THE PAST YEAR HAS BEEN a troubled time for the nation's hotels. The economic slowdown put a crimp in business travel, and the threat of terrorism following Sept. 11 convinced vacationers to stay close to home. Occupancy rates plunged and so did room rates.
However, not all hotels have suffered equally. Limited-service hotels — those that do not feature food and beverage service — have held their own, even as luxury hotels and destination resorts have seen reservations vanish.
Hendersonville, Tenn.-based Smith Travel Research tracks limited-service properties through two categories: the mid-scale chains that don't offer food and beverage service, such as Comfort Inn, Holiday Inn Express and Wingate Inn, and the economy chains, such as Red Roof Inn, Motel 6 and Days Inn. (Note: Smith Travel also tracks mid-scale chains with food and beverage service.)
The annual occupancy rate for mid-scale chains without food and beverage (where the average room ranges between $55 and $80 per night) declined 2.3 percentage points to 62.3% in 2001 compared with 2000, and the rate for economy chains (where rooms average $55 per night or less) fell 1.9 percentage points to 56.2%.
By contrast, chains whose properties charge an average of more than $110 per night experienced a 7.1 percentage point drop in annual occupancy rate — to 65.4% — in 2001 compared with 2000, according to Smith Travel Research. Against the backdrop of this relative success, owners and operators of limited-service properties are busy contemplating the next wave of new construction and how to best tailor their properties to travelers. Their plans are varied, from trimming down room size in order to cut construction costs to entering new markets.
Resilience From Within
The experience of Arlington Heights, Ill.-based Arlington Hospitality Inc., an operator of some 80 limited-service hotels such as Amerihost and Days Inn, serves as an example of the resilience within the sector. Occupancies throughout the company rose 7.5% in the first two months of this year when compared with the same period in 2001. The company's RevPAR was up 5.4% from the first two months of 2001.
Michael P. Holtz, Arlington's president and CEO, says a couple of factors are at work in the performance of his properties. He reports that low gasoline prices have encouraged leisure travelers to hit the road in their cars. As for the business traveler, he's seen a change since Sept. 11: “The corporate people are trading down a notch,” he says. “Managers and executives who used to stay in Hiltons and Hyatts are now being asked to save money and stay in less expensive hotels. We're seeing more of that corporate customer now.”
Washington, D.C.-based MeriStar Hospitality Corp. operates 275 hotels, with 55 of them falling in the limited-service category. At those limited-service properties, RevPAR declined an average of 5% in March when compared with the same month a year earlier. But that decline seems modest next to the company's full-service properties, which suffered an average 12% decrease in RevPAR in March when compared with the same period a year earlier.
A New Round Of Construction
Travelers seeking to stay in limited-service properties have more inns from which to choose. In 2001, the U.S. hotel marketplace recorded a 2.4% increase in the number of hotel rooms, to 4.2 million rooms. However, the mid-scale segment without food and beverage experienced far more robust development, with room supply rising 8.1% last year to 561,000 rooms. “That has been the fastest growing sector in the entire industry,” says Duane Vinson, an analyst with Smith Travel.
And there's more to come: Arlington Hospitality put up only six new hotels last year. This year the company expects to come close to doubling that total.
Atlanta-based U.S Franchise Systems Inc. (USFS) broke ground on five new Microtel Inns and another five Hawthorn Suites during the first quarter of this year. Overall the company, which has 518 franchised properties in 48 states, expects to add 75 properties this year, some of them representing conversions from other brands, but the majority are expected to be new builds. According to Michael A. Leven, president and CEO of USFS, that total will be down from the high-water mark of 2000, when 120 new properties were added.
Even if every highway interchange seems to be brimming with limited-service product, executives still say the outlook is good for more construction. Why? For one, limited-service hotels typically have a shorter lifespan than full-service properties, and thus are prone to be replaced more often.
“The big surge in limited-service development started in the 1980s, and many of the hotels built back then are nearing the end of their useful lives,” says John Repa, director of the real estate and hospitality practice at KPMG LLP, a Minneapolis-based accounting firm. “Limited-service hotels that are five years old still seem new and fresh. But properties that are 12 and 15 years old have to worry. Competitors are likely to start a new round of development looking to replace those older-generation properties.”
An old limited-service property typically doesn't lend itself to refurbishment like a big luxury hotel does, experts say. Many of those older hotels were built with open-air corridors, while the favored model today has interior corridors. “The architecture in high-rise hotels is more timeless. You can repaint them and fix them up, and they look good again,” Leven says. “But the architecture on a low-rise roadside hotel begins to look awfully dated after 15 or 20 years. Replacement becomes the best option.”
Still, USFS is taking steps to lengthen the life of its properties by putting vinyl siding on new Microtels. “We can replace that vinyl siding with an all-new skin for less than $100,000 and give each hotel a dramatic appearance change,” Leven says. “That will keep it fresher.”
The economics of rehab are starkly different among the various hotel classes. The owner of a large full-service hotel that cost $50 million to build can pour $10 million into an overhaul, with the result being a brand-new looking facility. By contrast, many limited-service properties cost $5 million or less to build. With land cheap and plentiful in many small towns, owners figure it makes more sense to find a new site and build from scratch again. Thus limited-service properties are viewed by many as somewhat perishable concepts.
The cosmetic appearance of a roadside inn means everything to customers. “Newness, or the appearance of newness, almost always wins out on a hotel strip where limited-service properties are competing against each other,” says Tim Shuy, vice president of economy brands at Silver Spring, Md.-based Choice Hotels International, which owns such brands as Comfort Inn and Sleep Inn and counts some 5,000 properties under its umbrella.
