Economy execs share views on frothy segment

David Eisen

During the Asian American Hotel Owners Association’s annual conference in March, Hotel Management gathered a group of hotel industry executives to discuss a sometimes-overlooked hotel segment: economy hotels. What we found is that hotel developers looking for healthy margins should pay attention to this undersupplied sector. According to PKF Hospitality Research, supply in the economy segment is only forecasted to rise 0.1 percent in 2014, while demand is predicted to increase 2.2 percent.

The roundtable at the Philadelphia Marriott Downtown was moderated by Hotel Management’s managing editor, David Eisen, and attended by: Jim Amorosia, CEO, G6 Hospitality; Tom Bernardo, regional VP of franchising, Choice Hotels International; Roger Bloss, president and COO, Vantage Hospitality; Paul Braungart, founder and president, Regional Capital Group; Ron Burgett, EVP of franchise development, Value Place Hotels;

Phil Hugh; chief development officer, Red Roof Inn; Tom Magnuson, president and CEO, Magnuson Hotels; Ravi Patel, president, Hawkeye Hotels; and Gus Stamoutsos, EVP of franchise development, Wyndham Hotel Group.

HM: Let’s jump in by going back a few years ago to the financial downturn. How did the economy segment business fare during that time? Did you find travelers, companies trading down to the economy tier? As times have gotten better now, have they stayed with you?

Hotel Management’s David Eisen moderated the economy roundtable. At left is Choice’s Tom Bernardo.Pictured: Hotel Management’s David Eisen moderated the economy roundtable. At left is Choice’s Tom Bernardo.

Magnuson: Customers have been trading down. [Economy] used to have a bad reputation as a substandard product. No matter how much money a person might have, they might not always want to spend a lot of money. They want a good property, a good location, good value and with good branding.

Stamoutsos: When the market got hit really bad, the better operators, the ones that always kept their assets in good shape, provided great service—their downturn wasn’t as much as in other segments. So the midscale segment came down. The upper-upscale segment came a lot down. Many of these folks said, ‘We can continue to pay our mortgages operating in the economy segments,’ and I agree. As consumers, we’ve all adjusted the way we spend money, and the economy segment was able to capitalize on that last downturn and keep many of those customers.

Red Roof’s new CDO Phil Hugh talks about his brand.Pictured: Red Roof’s new CDO Phil Hugh talks about his brand.

Amorosia: You’ve also got a second confluence going on at the same time. Now you’ve got the maturation of the millennial movement, and they have a different mindset, not to mention a different set of challenges, than most of the other generations prior to them. A couple of them being: we’ve yet to come back to full employment; and we’ve got a cost of living in regards to affordable care, in regards to education, that has hit this generation particularly hard. The average college debt now is over $35,000. You put all these different pieces together and that adds to the original question that people are looking for better value. Everyone’s trying to find the sweet spot in regards to their wallet.

HM: Fast forward to now. According to PKF, for 2013 in the economy hotel segment, ADR was up 3.3 percent to $54.26, occupancy was up 1.5 percent to 55 percent, and RevPAR was also up 4.9 percent to $29.83. Are you happy with these numbers?

Ravi Patel of Hawkeye Hotels shares a take on economy.Pictured: Ravi Patel of Hawkeye Hotels shares a take on economy.

Amorosia: We’re back to where we were at the peak of the prior before the recession. But we’re still not where we want to be. We want to be at over 70-percent occupancy. That’s our current goal.

Hugh: I think the owners are still a little gun-shy. They’re going to be hesitant to drive rate in this segment for fear that they’re going to lose occupancy.

Patel: I have two perspectives. As a developer, supply isn’t going up that much, and I’m okay with supply only inching up and demand skyrocketing. Because our properties are able to absorb that demand a lot better. From the operations perspective, there are a lot of operators that are pretty resistant to increasing ADR because they still haven’t captured the occupancy percentage that they want. For us, we’re a very ADR driven company so we’ll sacrifice occupancy for ADR any day, just because we know it’s more profitable. The [economy] guest is a lot more sensitive to that $2 or $3 change. We have been pushing rate, but wish that it would happen a little bit quicker right now.

Jim Amorosia of Motel 6 said to take notice of millennials as a budding source of business.Pictured: Jim Amorosia of Motel 6 said to take notice of millennials as a budding source of business.

Stamoutsos: You’re going to see slow, steady growth and improvement on the ADR front. I don’t think you’re going to see the steep increases we’ve seen in the past. That’s a good thing because it doesn’t rush everybody out there to start building, increasing that supply.

