You’re completely correct on the exposed demand issue. I would also add that in most cities (in the United States anyway) hotels can only exist in very specific corners of the city due to zoning, often in just three places: downtown (expensive!), the suburbs (so not even in city limits), and “motel alley” (which is usually an old highway in askeevy part of town lined with mid-20th century fleabag accommodations that are slowly being abandoned/bulldozed). For some cities this isn’t an issue, but in others it’s a problem for accessing the tourist attractions, especially if the tourists in question don’t have a rental car. Then there are the non-tourist visitors to consider: if you’re in a city to visit family, you’re probably going to want to stay as close to them as possible. Same with a lot of business travelers. This is a bit of a conundrum when the nearest hotel (or affordable/decent hotel) is a 30 minute drive away.
You’re completely correct on the exposed demand issue. I would also add that in most cities (in the United States anyway) hotels can only exist in very specific corners of the city due to zoning, often in just three places: downtown (expensive!), the suburbs (so not even in city limits), and “motel alley” (which is usually an old highway in askeevy part of town lined with mid-20th century fleabag accommodations that are slowly being abandoned/bulldozed). For some cities this isn’t an issue, but in others it’s a problem for accessing the tourist attractions, especially if the tourists in question don’t have a rental car. Then there are the non-tourist visitors to consider: if you’re in a city to visit family, you’re probably going to want to stay as close to them as possible. Same with a lot of business travelers. This is a bit of a conundrum when the nearest hotel (or affordable/decent hotel) is a 30 minute drive away.