Upper-midscale hotels to enjoy favorable demand in 2018, despite supply boom

The upper-midscale hotel segment will continue to see extensive new supply in 2018—second only to upscale hotels—but demand growth in this popular market sector may be robust enough to stave off any ill effects. Experts expect another healthy year for upper-midscale hotels overall, even if occupancy growth is less than stellar.

According to CBRE Hotels, supply in upper-midscale will grow 2.7% in 2018, while demand will increase 3.2%. That’s why the firm is expecting occupancy to grow by only a modest 0.5% this year, along with healthy increases in rate and RevPAR.

“Occupancy now has the ability to grow because we’re under 70%, and, therefore, there is room to accommodate the demand that desires to stay at the upper-midscale hotels, as opposed to finding capacity situations in those chain scales that are priced higher,” said Robert Mandelbaum, director of research information services for CBRE Hotels’ Americas Research. “Despite the fact that at 2.7%, it’s the second-highest supply growth rate of any chain scale, we are projecting an even greater 3.2% increase in demand.”

Even in the face of the significant new supply in the segment, the popularity of upper-midscale brands will continue to drive gains in 2018. CBRE is expecting occupancy growth of 0.5% to 67.9% overall, an ADR gain of 2.3% to $115.61 and RevPAR growth of 2.8% to $78.55. STR is projecting slightly less ambitious numbers for the segment, with a year-end 2018 occupancy decline of -0.5%, ADR growth of 1.9% and a RevPAR increase of 1.4%. STR executives, however, stated the chain scale could conceivably perform above those expectations.

“I don’t really see that you would have any huge growth in occupancy; however, I think you could see better growth there, just because their highest occupancies annually are like 65% or so,” said Bobby Bowers, SVP of operations for STR. “There’s some room to move there—it’s just that with all the supply that’s on the board, right now we see them being a little bit down in 2018.”

That’s why some upper-midscale hoteliers are looking to capture a greater piece of their local market share this year, while leveraging the equity of their brands to justify continued growth in rates. For some, this year will be about competing harder in the segment, but without sacrificing pricing power.

“We are maniacal about systematically and strategically identifying the business in our area that fits our revenue and profit models, and arming our sales team with the knowledge, training and confidence to go out and get it,” said Steve Van, president and CEO of Prism Hotels & Resorts. “That being said, we’re focused on rate for 2018, knowing that it will move the needle in the right direction for us. You can complain about supply growth, but capturing demand is as simple as taking it from someone else. As long as there are guests checking in with our competitors, there is business out there to steal.”

Experts expect upper-midscale hotels to also benefit from their positioning—often perceived to be similar to upscale select-service hotels and a step up from midscale—yet at a cost-conscious room rate. That lends itself to demand spilling over into the segment from both the lower and higher chain scales.

“You begin to see a little bit of trading down and trading up when you get into these middle-price tiers,” said Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research. “Sometimes it could be because maybe I was staying in an older upscale hotel, but now a new, fresh, better-located upper-midscale property opened up, so I’m going to trade down—from a chain-scale perspective—but yet, I think I’m getting as good as, or even better, value of a product.”

There’s also an underlying sense that currently unknown macroeconomic factors may boost upper-midscale performance beyond the current projections for 2018. The state of the economy, which in turn influences demand trends, may play a larger role in the coming year, affecting the tenuous supply and demand balance presently informing the estimates.

“We’re saying that the chain scales that are going to see the most impact from the standpoint of occupancy loss is upscale and upper-midscale. For me, that’s a pure reflection of the fact that those two have the most supply growth,” said Bowers. “But when you have negative occupancies forecast for those two segments, and you know what the supply growth is, it just means that the demand, or rooms sold, is not expected to keep pace. That could definitely change with what’s going on with the economy.”

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