Why might a profitable motel shut down if the land it is located on becomes valuable due to surrounding economic development?
There are several reasons why such a motel might shut down. One reason is that the cost of operating the motel might go up in this scenario. As economic development grows in the area, the land the hotel is on would probably become more valuable. Assuming the proprietor owns the property, his or her property taxes would rise, perhaps to the point where profitability is affected. Depending on the kind of economic development that is taking place, other investors might want the property, either because they don't want a motel (usually not associated with high-end businesses) next to their businesses or because they think buying the land the motel is built on is a good investment. This process, where businesses and housing catering to (or owned by) people with lower incomes are forced out by rising costs associated with economic development is known as gentrification.
Perhaps the economic development is industrial in nature, and in this case, zoning issues might cause ownership of the motel to become untenable. Or, most likely, the motel owner might calculate that selling the property is more profitable (or involves less hassle) than continuing to operate it. This, of course, would be related to many of the factors mentioned earlier in this answer. The owner would be forced to consider what they were giving up by not selling--in other words, the opportunity cost--and decide the best decision is to sell out to other buyers. So even though the motel is profitable, the economic development mentioned in the question might cause it to become less so.
There are a variety of reasons why a profitable motel might shut down if the land on which it is located becomes more valuable. One factor is that it might become more expensive to operate the motel. If property values rise, property taxes may increase. This could impact the profit that the motel owner can make. It is also possible that the owner of the motel might receive an offer for the land on which the motel is located that is too good to refuse. The owner could take the money offered and buy a different motel property that could be located on less valuable land, or the owner could take the money and do something completely different than what he or she is currently doing. It also depends on what kind of economic development is occurring. If new houses are being built, it could reduce the need for the motel to exist. If new factories are being built, it could make the motel a less desirable place to stay.
The factor that is really in play in this scenario is the concept of opportunity cost. If the motel owner determines that a better situation can be found in a different location, or if the current location becomes less conducive to successfully operating the motel, the motel owner would have an incentive to shut down the motel at its present location.
The reason for this is connected to opportunity cost. As the value of the land the motel is on goes up, the opportunity cost (and the implicit cost) of operating the motel goes up. This means that the economic profit that can be made by operating the motel goes down.
When the land is cheap, the opportunity cost of running the motel is low and it stays in business. When the cost of the land increases, there are other, more profitable things that can be done with the land than running a motel on it. Therefore, the motel closes and is sold to someone who can make more money using the land.