Shuy estimates that the typical newly constructed hotel enables its owner to command room rates that are $10 higher than what older properties can charge. “Newly constructed hotels get more occupancy and they give the owner better profit margins. That looks good to investors, and that's why you see so much continued interest in limited-service construction,” Shuy says.
At the same time, developers are figuring ways to lower the costs of new construction. For its Econo Lodge chain, for example, Choice Hotels has devised a new prototype with simpler furniture, bathrooms built back-to-back between rooms and 10% less square footage than older Econo Lodges. The result is a product that can be built for $30,000 per room, land not included, instead of the $35,000 per-room cost of Econo Lodges built in the recent past. The construction differences are virtually imperceptible to most guests, Shuy says.
Other chains are moving in the opposite direction, adding amenities and repositioning their brands as distinct from the run-of-the-mill, limited-service. Anthony Falor, president and CEO of the Villager chain for New York-based parent Cendant Corp. introduced the extended-stay Hearthside by Villager concept less than two years ago with full kitchens and dedicated living areas, featuring rates of less than $40 per night in most markets.
More recently, the company introduced a spinoff called Villager Premier, which features expanded amenities such as business centers, two-line phones, high-speed Internet connections and even fitness centers. The company converted the 495-room Drawbridge Inn adjacent to the Cincinnati/Northern Kentucky International Airport to a Villager Premier.
“We're finding that pure limited-service hotels are often viewed negatively by travel agents,” Falor says. “What we're trying to do is offer the services that people in focus groups tell us they want. We're finding that companies looking to do employee training, which once used only full-service hotels, are willing to come to one of our properties if we have a boardroom or meeting space that will accommodate their needs.”
The bigger limited-service chains are becoming much more precise in how they segment their businesses. Choice Hotels, which has eight brands, has aimed its Sleep Inn hotels at business travelers, with price points of about $55 to $58 per night and amenities such as large work desks, task lighting and free Internet access. Sister chain Comfort Inn has a price point of $65 per night or so and is targeted at the leisure traveler.
“When I was at Holiday Inn more than 20 years ago, we didn't dream of the kind of subtle differentiation between brands that you see today,” admits Thomas F. Hall, vice president of brand management and strategies at Choice. “But these differences are being driven by consumers. We wouldn't have a concept like Comfort Suites unless consumers had demanded more suites hotels.”
Some limited-service chains are pushing beyond old boundaries into new kinds of markets. Where are they going? In recent years hotels have put up their flags in many towns with populations less than 30,000, a size once considered too small to support a 75-room hotel. Other chains are staking claims to big-city locations once considered the exclusive province of high-rise establishments offering guests luxury comforts.
Baymont Inns and Suites, a unit of Marcus Corp. in Milwaukee, is currently building corporate-owned Baymonts in downtown Chicago and in Ontario, Calif., and is seeking additional sites in Minneapolis, Memphis, Tenn., and Nashville, Tenn. It's the first time the company has dived into major markets. It's had to change its prototype construction in the process: the Chicago Baymont, in contrast to its siblings that average 100 rooms each, will feature 226 rooms.
“Chicago will be our first urban Baymont,” says James Abrahamson, president and CEO of the chain. “We have good distribution in secondary markets now.” Baymont has eight hotels in Chicago's suburbs and a dozen more in downstate Illinois.
“What we're subscribing to is a hub-and-spoke development theory: We have our spokes in place in Illinois, and now we need to put in our hub,” Abrahamson says. “With a downtown Chicago property, we can leverage our investment more fully throughout the state of Illinois and elsewhere around the Midwest.”
Of course, the economics of urban development are different. Arlington Hospitality spends an average of $46,000 per room to build 75-room hotels spread over two stories in small-town markets. The company will start construction in June on a 4-story Amerihost in the dense Chicago suburb of Arlington Heights, population 80,000, at a cost of almost $60,000 per room. The typical Amerihost requires two acres, but for its new urban concept the company needs just one acre, parking included.
The payoff comes in room rates. A typical Amerihost charges less than $60 per night. The new Arlington Heights facility is expected to be priced at close to $90 per night. “I think you'll see much of the growth in new supply of limited-service hotels coming in small towns and in urban markets,” says Holtz of Arlington. However, he warns that these unfamiliar markets will require patience. A typical limited-service hotel currently takes a year or less to “stabilize” at regular occupancies and rates. “In small towns and urban centers it may take 18 months or two years to stabilize a new property,” Holtz says.
Other companies are looking to try new markets, too. Cendant's Travelodge already is in San Francisco and San Diego. “We'd love to be in New York City,” says John Valletta, president of Travelodge. “We're always looking for opportunities, wherever they may be.”
H. Lee Murphy is a Chicago-based writer.
DIFFERENT DEGREES OF IMPACT
The bigger, full-service hotels have been hit the hardest by the recession and the aftermath of Sept. 11, while the limited-service sector has taken less of a beating. The chart below compares the 2001 and 2000 annual occupancy rates of the two components of the limited-service sector with those of the entire U.S. hotel sector and the most expensive chains.
|Occupancy||Percentage Point Change|
|All U.S. hotels||60.1%||63.7%||-3.6|
|Upper upscale chains||65.4%||72.5%||-7.1|
|Mid-scale w/o food and beverage chains||62.3%||64.6%||-2.3|
|*The highest tier of the upscale chain whose properties charge more than $110 per night.|
|*A mid-scale chain without food and beverage whose properties charge between $55 and $80 per night.|
|*An economy chain whose properties charge less than $55 per night.|
|Source: Smith Travel Research|