Following one of the worst industry downturns ever from 2000 to 2003, hotel developers are back in full swing but with a new twist: An upscale product known as select service has emerged as one of the fastest growing and most lucrative niches in the industry.
Leaders in the select-service sector, also referred to as limited service, include Courtyard by Marriott with 670 hotels worldwide and 613 properties in the U.S. and Canada, and Hilton Garden Inn with 234 properties in the U.S., Canada and Mexico. Global Hyatt also is jumping on the bandwagon with plans to revitalize and operate its recently acquired AmeriSuites as a select-service hotel chain with a new name — Hyatt Place. Four Points by Sheraton, with 105 domestic hotels and 36 international properties, is yet another fast-growing chain.
The development pipeline includes Courtyard by Marriott with 102 hotels and 13,052 guest rooms under construction or on the drawing board, according to Lodging Econometrics. Meanwhile, Hilton Garden Inn is a close second with 97 projects and 12,494 rooms under development or in planning stages.
“Despite a modest flow of new hotel openings, 11 of the top 25 markets show negative supply growth through the first half of 2005, up from six markets in 2004,” says Patrick Ford, president of Portsmouth, N.H.-based Lodging Econometrics. “The reason is that a significant number of guest rooms are going off the market.”
In some cases, hotels are closing for renovations. In other instances, hotels that were built 40 or 50 years ago are closing because they can no longer compete with newer limited-service hotels. In many markets, the first wave of new supply will replace vanishing inventory before contributing to net supply growth.
Although the select-service niche is growing, consultants and operators say it will be a long time before the segment is overbuilt. Statistics show that the construction pipeline is only growing modestly. Across all niches in the industry, 58,420 new guest rooms were added in 2004, resulting in a reported 1% net supply increase. In 2005, 70,646 rooms will be added, but early indications are that new net supply will finish below 1%.
Driving factors
Perhaps the biggest reason for the hotel segment's success is that these properties appeal to both consumers looking for a nice room at a value, as well as business travelers who need to tighten the belt and spend less than they would at a full-service hotel, says Mark Woodworth, executive managing director at PKF Hospitality Research in Atlanta.
By and large, select-service hotels typically include about 100 to 200 guest rooms, limited food-service operations, and scaled-down meeting space. On the flip side, these properties often tout spacious guest rooms with comfortable, custom beds that are comparable to rooms found at their full-service cousins.
Some additional trademarks of select-service hotels include lounge areas for working and socializing, hot breakfast service, and free high-speed Internet access. Travelers get all this for about $100 a night — less than they would pay at a full-service Marriott, Hilton or Sheraton.
With this in mind, it's no surprise that these properties hold up better during industry downturns than upscale, full-service hotels, explains Al Calhoun, managing director of Jones Lang LaSalle Hotels' new select-service division.
“We focus on services that business travelers want for a value. Our guests are productive while they're on the road, and they don't see the value in paying for additional services,” says Chad Waetzig, Marriott's senior vice president of select-service brand management, which includes Springhill Suites, a growing all-suite, upscale brand.
“Travelers today want the comforts of a full-service hotel, but they don't want to pay the price to stay there,” adds Hung Luk, executive director of Four Points Manhattan Chelsea and Chelsea Grand LLC.
High-quality alternative
Many developers are drawn to select-service hotels because they are less costly to build than full-service properties. A Hilton Garden Inn would cost about $100,000 per room to build in New England, compared with twice that amount for a Hilton hotel, explains Gerry Chase, president and COO of New Castle Hotels & Resorts in Shelton, Conn. New Castle operates three Hilton Garden Inns and four Courtyards that have a first-class feel, but which can be built for substantially less than full-service hotels.
These hotels also have lower operating costs because they don't offer an abundance of meeting space, catering services, or multiple restaurants, says Hoyt Harper, senior vice president of brand management at Starwood Hotels & Resorts.
“Select-service hotels are a big part of our business. They are cost-effective to build and they appeal to travelers,” says Mit Shah, president and CEO of Noble Investment Group in Atlanta, which owns and operates 30 hotels including both Courtyards and Hilton Garden Inns. While Noble also owns full-service properties, Shah says the company's highest occupancy rates are in select-service hotels.
During the past couple of years, select-service hotels have indeed been top performers. Occupancy at a sampling of these properties with an average of 171 rooms hit 70% last year, compared with 67.5% in 2003. Average daily rates rose 4.8% from $98.67 in 2003 to $103.41 in 2004, while RevPAR jumped 8.6% to $72.34 last year, up from $66.59 in 2003, according to PKF Hospitality Research.
