Select-service hotel performance dimmed by supply surge
 
Select-service hotel performance dimmed by supply surge
19 SEPTEMBER 2019 8:16 AM

The supply of limited-service hotels in the top 25 U.S. markets has soared in the past three years, while growth in key performance metrics for this sector has been muted.

HENDERSONVILLE, Tennessee—The growth of limited-service hotels in the top 25 U.S. markets has outpaced that of other hotel classes in the past three years. After several consecutive years of intense competition, hotels in that sector showed the lowest year-to-date percentage change in revenue per available room (-0.6% to $66.24) since 2010.

Top 25 US markets: Limited-service hotel supply took off in 2017
As of June 2019, limited-service hotels in the top 25 markets make up nearly 25% of total limited-service hotel supply in 165 U.S. markets, and it is still growing. Starting in 2017, limited-service hotel supply in the top 25 took off at a speed that is significantly higher than the national average, growing by about 3% in both 2018 and 2019.

The increased supply of limited-service hotels might have resulted from trending demand for such hotels in previous years. In the top 25 markets, limited-service hotel demand grew at a faster pace in 2014 (+5.6%) and 2015 (+3.7%) than other hotel classes throughout the United States. By comparison, growth in demand for total U.S. hotels was 3% on average during those years.

Occupancy dipped slightly while absorbing new supply
Limited-service hotels in the top 25 markets have experienced an understandable tradeoff between growth in supply and occupancy. The unfavorable imbalance of growth in supply that has outpaced growth in demand led to a decrease in year-to-date occupancy for June 2016, 2017 and 2019. Not surprisingly, pricing power has declined as well, as evidenced by a decline in average daily rate. As a result, RevPAR for hotels in the segment has declined by 0.6% to $66.24 year-to-date in 2019, which marked the first year-over-year drop since 2010.

On an absolute basis, limited-service hotels in the top 25 markets have been performing well, and their occupancy has remained at roughly 70% for several years. Despite such healthy occupancy, ADR has not registered much of an increase.

Continued pipeline growth for limited-service hotels in the top 25 markets
Looking forward, roughly 3,700 limited-service rooms, including more than 1,000 rooms currently in construction, will be added to a top 25 market on average. By contrast, roughly 400 limited-service rooms are in construction in markets outside the top 25 on average. With the large incoming volume of new supply, limited-service hotels in the top 25 U.S. markets will likely experience heightened competition in the near future.

Conclusion
The muted performance of limited-service hotels in the top 25 U.S. markets has largely been due to growing supply and projects in the pipeline in recent years. Year-to-date ADR growth was muted and barely positive (+0.4%) in 2019. Absolute occupancy, however, has remained robust at around 70%.

Going forward, STR will continue to monitor development trends and consumer preferences for limited-service hotels in order to provide timely information for hoteliers and developers to respond to any changes in such a competitive landscape.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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