NATIONAL REPORT—The outlook for economy hotels is good, with the segment expected to post some of the industry’s highest growth rates for ADR and RevPAR for the rest of the year. These gains will be driven by minimal new supply, along with a continued post-recession recovery that occurred later than with other segments.
“The economy segment continues to surprise and excite us, primarily due to the infrastructure improvements and construction, etc.,” said Paul Breslin, managing director with Horwath HTL, a hotel, tourism and leisure consulting firm. “We expect this segment to do very well in the coming 18 months. The guests who frequent this segment are unique and diverse, from frugal baby boomers to millennials to good old-fashioned road warriors.”
The state of the U.S. economy will also help the segment. “2018 should see more travel in the family segment as the economy continues to stabilize,” said Jay Litt, owner and founder of The Litt Group, a boutique hotel capital project administration firm. “The family segment enjoys value from economy properties and could be a factor in occupancy growth.”
Tim Dick, director, national hospitality advisory services group, real estate advisory group with Duff & Phelps LLC, also is optimistic for the segment. “I think the economy segment will continue to perform well (at or above historical levels) throughout the remainder of 2018. This is largely due to the economic uncertainty that remains among consumers,” he said.
It is also because of the work of the segment’s brands themselves. “[It is also due to] the continued offering and evolution of new features and amenities among the brands in this segment—which will maintain and grow consumer interest,” Dick said. “Conversely, the brands are ‘stepping up’ and expanding their offering (broader F&B) and also creating innovative and interesting spaces that target millennials.”
CBRE is expecting occupancy growth of 0.7% to 58.5% overall, an average ADR increase of 2.7% to $64.04—the highest growth of any segment—and RevPAR growth of 3.4%, to $37.45, which, in terms of growth rate, is second only to the luxury segment. STR is projecting slightly less expansive numbers for the segment, with a year-end 2018 occupancy decline of -0.1%, ADR growth of 2.2% and a RevPAR increase of 2.1%.
Dick said there are several factors as to why the segment is expected to see the highest ADR growth in the industry: the continued economic caution; the renewed price value relationship perception of consumers toward brands in the sector; and the refresh among the brands that position them well in the minds of consumers.
Breslin added, “From a percentage of growth perspective, we agree from overall dollar impact, it’s not huge. The best part of the ADR growth is the flow-through to the bottom line; typically, it’s very lucrative.”
CBRE projects just 0.2% economy supply growth this year, with much of that likely coming from conversions. While this will drive both rates and occupancy this year, other segments are where developers are expanding. “0.2% growth could be a caution with rising interest rates and lower LTV debt ratios,” said Litt.
Breslin said that while the midscale segment may be on the rise, traditional economy brands are working hard to grow their segment. “We would expect with SureStay by Best Western, Avid by IHG and Tru by Hilton, the midscale segment may steal the show,” he said. “The Motel 6 and others are aggressively attacking open markets. This may even bump up the estimated supply.”
While the segment is expected to grow, this doesn’t mean that operators can just stand pat with their offerings to guests, who are looking for more for their money. “Economy should search out items of low cost that can create a value proposition in travelers’ minds,” said Litt. “Make sure to keep your property in clean tip-top shape. Watch for changes in electronics, upgrades to door locks and invest in TVs that compete. Wow the travelers with an experience that is a surprise for an economy hotel.”
Dick agreed, citing areas such as technology, furnishings, RFID door locks, and improved food and beverage options as areas operators should pay attention to. “Something to also look at is the ‘look and feel’ of a residential room for the guestroom, and even a vibe and energy that appeals to millennials. But most important is consistent service.”
Breslin’s advice is simple: “Find a way to keep the hotels safe, clean and fresh—not to mention easy to book, fun and innovative—and the guests will flock.” HB