HM: The hotel industry cycle is oftentimes compared to a baseball game. The feeling is we are in the middle innings. Do you agree or disagree as it pertains to the economy segment?

Bloss: I think we’re in the 5th inning: When they come out and they freshen the infield and replace the bases. We’re going to see that in our properties. Property owners are going to have to put money back in. Because of the recession they might have slacked off on that.

Bernardo: As we get into the later innings, with the aging of the product in the marketplace, you’re starting to see a lot of properties repositioned into this [economy] segment. We see a lot of that at Choice, where Starwood and Holiday Inn and Marriott and some of these assets are being repositioned into our segment. So it may not be new supply, but some of the product that’s coming into our segment has to be dealt with and it’s going to [add] another dynamic to the consumer’s options.

Roger Bloss of Vantage hailed mobile as a major emphasis in distribution. Pictured: Roger Bloss of Vantage hailed mobile as a major emphasis in distribution. 

Burgett: We’re a new-construction-only hotel company. So depending on where you are in the ballgame depends on how much money is out there and how capital is flowing.

Braungart: You’re exactly right: Capital is going to drive the projects. It’s almost a rebirth. We have three to five years where there was nothing happening. There were no exit strategies. The banks were scared and still are. So I think that’s something we have to factor in as you build ground up. The other piece is ground-up is very scary. Re-purposing or repositioning assets has really taken precedence over any other asset class. If you can buy it and renovate it cheaper than you can build it coming out of the ground, then that’s the way to go.

HM: One of the glaring numbers is that supply was actually down 1 percent in 2013 and only predicted to rise 0.1 percent in 2014. What’s the opportunity there in the economy segment to build more hotels?

Stamoutsos: We’ve done a lot more in-depth analysis into what the strongest markets are. Then what we’ve done is focused our attention in those areas—try to find sites, try to match them up with folks that have the capital and the resources to build.

Tom Magnuson of Magnuson Hotels is excited to see the likes of Apple in the travel space.Pictured: Tom Magnuson of Magnuson Hotels is excited to see the likes of Apple in the travel space.

Hugh: I don’t see us getting any legs in the new construction side of things because there is just not that great return on investment compared to buying a product for $18,000 to $25,000 a key, throwing another 5 to 10 in it, and you’re done and out the door for $35,000 or $40,000 a room versus building new.

Burgett: We scratch our heads why anyone would convert a hotel today and go the economy segment when you can build one for less than $5 million and have a pretty big return on investment. If you have a company behind you that knows how to do it and get them done quick and get them in the ground, right now is the absolute time to do new construction. Especially in the economy segment.

HM: What does the current transactions landscape look like in economy? Is it mostly private, smaller investors or are we seeing anything from REITs and private equity?

Stamoutsos: The majority is individual owners, multi-unit owners buying properties, but the bulk of it is not REITs. There’s certain package deals that we’ve done—certain properties have been sold that might have been a mid-scale property that they needed to find a new home in one of our brands. So it could be multi-unit, but usually its one, a few partners, corporations or civil corporations.

Bloss on where we are in the cycle: “I think we’re in the 5th inning: When they come out and they freshen the infield and replace the bases.”Pictured: Bloss on where we are in the cycle: “I think we’re in the 5th inning: When they come out and they freshen the infield and replace the bases.”

Patel: If it’s in the economy segment, it’s typically a smaller group, single owner or a couple partners. I just recently asked one of my broker friends to do an off-market deal for me in a college town, also economy branded. I was surprised at the amount of interest I got for it from regional players, that kind of thing. I feel like a lot of them have pent-up capital that they haven’t been able to deploy because the REITs have been taking a lot of the upper-end properties.

Hugh: Among this group, if we had REITs and private equity investing, we certainly are not going to share it, first of all.  Second of all, we probably sold about 80 of our company stores over the last 3 years. They’ve gone for very nice prices. I would say we get an unsolicited bids every two to three days on one of the hotels that we own.

HM: What does lending look like in the economy segment?

Gus Stamoutsos of Wyndham said ADR will see slow, but steady growth, which is a good thing, he commented.Pictured: Gus Stamoutsos of Wyndham said ADR will see slow, but steady growth, which is a good thing, he commented.

Braungart: On the permanent side, years ago I ran a CMBS platform and they’re still very interested in looking at hotel properties, well sponsored, great LTVs—that kind of thing. So the money’s back. Five years ago, I was running a good size bridge fund and there was no take out money at all. I think it’s promising. I think you’ll find it’ll stay so for awhile. They are being pressured on the LTVs. That’s the only issue I see.

