Strong RevPAR growth fuels limited-service development pipeline

The limited-service segments of the U.S. hotel business continue to perform as well or better than the overall industry. In September, both the midscale and economy segments, which comprise the limited-service segment, recorded increases in revenue per available room that were higher than all but one other chain scale.

RevPAR in the economy segment rose 9.6 percent and increased 9.5 percent in the midscale segment, while it increased 9.6 percent for the overall industry. Most of the growth in the economy segment was fueled by higher average daily rates, which rose 6.3 percent.

Strong performance by limited-service hotels has contributed to a robust development pipeline for both midscale and economy hotels. According to Lodging Econometrics, nearly 500 hotels and more than 38,000 guestrooms are under development in the two segments.

At the end of September, the midscale development pipeline comprised 393 hotels with 29,994 guestrooms. That’s up by 15 properties and 580 guestrooms over the total at the end of the second quarter. The economy segment pipeline shrunk by 17 hotels and 1,108 guestrooms from the second to third quarter, with 97 properties and 8,354 guestrooms in the queue as of Sept. 30.

More than 100 hotels and 7,000-plus limited-service rooms will open in 2015. Next year another 105 properties with 7,853 rooms will open.

Marriott International is particularly bullish on limited-service lodging. During the company’s third-quarter earnings call with stock analysts, President and CEO Arne Sorenson said about 80 percent of hotels in the company’s U.S. development pipeline are limited-service properties.

Hilton Worldwide is also focusing on limited-service. In April, the company announced plans to launch a new midscale brand sometime in 2016. The as-yet unnamed brand will be all new construction and have a price point lower than Hilton’s Hampton chain.

Hilton CEO Chris Nassetta said company executives introduced the concept to a group of owners during the recent Lodging Conference in Phoenix.

“The response was extraordinary,” Nassetta said during a conference call with stock analysts. “We expect to formally launch the brand early next year with a large number of signed deals and believe this could be our largest brand by number of hotels over time as it serves the largest segment of customer demand.”

Oil patch troubles

During third-quarter earnings calls with stock analysts, several brand company CEOs pointed to weakening economies in oil production regions as being a drag on limited-service hotel performance.

Kevin Cline, interim president and CEO of La Quinta, said through the second and third quarters, business in oil-related markets in Texas was down between 3 percent and 4 percent, while demand in nonoil markets rose between 4 percent and 7 percent.

Similarly, during the third quarter Wyndham Hotel Group experienced weaker performance in the oil-producing states of North Dakota, South Dakota, Arkansas, Oklahoma and Texas. In those five states, RevPAR dropped 3 percent, while RevPAR for the rest of the company’s predominantly limited-service portfolio grew around 6 percent.

Airbnb and other home-sharing sites also seem to be causing problems for limited-service hotels. Fitch Ratings recently warned investors that lower-price-tier limited-service and extended-stay hotels are most at risk from the effects of Airbnb, citing Wyndham, La Quinta and Extended Stay America as those facing the greatest risk.

 Rising construction costs

While development of limited-service hotels remains strong, higher costs of construction and more limited availability of construction labor could inhibit some additional growth.

Sorenson told analysts Marriott and its partners are seeing “both land and construction cost inflation,” although most of the cost pressures are being felt in large urban destinations rather than suburban and secondary markets where Marriott has about 1,000 limited-service properties in its pipeline.

He added that despite increasing construction costs, new development of limited-service hotels still makes a lot of sense, given relatively inexpensive financing and the continued improvement in performance by hotels in this segment.


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