Not all hotels are created equal — or hotel categories, depending on prevailing economic trends. The hotel category has been hot — despite formidable competition from Airbnb and other sharing-economy players of its ilk — but the hotel category is cooling.
Demand is forecast to grow modestly this year for many hotels, but significantly better for premium select-service and extended-stay hotels. They are one of the best-performing real estate investments in today’s market and should not be confused with the overall lodging sector, according to a new report from JLL. Investors’ appetite for select-service and extended-stay hotels is on the rise as they look to deploy capital in higher yield investment opportunities with defensive characteristics, the report says.
At the core, the attributes that make this sector so attractive are its streamlined operations, technology-focused amenities, and lean staffing models with cross-trained personnel. Collectively, the report says, these attributes enable select-service and extended-stay hotels to achieve lower operational costs, allowing the sector to enjoy the highest and most stable margins in the lodging industry.
Relative to traditional and alternative real estate property sectors, the select-service and extended-stay hotel sector outperforms from an occupancy growth, room-rate growth, yield and returns perspective. This performance endured multiple economic cycles, highlighting the downside risk protection and durable income stream that the sector offers.
The select-service and extended-stay sector also offers opportunity for achieving investment of scale. When looking at existing premium select-service and extended-stay hotels in the United States across Marriott International, Hilton Worldwide and Hyatt Hotels, there are nearly 9,000 hotels with over 1.0 million rooms in aggregate. Collectively, these parent companies amassed more than 250 million loyalty members in the United States at year-end 2019. What’s more, this top-performing cohort is estimated to represent nearly $200 billion in asset value when applying average price-per-room metrics of recent transactions.
Evolved product in this space featuring technology-focused amenities, limited food and beverage programming with a local market focus, and open-spaced lobbies that encourage guests to mingle, makes select-service and extended-stay hotels an attractive lodging option.
“The evolved product resonates with guests’ needs and expectations, which helps boost demand levels and occupancy growth,” the report notes.
Indeed, overall U.S. hotel demand is expected to grow 1.6 percent in 2020, while select-
service and extended-stay hotel demand is anticipated to outperform by growing 2.7 percent in 2020. This is largely underpinned by strong transient demand levels, which account for the lion’s share of lodging demand for select-service and extended-stay hotels. Favorable U.S. household wealth, consumer spending and corporate profit growth trends in 2020 will support continued positive transient demand.
Ultimately, the report concludes, specialist owners with long track records of navigating the financial and operational aspects of the sector are best positioned to drive returns.
Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.