While new development is tentatively rising overall in the hotel industry, it is booming in certain U.S. states. This demand is being fueled by the growing energy opportunities in places such as Nebraska, North Dakota, Oklahoma, Wyoming, and West Virginia where advances in drilling technology have spurred a surge of workers in need of places to stay.
Comparing statewide RevPARs through June of 2012 to five years ago, a report from Marcus & Millichap National Hospitality Group, shows numbers more than doubled in North Dakota and also rose substantially in Nebraska, Oklahoma, and West Virginia.
Greg LeBerge, director, National Hospitality Group, compares the rapid development happening in these states to the same building boom of the Wild West.
“What you’re seeing in terms of hospitality is not just people rushing to serve the immediate need of workers, but to serve longer term goals,” he says. “There is a speculative notion that the entire paradigm of these areas will be filled in 20, 60, or 80 years from now as those regions are mined.”
Art Cahoon, CEO and president of Nakota Development Company, a firm that is building several extended-stay franchise hotels in the Bakken region of North Dakota and other nearby states, says that thousands of men, particularly in Williams County, rely on “man camps” for lodging. Man camps provide temporary, dorm-style accommodations to oil workers. But Cahoon explains that these camps, on average, cost $120 each night and have strict rules regarding visitation and alcohol.
“Man camps are trailers divided into tiny rooms with a communal cafeteria and communal bathrooms on property,” he says. “It’s not really a place that you want to spend a lot of time.”
Because of the living conditions and expenses associated with man camps, many workers seek out extended-stay hotels or select-service properties for their temporary housing needs. But the demand for rooms currently outweighs the supply.
“If you look at the construction pipeline of new development across the 50 states, the energy states are leading the vast majority of that new development,” says LeBerge. “You are going to see a larger number of assets being built including flagged hotels, extended stay hotels, and limited-service hotels. You’re certainly not seeing luxury hotels being built in these areas.”
Cahoon, a successful entrepreneur and investor based out of Florida, recognized the need for lodging in Williston, North Dakota and other areas of the state early on and formed Nakota Development Company (NDC) two years ago with the goal of building lodging and residential properties in oil-shale regions. NDC signed a franchise agreement with Value Place as the exclusive developer of the extended-stay brand in North Dakota, Montana, and Wyoming. The company opened its first Value Place property this fall in Williston and is running at an occupancy rate of 95 percent.
“We were pretty set on an extended stay model, because people are coming to North Dakota for work, not short-term visits,” says Cahoon. “We looked at the franchises that existed and selected Value Place because we thought it best fit the needs of the customers that were going to be in that market.”
Cahoon says that NDC plans to develop 12-15 hotels in areas of North Dakota, Montana, and Wyoming—all of them Value Place franchises. This fall, work will begin on the company’s next property in Dickinson, N.D., which is expected to open in the spring.
LeBerge explains that extended-stay properties are not the only type of lodging businesses that are benefiting from the boom. He says that select-service hotels are also reaping the rewards from drilling activity.
“When you talk about the amount of extended stay rooms, they fill up quickly and then that overflows into other limited service brands,” he says. “There’s just so much demand out there that it is difficult to keep up with it.”
LeBerge explains that although the market in energy states continues to look strong for developers, there is still some risk associated with investing in rapidly growing areas associated with fracking.
“If you think of any drilling operation, you’re drilling under the ground with the expectation and hypotheses that there will be significant positive results from those activities,” he says. “That’s based on a lot of math and a lot of science and some variability and assumptions. There is still some risk there. It’s a very defined and calculated risk, but it is a risk nonetheless.”
As a developer, Cahoon understands the risk factors, but believes the payoff will be worthwhile and expects his assets will continue to do well as towns in oil-shale regions grow larger and expand.
“If you come to North Dakota, you will see license plates from every state in the Union, where people have come seeking opportunities and jobs,” he says. “I think the redevelopment of the U.S. energy industry is the single biggest job creator that this country has the opportunity for. It’s our belief, along with many others, that the Bakken will develop like the Midland-Odessa area of Texas. It will go from being a sparsely populated rural area to a region of continuous development and production.”