-quality concepts. Examples include Baden-Baden, Füssen, and Sylt. Expertise in this area is more commonly found in municipal administrations than in the political factions of city councils.

Demand Analyses with Multiple Scenarios

Apart from the fact that some mayors would still like to attract a luxury star hotel to their city, the local public – as seen recently in Schliersee in Upper Bavaria – can completely block hotel projects or have a say in the issue of refugee accommodation. For example, every tenth municipality in North Rhine-Westphalia uses hotels to accommodate newly arrived refugees. Demand analyses for municipalities must therefore include multiple scenarios to assess the feasibility of new developments and match suitable locations with appropriate hotel concepts, the right operators and investors. One crucial challenge, especially in light of rising operating costs and staff shortages, is whether the construction and capital costs can be covered by a sustainably achievable rent.

A Professional Approach Increases Success Chances

Municipalities seeking consultation typically already have a tourism concept in place, which includes data on guest arrivals, overnight stays, and bed occupancy. However, operators require much more: specific plots of land with details about the developable floor area, new zoning plans, or amendments to land use regulations. Consultants can also assist with property and land valuations, as they can develop a generic concept for a location independent of a hotel brand and use this as a basis to identify the best-suited partners for a project.

The more professionally the marketing materials are prepared by the municipality, the faster a successful operator identification can happen. Also, it is important to clarify from the beginning who will finance these advisory services. Many hoteliers approach municipalities proactively due to a lack of succession planning to preserve the hotel location. However, they should aim to avoid financial conflicts with the local government, as aligning the interests of both owners and municipalities is key to successfully continuing a hotel’s operations.

Which Brands and Operators Are a Good Fit?

Once the municipality has completed its work and clearly defined a micro-location, the second phase of consultation begins, focusing on investors, developers, and operators. Municipalities generally want a complete package with a finalized concept, including the operator and investor. Specific knowledge of the hotel industry is required here: which franchisee of a major hotel brand is best suited for a particular location? What do the current financial statements, track records, and portfolios of the operators look like? How should lease agreements be structured?

Municipalities may also play the role of supporters for local hoteliers. In smaller and medium-sized municipalities, family-run hotels are often up for sale, particularly due to the lack of succession. Private hoteliers are experienced businesspeople, but they only sell their life’s work once. Therefore, it is essential that such a sale is well-prepared to identify suitable buyers and offer them a future-oriented concept at a marketable price. Thus, simply having a good personal relationship is not enough; win-win solutions must be found. In practice, the value of a competent neutral third party to facilitate such a process is evident.

Hotels as City Landmarks

For successful collaboration between operators and municipalities, it is essential that operators understand the needs and requirements of municipalities. Small and medium-sized municipalities generally seek more than just a lodging facility; they want meeting points. They rightly identify hotels as city landmarks. This opens up social opportunities – for example, through public events at the hotel, promoting the local job market, or collaborating with local businesses. The more operators are connected with the municipality through their local players, the greater the goodwill in the cities: from politics to administration to residents.

Operators are well-advised to carefully assess municipalities outside of large cities. Historical developments in the local tourism sector, plans for new conferences or events with associated venues, and the political composition of city councils are key indicators when considering new locations for further planning. If there is a match with the operational needs, consultants can again assist with investor identification. While large hotel investment funds have added properties at selected B- and C-locations to their portfolios in recent years, they are currently less interested in new investments.