Patel: It’s like any asset: if you have the right borrower, the right market, the right brands, etc. You have to know the bank is able to lend to you before you ever go to them.

HM: In today’s operating climate, what do your franchisees come to you with?  What are their concerns and how do you respond?

Stamoutsos: They look for us to guide them and to educate them and to show them examples of what they need to do out there. Being part of a franchise group or a larger company means that you’re not in business by yourself. The other thing is making sure that we have open and honest and communicative dialogue with our franchisees. When we went through that bad cycle, it was tough on everybody. It wasn’t easy, but we worked with them.

Magnuson on changing technology: “How do I, as a hotel owner, deal with technology overload?”Pictured: Magnuson on changing technology: “How do I, as a hotel owner, deal with technology overload?”

Bernardo: They just want to know what’s coming down the pike. What’s next? What’s going to be the next brand standard that’s going to be implemented and how that’s going to affect their ROI. What kind of timeframe are you going to get to implement these standards? Is it necessary? Is it something that you need? So it’s a very delicate balancing act.

Magnuson: One thing that we find is, ‘How do I, as a hotel owner, deal with technology overload?’ Things have changed so much. I’ve never seen an industry in the world that is more technologically fragmented. The trouble that any hotel owner has is that nagging feeling of, ‘Should I have that? If I don’t, am I missing the boat?’ The struggle is: what is essential, what do I need, what don’t I need. That’s one that’s not going to let up.

Patel: PIPs are a big thing that comes up. With the power that you have with all of your brands, I think that you could create a program so your franchisees could have a package where they know that this is the best price I’m going to get. That makes it really quick and easy and it’s probably going to cause less frustration between the franchisor and the franchisee as well.

HM: Where are your customers coming from? How are they booking your hotels?

Ron Burgett of Value Place Hotels looks on as Bloss responds to a question from a participant. Pictured: Ron Burgett of Value Place Hotels looks on as Bloss responds to a question from a participant.

Bloss: The biggest area we see is through mobile. You know we have apps that you can download. We ping people within 7 miles of our properties—all those kinds of things. There’s no question OTAs have a good share of the market, brand.com has a good share of the market, but I think most of it is going to start shifting to mobile.

Stamoutsos: Communicating to owners to update their websites, update their pricing and make sure they take advantage of all the revenue management so they can draw more business through brand.com, through direct property, through the mobile apps, versus GDS. It’s a continued educational process.

Magnuson: We’re heading for a new wave in distribution. The OTAs have consolidated greatly. Where the new stuff is going to come from is Google, Apple and Amazon, the three most powerful online brands; the ones we think can bring innovation, and scale, and low price. It’ll probably be a bad thing for the OTAs and a good thing for hoteliers.

HM: What is your strategy as it relates to expansion outside the U.S.? And, what are your thoughts on Marriott’s new economy brand, Moxy, which is starting in Europe?

Burgett’s extended-stay Value Place has a different model than most: AWR instead of ADR. Pictured: Burgett’s extended-stay Value Place has a different model than most: AWR instead of ADR. 

Bloss: We’re in China; we’re in Korea. We get approached regularly by hotel companies in those countries that want to come to the U.S. Make no mistake about it, those brands from the other countries, they want to come to the U.S. as well.

Burgett: We think there is plenty of opportunity here in the U.S. We have our eye on Canada—there is a lot of oil money up there—a lot of energy corridors that we are looking at, but that would be phase two going into next year for us.

Amorosia: Since our new ownership, we’re being looked at, very seriously, as an international brand. We were in Canada. We’re getting ready to go into Mexico. We’re going to head into Central and South America. 

Patel: The Moxy brand is a really interesting concept. Marriott has a pretty phenomenal brand engine they work with. They aren’t in the economy segment, so I’m sure it would make sense for them to move here eventually and we’ll all see if that happens or not. What’s interesting about Moxy is, I think it’s a mix of economy and tech-infused as well.  So they’ve got a lot of tech items that they put into that property. To me, it looks more like a millennial hotel than an economy hotel.

Paul Braungart of Regional Capital Group was the financial voice among the group of executives on the panel.

Paul Braungart of Regional Capital Group was the financial voice among the group of executives on the panel.

Patel on lending: “You have to know the bank is able to lend to you before you ever go to them.”

Patel on lending: “You have to know the bank is able to lend to you before you ever go to them.”

Hugh on owners: “They are going to be hesitant to drive rate in this segment for fear that they’re going to lose occupancy.”

Hugh on owners: “They are going to be hesitant to drive rate in this segment for fear that they’re going to lose occupancy.”