Cost effective, profitable top limited-service hotel appeal

With operating fundamentals strong across all industry segments, limited-service continues to be a solid performer. The segment enjoyed ADR growth of 3.9 percent in 2014, year-over-year, not quite scaling the heights of the luxury segment, which saw ADR growth climb 5.6 percent, according to STR.“But limited-service/midscale occupancy in 2014 grew 4.3 percent, compared to the luxury segment’s gain of a much more modest 0.9 percent,” said STR SVP Jan Freitag.

At Marriott International, RevPAR in the fourth quarter of 2014 for limited-service hotels in North America jumped 8.2 percent, compared to the same period a year ago. This includes such legacy Marriott brands as Courtyard, Residence Inn, SpringHill Suites and Fairfield Inn & Suites. Also tucked into the category are Marriott’s two extended-stay brands, Residence Inn and TownePlace Suites.

By comparison, RevPAR during the fourth quarter for the company’s full-service hotels in North America grew 6.7 percent, compared to the prior year, a healthy showing, but still 1.5-percent lower than the growth seen in the limited-service sector.

Given that limited-service properties are typically franchise operations, it should come as no surprise that franchise fees for the last three months of 2014 increased 13 percent, compared to the same period in 2013, boding well for 2015.

On the transactions front, the market for limited-service hotels remains vibrant. “The year 2014 was actually dominated by the transactions activity of limited-service/select-service hotels, relative to other industry sectors,” said HVS Senior Managing Director Suzanne Mellen, drawing on data from Real Capital Analytics.

At Hyatt Hotels Corp., the company sold a total of 46 hotels during the fourth quarter of 2014. Of these, 43 were either Hyatt Place or the company’s extended-stay offering, Hyatt House. In each case, the new owner of the property retained the Hyatt flag. “Last year was a very successful one on the transaction and recycling [of assets] front,” said President & CEO Mark Hoplamazian.

For potential buyers, investors and developers, the appeal of limited-service assets can be summed up in two words: “cost effective.” These projects are cost effective in terms of cost to build vis-à-vis the cost of full-service properties. And they’re cost effective to operate in terms of the amenities package, food-and-beverage offering and labor model, again compared to full-service.

Looking ahead in the short term, STR’s Freitag forecasts “relatively healthy RevPAR growth industry-wide for 2015 and 2016. Overall, it’s very smooth sailing.

“We’re forecasting that in 2015, RevPAR in the limited-service/midscale segment will grow 5.2 percent compared to the same period last year. By contrast, RevPAR is scheduled to grow 6.1 percent in the luxury segment this year and an even better 6.3 percent in the upper upscale,” he said.