Adapted by Dave Hogg from a December 2, 2014 article by Ed Watkins, Editor-at-Large, Hotel News Now
• For the most part, business travelers prefer the select-service experience over tired full-service hotels.
• Institutional investors have recently been clamoring for select-service product.
Once the hotel industry’s step-child, the select-service segment has blossomed into the preferred product type for many investors and developers. With all the talk and media hype about boutique and lifestyle brands and concepts infiltrating the hotel industry, a trend that’s been flying under the radar is the rise to dominance of the select-service segment of the industry.
Of course, select service (at one time called limited service but since changed for reasons no one really knows) has been the preferred product type for mom-and-pop-type entrepreneurs. Many owners, including most of those in the Indian-American community, got their start by buying, then developing select-service hotels.
The rest of the industry—and most importantly Wall Street and other institutional investors—looked upon this segment as a hotel industry step-child: It was a nice street-corner business, but the real money was in full-service, big-box convention hotels and luxury beach and mountain resorts.
Those attitudes have changed in the past decade, and certainly since the end of the last recession. Select-service hotels have always been cash machines, consistently generating profit margins in the 40% range. The problem for institutional investors was one of scale. The thinking was why bother with a 90-room select-service Fairfield Inn, even one throwing off gobs of cash, when you can invest in a 500-room downtown Marriott that creates profit through volume, not margin.
Part of the shift toward the segment is due to changing travel patterns. In recent years the iconic suburban, 250-room full-service hotel, complete with a depressing bar and restaurant, had fallen out of favor among business travelers. Instead, these road warriors have flocked to the select-service hotels popping up all around, and usually surrounding the old full-service dinosaurs.
These new-style properties have the same quality of guestrooms and amenities as full-service hotels, but they are easy to navigate and offer the amenities business travelers want most: free Wi-Fi, quick and often-free breakfast and a lobby to gather in the evenings to get a bite to eat and a beer.
A review of U.S. hotel development pipeline data from STR, the parent company of Hotel News Now, shows how developers are flocking to select service. As of the end of October, five select-service power brands—Holiday Inn Express, Hampton, Hyatt Place, Fairfield and Comfort—accounted for 900 hotels with more than 86,000 rooms under contract in the pipeline.
Clearly, this is the segment of choice for many developers.
Institutional investors also have found a taste for this product type. Several announcements in the past month reinforce that notion:
• American Realty Capital Hospitality Trust agreed to pay $1.8 billion for 116 mostly select-service hotels in 31 states.
• According to a report in the Pioneer Press, ZMC Hotels is putting its 28-hotel portfolio up for sale. All but two properties in the package are select service.
• The trend is global. Plateno Hotels Group signed an agreement with Hilton Worldwide Holdings to develop more than 400 Hampton by Hilton properties in China. The first is expected to open by the end of 2015.
The select-service segment has been firmly planted as the preferred product type for owners, investors and, most importantly, guests. The interesting thing to watch is how this business niche develops and innovates in the coming years.