How limited-service hotels fared in 2018

Limited-service hotels, like the Holiday Inn Express & Suites Cleveland West in Westlake, Ohio, remain a focus for investors due to steady economic growth and growing performance metrics. Photo credit: IHG

Limited-service hotels have long been the darlings of the hotel industry, but do U.S. investors still have their eyes set on these properties?

It would seem so, according to Marcus & Millichap’s "National Hospitality Research: Fourth Quarter 2018" report. Limited-service hotels (along with upper-midscale properties) led transaction velocity during all four quarters of 2018, the research found. Economy hotels, in particular, offered lower entry costs and first-year yields averaging in the low 10-percent band. Meanwhile, upper-midscale hotels traded with cap rates close to the national average.

Researchers noted that limited-service hotels remain a focus for investors due to steady economic growth and growing performance metrics. Economy hotels, for example, saw average daily rate rise 2.7 percent and revenue per available room increase 3.3 percent. Overall, transaction velocity was up about 6 percent during the 12 months ending in September. Meanwhile, heightened competition for properties increased values 9 percent to $110,700 per room over the same time period.

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But limited-service hotels weren’t the only ones to remain steady. In terms of performance growth, luxury hotels led the charge during the 12 months ending in September, according to the report, which used data from STR.

ADR growth for luxury hotels outpaced the national average (+3.2 percent), rising 3.3 percent to $332.91. RevPAR growth, too, outpaced the U.S. average (+2.5 percent), increasing 4.9 percent to $248.50.

Meanwhile, demand for resort hotels was on the rise, according to Marcus & Millichap. ADR for these hotels was up 3.2 percent to $177.56 during the past four quarters, while RevPAR increased 4.6 percent. Interstate hotels also posted above-average RevPAR growth, rising 3.6 percent, while ADR was up 2.4 percent.

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Development Drive

Marcus & Millichap noted that in the 12 months ending in September, about 113,500 rooms in 990 hotels came online in the U.S. Over the next four quarters, that supply will continue to grow with another 188,000 rooms under construction.

Upscale and upper-midscale hotels are leading the pack when it comes to construction with 65 percent of the share. And midscale development only continues to grow, with 15,000 rooms under construction and another 22,870 rooms expected to break ground in the next year, the data showed.

Marriott International and Hilton were the main drivers of new construction during the past four quarters, according to Marcus & Millichap. New rooms under Marriott and Hilton comprise 28.7 percent and 27.5 percent of total supply, respectively.

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