Many of the “Road Warriors” and cost-conscious guests traveling today are on the lookout for a limited-amenity product, harking back to the old E.M. Statler days of “A Room and Bath for a Buck and a Half.” What these guests are searching for are what we today call limited-service (LS) hotels. However, lately the distinction between full-service (FS) and LS hotels has been more fluid. A number of new LS prototypes offer food and beverage products for purchase from the front desk or in “grab-and-go” kiosks that allow guests to grab a bite in the lobby or bring a snack up to their rooms. Considering these new F&B options in LS properties, it may be now that the main differentiating factor between FS and LS hotels is the presence or absence of meeting space.
For the purpose of this discussion, we grouped the performance of the three higher-end STR segments (luxury, upper-upscale, and upscale) to represent FS and the three lower-end segments (upper-midscale, midscale, and economy) to represent LS. This serves to highlight differences between the two groups. One of the most visible differences is achieved ADR, which for end-of-year 2015 stood at $170.04 for FS hotels and $87.33 for LS hotels. This is because the higher-end properties offer more amenities, but also have a more expensive infrastructure, so hoteliers need to charge more to make a profit. Occupancy also falls in favor of FS hotels. For 2015, FS hotels reported an occupancy of 72.3 percent, almost 10 points higher than the 61.8 percent reported by LS properties. The smaller occupancy is partially the result of an almost 50 percent higher LS supply (1.16 billion room nights in 2015) than FS supply (649 million). In absolute terms, the numbers are even more telling: STR counted 42,682 LS and only 9,827 FS hotels in the United States at year-end 2015.
That said, over the last cycle developers have disproportionately built FS hotels. The growth rate for these properties has been over 1 percent, even during the last downturn. In contrast, the LS supply percent change has been less than 1 percent since the year 2010. It is worth noting, however, that the upscale segment’s supply growth within the FS number alone was 3.7 percent. That should not be surprising given that the fastest growing brands of the large, publicly traded companies are in this segment.
In the long run, FS hotels show wider fluctuations in RevPAR growth than their LS counterparts. In the strong growth years of 2007 and 2014, the FS RevPAR percent change grew stronger as hoteliers took full advantage of group and business travel demand. However, as those travelers stayed away and companies cut travel budgets, the impact of the Great Recession in 2008 was also more pronounced. FS annualized RevPAR declined by almost 19 percent versus the LS decline of “only” around 16 percent. The rebound for FS hotels was also more pronounced, and with it came a sharp increase in absolute occupancy.
In the near future, we will enter a period where supply growth and demand growth achieve equilibrium. It will be interesting to see how hoteliers react to flat or declining occupancy growth and how they use pricing tools to change their occupancy fortunes. FS hotels will likely continue to run at higher occupancies, so their RevPAR growth figures will probably continue to underperform the LS RevPAR growth. Because of all of these factors, this is the period in the cycle when pricing power should be firmly in the hands of the operators. We will continue to monitor if ADR increases bear this out.
About the Author
Jan Freitag is senior vice president of STR.
