Lower-priced hotels are redefined, see high demand

Looking back over 30 years, evolving consumer preferences have driven a steady rise in popularity of high-quality hotels that are geared toward the middle to lower end of the price spectrum. Indeed, of the total hotel rooms added between 1987 and 2016, nearly 60 percent fell into the upscale and upper-midscale segments (Figure 1). However, despite this increase in supply, brand innovation has been largely focused in the higher-priced luxury and upper-upscale segments. Recent trends, however, suggest there is an increasing focus on redefining the lower- or more moderately priced experience as lodging companies seek to further expand their brand portfolios.

Due in part to changing demographics, consumer preferences have recently shifted toward more authentic, experiential and unique travel offerings. Consumers now derive value, in the form of “social currency,” from their ability to share their unique travel experiences through social media platforms such as Snapchat, Instagram, Facebook and Twitter. Driven by the need to capture evolving consumer preferences and to diversify their brand portfolios, major hotel companies started by introducing higher-priced lifestyle hotel concepts, which attempted to position hotels as trendy, cool and most importantly, unique. Soft brands, the most recent extension of this concept, offer properties access to the commercial engines of these large hotel companies, but without the required homogeneity of a traditionally branded hotel. These soft-branded hotels have been able to capture multigenerational traveler preferences; however, as of June 2017 they still only account for just over 2 percent of total hotel room supply in the U.S. (Figure 2).

This concept has begun spreading to lower-priced hotels. Lodging companies today are increasingly experimenting with either new “focused-service” hotel concepts or refreshing existing brands. In several cases, they’ve adopted strategies used by higher-priced lifestyle and soft-branded hotels. These properties aim to adjust combinations of amenities as a way to appeal to an increasingly fractured and selective consumer base that is looking for authentic and local experiences. Though this trend is arguably still in its infancy, a number of the large hotel companies with existing lower-priced brands have already announced new limited- or focused-service brands with a trendy DNA (e.g. Moxy, Tru by Hilton and IHG’s recently announced, as-yet-unnamed midscale brand) in an effort to replicate the success of lifestyle and soft branding. Consumers are buying in: RevPAR growth of lower-priced hotels has outperformed that of higher-priced hotels in every year since 2007 (Figure 3).

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Consumers aren’t the only ones responding positively. Institutional investors, expressing cautious optimism that the current growth cycle will continue, are increasingly choosing to invest in lower-priced hotels. While they may not offer as much RevPAR growth in a cyclical upswing, these hotels also tend to decline less dramatically than higher-priced hotels in a downswing (Figure 4). This relative RevPAR stability, combined with higher margins, is a key focus for many longer-term investor platforms.

The industry is expected to continue to innovate and adapt to evolving preferences. Current trends suggest that generation-Z travelers will have similar travel preferences as millennials, which will likely support continued innovation and growth in lower-priced hotels. Overall, the current environment suggests that expectations for lower-priced hotels are anything but low.

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