Economy segment hotels are expected to post a nearly negligible overall occupancy drop in 2017; however, experts do see some opportunity to continue to push rate and RevPAR. Even though growth in demand levels for the segment remain conservative, sources believe the enduring appeal of a bargain-priced product, paired with anticipated growth in the national economy, bodes well for the sector this year.
According to industry researchers, economy hotels are still operating below the historical highs for occupancy in the chainscale. And while those prior record-setting occupancy levels may not be in reach in the near future, experts say there’s still room to grow the market, which can’t be said for the upper-tier hotels, which have essentially reached their practical maximums in occupancy.
“When we’ve tracked the economy chains from back in the latter part of the 1980s and early ’90s, they had occupancies in the 60s and they’ve never come back to that,” said Bobby Bowers, SVP of operations for STR. “If you look at basically all of the other chainscale groups, from an absolute occupancy number, they’re not at their high points, but they’re not far away, aside from economy.”
Predictions are fairly straightforward for the economy sector this year. CBRE Hotels’ Americas Research is expecting economy occupancy to fall -0.2% to 57.5% overall, with an ADR gain of 2.8% to $62.55 and RevPAR growth of 2.6%, to $35.95. STR is also projecting a similar performance, with a year-end 2017 occupancy decline of -0.2%, ADR growth of 2.3% and a RevPAR increase of 2.2%. There is also minimal new supply—just 0.5% versus a 0.4% uptick in demand—and that factor is also keeping the outlook relatively stable.
“In economy, not much new supply has happened there for a long time,” said Bowers. “The Value Place guys that are WoodSpring now, that’s kind of been the most new construction you’ve seen there.”
But there are other concerns. One broader macroeconomic issue that many hoteliers are talking about this year is the rising cost of labor—especially in markets where recent increases have been made to the minimum wage—but most of the focus has been on the cost impact to full-service properties, which generally carry a larger staff. Experts warn, however, that lower-priced, limited-service hotels like those in the economy segment may also feel an impact in 2017.
“The upper-priced, full-service hotels are definitely much more labor intensive, and labor’s much more a part of the product of that level of service you get at a luxury hotel,” said Robert Mandelbaum, director of research information services, CBRE Hotels’ Americas Research.
“But, on the other side, if your wages go up 10% for the very few employees you have at an economy hotel, that’s going to have a quick impact on your profitability.”
Many owners are now looking to the incoming Trump administration, and the expected positive impact the new leadership will have on the economy, as the “magic bullet” solution to the labor issue. Time will tell if a change in the White House will truly be the answer.
“I am hoping to see an upward swing in the economy segment,” said Bennet Davis, owner of the Americas Best Value Inn in Brandenburg, KY. “The unemployment rate is still low, so finding quality employees is a challenge. It should be interesting to see how the next four years pan out for the hotel industry, having a hotelier in the White House.”
Others hope the new administration will fuel a nationwide reinvestment in infrastructure, which would lead to a surge of construction workers in search of economy-priced rooms. Experts said recent declines in unemployment rates and rises in wage growth have already triggered resurgence in construction and manufacturing activity and hence, economy hotel demand; the anticipated boost from Trump’s policies, if any, could be a potential boon for the segment in 2017 and beyond.
“If the whole focus that Trump has put on infrastructure—and it seems a lot of Congress is also favorable to that—if that proceeds, a lot of economy and lower-midscale hotels will benefit because that’s a lot of typically blue-collar workers,” said Marian Goodman, SVP of development at Channel Point Hospitality. “Our office is in Plano, TX, and I see a dozen active cranes pretty much any place I look on the skyline. The economy is growing again, and if we add the infrastructure piece, we’re going to continue to do very well.”