Economy Chains Face Lack of Demand

In the rapidly expanding room pipeline of the U.S. hotel industry, one segment seems to have fallen out of favor with developers. In June 2016, STR counted 166,000 rooms under construction. However, only 1,000 of these rooms were in the economy segment, which, as defined by STR, is comprised of 44 brands. These properties are mostly smaller with an average room count around 75. Economy ADR is on the low side at $59. Average annual occupancy for the segment since 2000 has only been around 55 percent, and so far this year economy occupancy has been at 57 percent.

Of course, it should be kept in mind that this segment is not immune to the swings of the macroeconomic environment. This was clearly seen in 2009 when STR recorded an occupancy of only 48.5 percent of all rooms sold, meaning that half the economy inventory stood empty for the year. Fortunately, these numbers have rebounded, but for the segment as a whole we have never reported occupancy of over 60 percent.

The underlying fundamentals of supply and demand echo the story of a somewhat stagnant sector. The average demand increase since 2000 has been only 0.3 percent. In all other scales this would spell trouble. However, in the economy segment, the supply growth has been only 0.3 percent, effectually showing no occupancy growth over a 16-year period. The year-to-date number of rooms sold increased slightly from approximately 77 million in June 2000 to approximately 80 million June 2016. At the same time, the number of economy hotels grew from 9,200 to approximately 10,200, a very small increase given the 16-year time span.

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Historically, the performance metrics for the economy sector have been much stronger on weekends versus weekdays. Through June 2016, the weekday occupancy was only 53.7 percent, whereas we reported a 63.5 percent weekend occupancy. Granted, the weekday averages are reduced by the Sunday occupancy performance of only 49.1 percent. The markedly better weekend performance is also mirrored in the weekend ADR premium of $7. The average room on a weekday costs $57, versus $65 on a weekend.

In the long run, the economy segment ADR increase has hardly kept pace with inflation. In 2000, rooms were sold for $47.54 with a relatively low increase to $58.78 in 2015. The average ADR increase over this period was just 1.5 percent. As discussed earlier, because of the lack of occupancy growth, RevPAR only increased 1.6 percent on average. For the United States, that average annual increase was 2.9 percent.

Monitoring this segment’s performance should be interesting over the next three to five years. Changing customer preferences and property renovations and updates provide a real opportunity to capture the quality and price-conscious consumer. Conversely, as customers trade up to new midscale product, economy properties and brands in need of a refresh will be left behind.

About the Author
Jan Freitag is senior vice president of STR.