Game of reinvention
With competition heating up in the select-service segment, established brands are rolling out brand enhancements. Meanwhile, other hotel companies are entering the game with new brands to appeal to developers looking for something different.
Courtyard's ongoing reinvention strategy, for example, calls for all properties to offer The Market — a 24-hour self-serve food pantry — and spacious lounge areas. Hotels will feature hot table-side breakfast service, although lunch and dinner service will still be offered at some properties. All Courtyard properties will offer the enhanced amenities by the first quarter of 2006, according to Waetzig.
Hilton, in turn, relaunched its Hilton Garden Inn brand early this year. The hotels are already known for their signature glass-walled pavilions that house the registration desks, Pavilion Pantry self-service food marts, and dining/lounge areas. Room enhancements, however, include free high-speed Internet access, complimentary guest remote printing to the hotel business center, new Garden Inn beds and high definition televisions.
Hilton hopes to have 350 Hilton Garden Inns open by the end of 2007, which will make the brand the company's largest chain. “These brands continue to reinvent themselves with the amenities they offer,” says Shah at Noble Investment Group.
With the success of Courtyard and Hilton Garden Inn, other hotel companies are also jumping into the select-service niche. Starwood, a recognized leader in the full-service hotel segment with its Westin, Sheraton and W brands, is working with owners to grow the Four Points chain.
It now has 64 properties under development, almost all of which will be newly built, franchised properties. That's a far cry from 2003 when Starwood only had five Four Points in its pipeline, says Harper, adding that the company expects to have more than 300 Four Points open in the next five years.
Starwood has spent the past year reinventing its Four Points brand to compete with Courtyard and Hilton Garden Inn. Four Points now has prototypes for urban, suburban and resort markets. “There's a lot of interest in our brand as an alternative to Courtyard and Hilton Garden Inn. We may be smaller, but we're setting the standard in terms of lifestyle, design and comfort,” says Harper.
Four Points hotels, he says, are designed to appeal to developers looking to build select-service hotels or convert properties to this type of product — in any location.
The urban prototype sports a contemporary interior design. The newly built 158-room Four Points by Sheraton Manhattan Chelsea, which opened in March 2004, is a prime example.
The chic property features a fitness room, a comfortable lounge area, and two executive boardrooms with plasma screen televisions. All guest rooms boast the new Four Comfort Bed (similar to the Westin Heavenly Bed) and free Internet access.
Luk, the hotel's executive director, says he looked into other select-service brands, but chose Four Points because the chain is not yet saturated in Manhattan.
Chelsea Grand also wanted to take advantage of Starwood's marketing clout and strong reservation system. Luk is constructing a second New York City Four Points hotel, which will open in Soho in late 2006. “We opted to be different,” Luk says, “and we wanted to be a leader.”
Robyn Parets is a Boston-based writer.
New Brands on Horizon
Recognizing the growth potential in the select-service category, Starwood Hotels & Resorts is not stopping with just one brand. In June 2005, the company announced that it will debut an entirely new select-service hotel concept, dubbed Project XYZ.
These new hotels will share characteristics of the company's upscale, boutique W brand, but tout lower daily room rates. XYZ will also continue to provide an urban-inspired lifestyle alternative to select-service brands like Courtyard and Hilton Garden Inn. The first XYZ hotels will break ground early next year and open in 2007.
Choice Hotels International is yet another hotel company hoping to expand a new chain — Cambria Suites. Since the company first announced the brand in January 2005, it has executed six franchise agreements and is reviewing an additional 10 franchise applications.
“Our franchisees like the segment, but we had nothing to offer (before Cambria Suites),” says David Pepper, senior vice president of franchise development. Choice is aiming to have 200 Cambria Suites open in the next five years.
The hotels will have an average of 100 to 150 oversized rooms. Each property will feature lobbies with multi-purpose lounges that will be used for breakfast buffets, media walls, and convenience stores. In addition, hotels will offer 1,000 sq. ft. of meeting space, fitness facilities, and indoor pools. Average daily room rates will be about $100.
A typical Cambria Suites will cost about $63,000 to build, excluding land and soft costs. This is about half as much as it would cost to construct a full-service property, says Pepper. “There's a big opportunity for Choice with Cambria and for investors.”
— Robyn Parets