Strong performance sparks increase in limited-service pipeline

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The size of the development pipeline for limited-service hotels increased slightly during the second quarter, according to Lodging Econometrics. The number of hotels under development in the quarter in the midscale and economy segments increased by 35 properties with 3,284 additional rooms.

The midscale pipeline is especially robust, with 378 hotels under development, up 27 properties from the first quarter of 2015. The 29,414 midscale rooms in the pipeline represent a 5.9-percent increase in supply if all the properties eventually open.

The economy segment pipeline includes 114 hotels, up from 106 properties in the first quarter. The economy pipeline includes 9,462 rooms, representing 1.1 percent of the segment’s total supply.

While 103 limited-service hotels with 7,157 rooms are expected to open this year, the bulk of properties in the pipeline will open in 2016 (104) and 2017 and beyond (342).

Strong performance

In part, the size of the limited-service pipeline is a result of strong property-level performance in both the midscale and economy segments. According to industry data, in the 12 months ending July 31, the limited-service segments of the market recorded increases in all performance metrics.

Demand increased 3.4 percent in the midscale tier and 2.9 percent in the economy segment. And with little new supply opening in the past year, occupancy rose by similar levels: up 3.8 percent for midscale hotels and 2.9 percent for economy properties.

Increases in average daily rate were even stronger. ADRs rose 4.4 percent for midscale hotels and 5.3 percent for the economy sector. As a result, revenue per available room went up 8.4 percent for both chain scales.

Growth in performance numbers will continue in the next few years, but the rate of increases will soften. According to PKF-Hospitality Research, all chain-scale segments will see RevPAR growth in excess of 6 percent for the rest of this year and 2016. While RevPAR in upper-priced segments will be driven mainly by growth in ADR, lower-priced properties, such as in the midscale and economy segments, will see a more balanced mix of increases in both occupancy and ADR.

Performance increases will also differ by location, according to the PKF-HR research. Hotels in airport and suburban locations are forecast to record the strongest gains in RevPAR, whereas hotels in highway and rural markets will see smaller gains in RevPAR.

“The interstate market is very seasonal, which places a realistic cap on occupancy growth,” said Jack Corgel, a professor at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “In addition, the interstate and rural lodging inventory competes almost exclusively in the lower-priced tiers and have been unable to attain pricing power.”

Two are better than one

A significant amount of development of limited-service hotels has been within dual-branded lodging projects. According to one estimate, at the beginning of 2015, 30 dual-branded hotels were open in the U.S., and another 24 projects were under construction.

Rui Barros, president and managing director of North American franchise operations for Wyndham Hotel Group, said he anticipates more dual-branded projects by franchisees in the Wyndham system.

“For the developer, there is a huge benefit because you can leverage the cost of building and operating through the back of the house and level of service, while creating unique experiences for customers,” he said, adding that care needs to taken in creating these projects.

“We want to make sure the right brands are coming together, and we don’t want to confuse the consumer,” he said. “There needs to be separation for both the operator and consumer: For the consumer from an experience perspective and for the operator from a financial perspective. Putting two brands together that compete with one another doesn’t work as well as creating different experiences with two products.”

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