Select-service products in the branded upper-midscale and upscale segments continue to dominate the hotel construction pipeline, and for good reason.
REPORT FROM THE U.S.—Select-service brands positioned within the upper-midscale and upscale hotel chain scales continue to dominate the hotel supply pipeline, driven by both the popularity of these products among travelers and the significant cost advantages of building and staffing them, sources said.
Meanwhile, construction of large full-service, new-build hotels is relatively rare.
Big-box, full-service hotels usually are just too expensive to build new these days, especially with rising labor and materials costs, sources said. The pervasive guest preference for select-service brands, and the healthy profit margins from operating them, make developing select-service flags a no-brainer, particularly for those who are risk-averse, they said.
“We are hopeful and optimistic about the select-service space, because we really think it delivers the essence of what a guest is looking for: a local experience, safety, value and good connections with people who care about those things,” said Brian Fry, president of Commonwealth Hotels. “We want to take care of our guests, and there’s a real efficiency and value to the select-service space that I think is appealing.”
The new standard
Sources pointed to several factors fueling the select-service development boom. Chief among them is cost.
Select-service products are cheaper to build and then operate, yielding considerable savings throughout a property’s life cycle.
Financing also is easier to obtain for these projects, and customer demand continues to grow.
“Certainly, select-service, midscale and upscale are still the darling, so to speak,” said Mark LeBlanc, EVP of development and acquisitions at Interstate Hotels & Resorts. “Typically, in select-service you can still do four- or five-story, stucco-type products, which are cheaper to build. But the other factor is labor, which is a lot more expensive because there’s a lot less of it to go around. When you have a select-service product, labor becomes much less of a factor, particularly if there’s a union component. Your profit margins are still much better.”
Select-service isn’t just supplanting higher-priced full-service hotels, either. It’s also cutting into demand for products such as extended-stay hotels, previously one of the industry’s fastest-growing segments. Select-service hotels achieve this by offering value that, for some travelers, outweighs conveniences like in-room kitchens, sources said.
“When you look at the user today—whether it’s the business or leisure traveler—a lot of us want to have a nice, clean, enhanced room, but I’m just as interested in the common areas,” Bill Wilhelm, president of R.D. Olson Construction, said. “What’s the relationship between the property and external venues like restaurants and entertainment? What does the property have to offer? Is there a sky bar or a lounge that looks out over the city? Those things kind of drive the decision of what property you’re going to stay at, whereas before I was always after that extended-stay hotel because I wanted the kitchen and a little more of a desk.”
Some believe the rise of select-service is also part of a larger cultural shift, in which some guests no longer need or even want certain services that were once standard at hotels. This demographic evolution is giving rise to a series of automations, either currently available or in development, which aim to minimize interaction between guests and hotel staff. These innovations might also affect the cost of labor, which is a hot-button issue within the industry.
“The one thing that is changing is the modernization and robotization of hotels. It’s a real thing that’s going on,” LeBlanc said. “It’s not a huge impact today, by any means, but I think there’s no doubt that everybody’s thinking the same thing: Where you can, eliminate the front desk almost completely, whether (by) a mobile check-in app or an iPad-type system in the lobby where (guests) check in. Maybe there’s a concierge person to help with (guest) questions, but you don’t have your traditional front desk. That’s a huge savings on labor. There are robots being tested to help clean rooms. As those things come into play, the margins get a little better and certainly the labor issues become less of a factor.”
Full-service: A risky proposition
Full-service hotel projects still are happening, but they’re fewer and further between, sources said. To be viable, these projects must hit the right combination of location, cost and demand drivers, they said.
Many of the new-build, full-service properties that do make it into the construction pipeline are viable by virtue of being mixed-use developments.
Another alternative, sources say, is adaptive reuse of existing buildings. This strategy offers a cost-sensitive option for developers while also revitalizing buildings—especially historic structures—and surrounding neighborhoods. It’s a win-win when the right situation falls into place.
“We’re not seeing a lot of new-build, full-service hotels that don’t have a multi-use component, whether it’s a condo component or retail on the first floor,” LeBlanc said.
“We have some projects in downtown L.A. where they’re taking an old office building and gutting it and converting that to a full-service hotel. A high-rise would cost $500,000 to $700,000 a key to build, where with an adaptive reuse, it would be maybe $250,000 to $400,000 a key, so your costs are significantly less. The neat thing is, in most cases, architecturally you’ve got a very nice building that (now has) a new use and is a great product.”
Full-service hotels generally do have the revenue-generating advantages of added facilities, such as meeting, banquet and convention space, as well as large F&B outlets, which set the product apart from select-service. However, in some markets, there’s just not enough demand for these ancillary facilities, at least for now.
“Once you start creating large conference centers, meeting spaces and ballrooms, you drive the cost of the building up, so you have to be able to justify those ballrooms and even the restaurants,” said Stephen Siegel, principal with H-CPM, a hotel construction project manager and owner representation firm. “They’re not huge moneymakers in a hotel; it’s really more of a service for a guest. Nobody really wants to spend the money doing that, because the return’s not there yet.”
One of the downsides to the surge in popularity of select-service products, sources said, is the proliferation of new brands attempting to gain a foothold in the market. As the rise of “lifestyle brands” and other select-service flags becomes increasingly pervasive, some question if franchisors are getting a little too granular with their targeting. This could lead to confusion as to what each flag really stands for, as well as competitive concerns, sources said.
“I think I speak for every hotel developer when I say I have some real concerns with the proliferation of new product coming out from the major brands,” Mike Zimmerman, VP of development for The Olympia Companies, said. “They’re trying to fill smaller and smaller sub-segments of the market, and that is leading to a surge of product that is really hard to differentiate. … That’s really tough for developers, where you are looking at a market and putting a lot of capital at risk and the brand isn’t going to assure you—and they typically won’t—that in your exclusion zone they won’t come up with a new product and put that hotel two blocks from your current one.”
Meanwhile, others question whether the influx of new select-service supply, and the abundance of related brands, will soon have a stagnating effect on the ability of operators to push rates.
With industrywide occupancies at or near record highs, and rate growth not far behind, it’s becoming increasingly vital to make sure the product and market are a perfect match. Otherwise, even popular select-service flags may struggle as new supply comes online.
“The big question out there for most hoteliers is what is the right product, because we have a little bit of everything right now,” Wilhelm said. “The even bigger question is the rates, which have kind of capped themselves over the last couple of years. Room count goes up, and rates have been able to go up marginally, and in some situations, they’ve even dipped a little bit. That’s a major factor in determining how much more supply we can put in the market today.”