Exterior-corridor hotels: Down, but far from out

(The number of exterior-corridor properties in the United States has been dwindling for years, but they still serve a purpose in today’s lodging landscape and will continue to do so, according to brokers. According to Teague Hunter, president of Hunter Rea)

The number of exterior-corridor properties in the United States has been dwindling for years, but they still serve a purpose in today’s lodging landscape and will continue to do so, according to brokers. According to Teague Hunter, president of Hunter Realty Associates, and Joseph McCann, principal of Optimum Hotel Brokerage, there are about 500,000 exterior-corridor guestrooms in the United States. 

The percentage of exterior-corridor rooms has dropped from 24 percent of total supply in 2006 to 16 percent in 2010, according to the American Hotel & Lodging Assn. This number is decreasing because of two main reasons: No franchisor is actively building exterior-corridor properties and these types of hotels are more likely than other types to be taken out of the system.

“Attrition is taking some of the older ones out as the properties become more valuable for a new hotel or some other use,” said Ed James, principal with The Mumford Company. “The hotels you see going out of the system are typically older exterior-corridor properties and they’re not being replaced. There will be fewer, but they won’t become extinct anytime soon.”

Holding its own
This category of hotels is still around because it does have some strengths going for it. James said one reason these hotels work so well is that the guest profile is so strong. “It’s an older guest, it is a more budget-conscious guest and it’s a transient guest,” he said. “[Guests] love to pull the car right up to the guestroom they are staying in, grab a light bag, go inside, spend the night and come back out without having to empty the car and without having to lug suitcases through a lobby to an elevator.”

On the whole, exterior-corridor properties are cheaper for owners to run. “In general, the exterior entry design has less public space and less interior space to maintain and control,” McCann said.” James said they’re typically located on prime real estate in good locations because they’ve been around for many years, in most cases, and are well-constructed buildings. “Those exterior-corridor properties that were built in the ‘70s and ‘80s are concrete and steel construction and they’re extremely well-built and will accept a renovation over and over and over again,” he said. “That makes them very attractive over the long haul.”  

This combination of factors bodes well for this type of property, according to James. “Demand is going to remain and the locations are good,” he said. “In a recovering economy like this, the future is very bright.” 

Facing hurdles
Even though a certain type of owner and guest are fans of exterior-corridor properties, there are many challenges facing this type of hotel, and its percentage of properties versus the total supply is expected to continue diminishing.

The biggest hurdle exterior-corridor hotels face is lack of new supply. McCann said no company is building them on a national basis, and many sought-after brands will not even consider having them in their portfolios. The brands that will accept exterior-corridor hotels typically are in the lower mid-market and economy segments. “You’re going to be handicapped in the rate you can charge because you can’t go into the brands that typically produce the higher rate,” James said. “In most cases you are forced because of your design into the lower mid-market and budget categories, therefore your resulting average rate and as a result [revenue per available room] are going to be lower.”

Despite the fact that there’s no new supply, James said there still are brands that will accept these types of hotels. “There’s going to be a home for exterior-corridor properties as long as people want to buy and own them,” he said. “Brands are ready to accept them and to continue on with them.”

He mentioned several Wyndham Worldwide brands, Americas Best Value Inns, some Choice Hotels International brands and Magnuson Hotels as options that welcome exterior-corridor properties. However, the hotels’ design can work against them. “They’re functionally obsolete in that they don’t qualify for certain corporate and government [requests for proposals], so they can’t be used to book a good percentage of business in corporate and government travel,” McCann said. 

Their age also can be a disadvantage, according to McCann. “An older product would have higher maintenance, repair and deferred maintenance,” he said. “An older product would be less likely to have certain amenities that are conducive to running a hotel in terms of wireless Internet access and a lot of technology.” This loss of business can push the exterior-corridor hotels further down the chain scale. “Owners of exterior-corridor properties have expressed that large accounts have been moving to interior-corridor properties, reducing their competitiveness,” Hunter said. “Exterior-corridor properties will be down-branded as brand standards continue on that path and these hotels will end up as independents and extended-stay properties.”

Financial side
Exterior corridors can be a major issue at sale time. The fact that a hotel has exterior corridors affects sale options more if it’s a branded select-service hotel that’s brand has moved away from exterior-corridor products, Hunter said. “It generally limits the length of life of franchise and repositioning options,” he said. “We have seen first-generation Hampton Inns and Residence Inns that are exterior-corridor converts from an upper-tier limited-service brand to a lower-tier limited-service brand, sometimes driving an immediate drop in revenues of 70 percent or more.”

This affects the sale price tremendously, according to Hunter. “Price is driven by brand and the revenues that a strong brand can generate,” he said. “It’s only a matter of time before an exterior-corridor property will end up as an economy-branded property.”

However, lenders care about cash flow, according to James, and exterior-corridor properties are starting to look more favorable. “While interior-corridor properties tend to have more glamorous futures or a higher-level franchise, lenders look for solid cash flow and a lot of these exterior-corridor properties are now producing that,” he said. “Sales are getting better, profitability is getting better, [and] the end result of that is that loans are available for people who want to buy [exterior-corridor properties].”

According to McCann, exterior-corridor properties generate less buyer demand and are usually valued much lower than exterior-corridor products, but James said buyer interest in these hotels is still relatively high. “It’s not near as high as buyer interest in interior-corridor hotels, but buyer interest right now is relatively high,” James said. “We are able to sell them based on their current operating results.”