Sonesta International Hotels Corp.'s new select-service Essential brand is meant to fill a niche within the company for both guests and owners, providing a product that is affordable to stay in and to own. The brand will sit in the upper-midscale segment, which Sonesta Chief Development Officer Brian Quinn calls the most successful in the industry. With existing brands like Hilton’s Hampton, IHG Hotels & Resorts’ Holiday Inn Express and Choice Hotels International’s Comfort already in the space, Quinn estimates there are about 7,000 hotels in the upper-midscale sector. “It is the one that the consumer demands the most and the developers have built, so I think we're playing on very, very solid ground,” he said. At the same time, Quinn feels that a lot of brands in the comp set are “completely built out,” but he still sees demand for the segment. “I think [this will] allow us to grow into to a lot of those markets,” he said.
The upper-midscale segment is attractive to stakeholders, he continued, because guests are looking for “the essentials” when they travel and owners are looking for return on investment. “If you're really going to have a full suite of offerings for the consumer and for the operators and the owners, we had to fill this white space—and that upper-midscale segment (other than extended-stay) drives the best margins,” Quinn said. Consumer demand will continue to shift and evolve, he added, “and the brands and companies that react quickly will win.”
The Essential brand will skip a lot of amenities that can drive up costs for owners, Quinn said. For example, the hotels will not have “a ton” of meeting space and will not offer lunch or dinner—elements that owners don’t want to pay for and guests don’t care about, he said. “They're gonna go out [to eat],” he said, noting that the hotels will be “well located” for other dining options: “So it was really about filling a white space, right-sizing it but really levering up the owner demand and the known consumer interest in the space.”
Quinn does not expect the new brand to encroach on any of Sonesta’s existing flags. The Sonesta Select brand, for example, has a “more robust” food-and-beverage program, with lunch and dinner available. “And then similarly, Red Lion Inn & Suites is a true midscale offering with a different comp set and a little bit of a different consumer wallet approach to that price point."
First Steps
Sonesta currently has two contracts executed for Essential hotels, one outside of California's Napa Valley in Vacaville and one in Chattanooga, Tenn. The latter property will be a conversion from a Sonesta Select as part of a deal with real estate investment trust Service Properties Trust, a capital owner that owns a stake in Sonesta and for which the brand manages more than 200 properties. Sonesta did not name the owner of the Vacaville property as of press time. “So we're leveraging that broader, deep ownership of being connected to [corporate real estate] with incredible resources like [The RMR Group, an alternative asset management company that manages Service Properties Trust] and bringing that to our franchise offering—and we've already secured a franchisee.” Quinn expects the brand to fit hotels with between 75 and 125 guestrooms as well as space for a fitness center and a lobby that can support breakfast gatherings.
While the Essential brand will allow for both new-builds and conversions, Quinn expects to see most development in the latter category. “There [are] so many hotels in that space, and there's just a significant amount of churn that happens there,” he said. At the same time, new-build projects will face ongoing challenges from the supply chain and interest rates. “But, interestingly enough, we do have some inbound soft demand for new construction because opening a new-construction hotel 24 months, 36 months from now could look like a very smart thing to do, assuming the economy stabilizes and unemployment holds,” he said. While the costs for a new-build project are not set in stone, Quinn said the typical cost for similar properties are about $125,000 per key, not including land. “We're going to have to get one done in order to be able to tighten that up beyond broad industry averages.”
Over the next 12 to 18 months, Quinn expects the brand’s pipeline to be between 80 to 90 percent conversions. Conversion costs will vary from project to project, he said, with the Chattanooga hotel as a litmus test for future developments. “It largely depends on the quality of the product,” he said. “You could have a product that's fully built out and just needs [operating supplies and equipment] and signage, and that could be on the low end of a range for a [property improvement plan]. But if it's a material renovation, [the cost] could be significant.” Similarly, average daily rates for the brand have not yet been determined.
In terms of markets, Quinn thinks the brand will fit anywhere. “You can do tertiary, you can do secondary, you can do urban, you can do destination markets, you can do resort markets, you can do commercial markets,” he said. The segment, he said, can appeal to developers anywhere. “It's a lower cost of entry for the owner, and it's the right size bundle of services for the consumer. And when both of those constituents are happy, you can make a lot of money.”