The U.S. lodging industry is in the later part of the economic cycle and questions about the longevity and health of the industry are being read in editorials and heard at conferences across the country. And indeed, we at STR project a slowing of the growth of U.S. RevPAR from over 8 percent in 2014 to just around 3 percent in 2017. In this environment, lending becomes harder because traditional money sources still can recall the 2009 downturn all too well and are restricting the flow of funds to new construction. So, slower growth in our lodging pipeline is to be expected.
However, there is one exception to trend: The upscale segment. If there is a current darling of the industry and development community it is the limited-service hotel with small meeting space, very limited F&B offering and with around 150 rooms. Thirty-two brands make up this scale, comprised of chains such as Courtyard, Hilton Garden Inn, Four Points, and Hotel Indigo, among others. At the end of the year 2000 there were around 2,000 upscale hotels, at the end of 2010 there were around 3,000, and at the end of the 2015 there were around 4,000 upscale hotels. The share of room nights available in this segment as a percent of total U.S. room nights increased from 7 percent in 2000 to over 11 percent in 2015. The demand share growth was equally impressive. In 2000, 6 percent of all rooms sold were in the upscale segment; at the end of last year it was 11 percent. No wonder then that the development community is enamored with this hotel type.
What is even more telling of this trend is that the current under construction pipeline of upscale rooms makes up roughly 34 percent of all rooms under construction in the United States. Performance for upscale hotels has been very healthy for the last several years. Hotels in this scale have always seen an occupancy premium compared to the average hotel. This was most pronounced in the middle of the downturn of 2009, when the industry recorded occupancy of less than 55 percent and upscale hotels still sold over 62 percent. This was off a high occupancy in 2006 of 70.1 percent.
So, while by no means recession proof, the segment weathered that storm much better than its economy and midscale counterparts. Most recently, the absolute occupancy for the year 2015 was 74.3 percent, so on average hoteliers sell three out of four upscale rooms every night. Naturally that level of occupancy breeds pricing power and room rates for the segment have increased from $108 (in 2010) to $135 (in 2015) or roughly 25 percent in just five years. For the nation, that increase over the same period was 22.6 percent. So not only are upscale operators able to attract more guests, they are also able to increase room rates a bit faster.
As the industry continues to evolve and less money is available to develop full-service hotels, it will be interesting to note how the designs of upscale hotels continue to change and adapt to new customer preferences. Food and beverage offerings that are slimmed down but still meet the needs of the business traveler, improved meeting space design, and changes in room layout and amenities are all topics that are hotly debated by engineers, developers, and brand managers alike. As the brands evolve their offering customers and owners alike will continue to be attracted to upscale hotels.
About the Author
Jan Freitag is senior vice president of STR.
