Development, acquisition opportunities for limited-service hotels abound

Limited-service lodging has been a strong growth platform for hotel developers for more than five decades, and while the segment continues to evolve it remains an attractive investment opportunity for developers, owners and operators.

Of the six chain scale segments covered by Lodging Econometrics, two—midscale and economy—are mostly populated with limited-service hotels. Also, many independent hotels (think roadside mom-and-pop motels) are limited-service properties.

Pipeline outlook

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The midscale segment in the U.S. has the most robust development pipeline, with 351 properties and 26,808 guestrooms under development. The economy segment has 106 hotels and 8,694 guestrooms in the pipeline, according to Lodging Econometrics. The two segments represent about 7 percent of all rooms in the U.S. construction pipeline.

Neither segment seems to be in danger of overbuilding, with many development opportunities available. In 2015, 23 midscale hotels with 1,776 guestrooms are forecast to open, representing a 0.9 percent increase in supply. In the economy segment, 76 properties with 6,537 guestrooms should open, or a 0.2 percent supply increase.

Rui Barros, president and managing director of North American franchise operations for Wyndham Hotel Group, sees a lot of opportunity for development of limited-service lodging.

“For the most part we focus on the top 50 markets, and several of them stand out for us: Nashville, New York City, Austin, Seattle and others,” he said. “But also there are secondary and emerging markets where our brands are performing very well. In particular, we believe the oil and gas markets will continue to be hot: west Texas, western Pennsylvania, eastern Ohio and West Virginia.

“In the end, it comes down to putting the right brand with the right owners in the right markets to make sure they are successful,” Barros said.

What is limited service?

The hotel industry has always been fuzzy about product definitions. There is no clear-cut differentiation between hotel and motel, other than the perceptions in the minds of travelers, owners and developers. The same goes with limited-service lodging.

At one time, the distinction between limited service and full service was quite clear: full-service hotels had food and beverage, limited-service properties didn’t. Today, most properties one would perceive to be limited service also serve breakfast, many have a small bar or coffee service, and some have limited meeting and banquet space.

Over time, a third segment name crept into the hotel lexicon: select service (sometimes called focused service), a designation that more accurately defines hotels that offer some F&B beyond free breakfast, meeting space and other amenities but don’t have the all-out amenities and facilities mix of what most people perceive as a full-service hotel.

Compared to full-service lodging, limited-service hotels are attractive investments because they are cheaper to build on a per-room basis, generate higher gross profits and are the favored hotel choice for many travelers, including those on business.

Performance data

The midscale and economy segments of the U.S. hotel market continue to perform well in an overall strengthening lodging market.

According to industry analysts, year-to-date through April midscale occupancy was 55.7 percent, up from 53.8 percent the year earlier. Similarly, economy segment occupancy was up 3 percentage points to 55.1 percent.

And in other metrics, the two segments are forecast to outperform the rest of the industry in 2015. The forecast for the midscale segment calls for occupancy to rise 1.8 percent, average daily rate to increase 4.2 percent, with revenue per available room rising 6.1 percent.

In the economy segment, all three metrics are forecast to equal or exceed the rest of the industry: occupancy, up 1.8 percent; ADR, up 5.2 percent; and RevPAR, up 7.1 percent.

Strong performance metrics and relatively low levels of new development create lots of opportunities for existing developers and those new to the industry to build and invest in limited-service lodging.

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