Reviewing Upper-Midscale Hotel Performance

The largest chain scale in the United States is made up of hotels in the upper-midscale segment. Comprised of 9,100 hotels with almost 900,000 rooms, upper-midscale properties represent 18 percent of all hotel rooms and 26 percent of all chain-affiliated rooms in the industry. In fact, many of the 40 chains that STR classifies as “upper-midscale”—Holiday Inn, Hampton Inn, Fairfield Inn, Comfort Inn, and Best Western Plus, to name just a few—have been developer favorites for a long time.

And, it doesn’t look like the segment is losing any ground in the current development boom. Of the 161,000 rooms under construction in April, almost 53,000 were upper-midscale properties, showing that their appeal to hoteliers continues unabated. In fact, there are 45 percent more upper-midscale rooms under construction now than there were a year ago, and as long as financing remains solid, we expect that growth rate to be healthy going forward.

From March 2015 to March 2016, upper-midscale hotels had more rooms available than ever before (324 million), sold more rooms than ever before (218.7 million), and generated more rooms revenue than ever before ($24 billion). ADR ($109) and RevPAR ($73.75) are at all-time highs as well. But given that the pipeline for hotels is steadily increasing, it should come as no surprise that the new supply growth has had an impact on occupancy growth. As a matter of fact, for the first three months of this year, occupancies have declined continuously. Multiple months of declining occupancies have not been reported since early 2010, when the industry came out of the Great Recession.

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In the upper-midscale segment, supply growth has averaged 1.4 percent last year and 1.4 percent for the first quarter of 2016. At the same time, demand growth for 2015 was 3.3 percent and only 0.7 percent in Q1 2016. Granted, the Easter calendar shift probably had a meaningfully negative impact on demand, but even with a clean calendar, a growth slowdown cannot be denied.

Occupancy, however, is still strong. The current quarterly occupancy of 61.6 percent is the second highest occupancy reported since the year 2000, and only 300 basis points behind 2015’s first quarter occupancy, which stands as the current record.

It will be interesting to note the impact of declining occupancy on ADRs. Over the last two years, ADR growth was recorded at over 4 percent, but in the first quarter stood at only 2.6 percent. And, during year-end conference calls, most major company CEOs seemed to imply that the second half of the year should be stronger than the beginning. It will be very interesting to see if their forecasts will come to pass.

As the year progresses, new supply growth will continue to have an impact on occupancies. This means then that RevPAR growth will be driven by ADR, which historically has been a very good sign for profit growth. As inflation continues to be muted and costs are able to be contained, even small ADR increases should yield sizable increases to the bottom line.

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