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Limited-Service Hotels Dominate Hospitality Construction Pipeline

Around 70 percent of under-construction stock in the hospitality sector is made up of limited-service hotels.

Developers continue building limited-service hotels in top markets, according to industry sources.

“They are among the most profitable of the [hospitality] property types,” says Anne R. Lloyd-Jones, managing director in the New York office of HVS, a global hospitality consulting firm. “With less beverage space and virtually no meeting space, they are a less labor-intensive property type. So, while you still need the full complement of housekeepers and desk staff, you’re not as dependent on labor. One of the things people are concerned about looking forward are labor costs and labor availability. So, a [limited] service hotel is just generally in a better position than some other properties because they don’t require quite as much labor as their full-service hotel cousins do.”

Increasing labor costs are one of the biggest challenges facing hotels today.

In addition, due to offering fewer amenities compared to full-service hotels, limited-service properties also require less land for construction. 

Today, many travelers staying at hotels in prime markets don’t necessarily want to eat and drink at the hotel restaurant, says Todd Benson, principal at Pebb Capital, a real estate and private equity firm. They prefer going out for local food and experiencing the city, so location might be more important to them than the amenities of a full-service hotel.

“Additionally, the increase in food delivery services, such as DoorDash and Uber Eats, further strengthens the limited service hotel appeal as in-house dining options are no longer a necessary requirement for business travelers,” Benson notes.

There are 205,000 rooms currently under construction in the hospitality sector, with 70 percent of those in the limited-service category. Of the total 205,000 rooms, 46 percent are located in the top 26 markets, according to Jan Freitag, senior vice president at STR, a data company.

“The reason that [limited-service] hotels work very well in prime markets is they can have a fairly small footprint, so they don’t need a lot of land, and they’re very efficient to develop and own,” says Lloyd-Jones. “So, if you can build a [limited-service] hotel, it will fit on the small footprint that’s available in prime markets and you’re going to be putting a majority of your money, two-thirds of your development dollars, into rooms, which generate a pretty high profit ratio.”

Limited-service hotel supply has grown every year since 2013. Supply grew by 2.8 percent year-to-date ending in October 2019. Revenue per available room (RevPAR) was up 1.5 percent. However, that’s the lowest growth rate in over five years, according to STR data.

“[RevPAR growth] is indicative of slowing in this part of the cycle,” says Freitag. “For 10 consecutive years of positive RevPAR growth, we’re now finally getting into an environment where RevPAR is slowing. So, 1.5 percent is certainly part of that slower growth. It’s still growth, it’s just not as aggressive as it used to be.”

Limited-service hotel occupancy grew by 0.3 percent year-to-date ending in October 2019. But occupancy may soon show a dip, according to Freitag.

“We’re building new rooms faster than we’re selling new rooms,” he says. “What that means then is occupancy is going to decline. What that means then is that all RevPAR growth has to come from room rate growth.”

The average daily rate (ADR) in the limited-service hotel sector was up 1.2 percent year-to-date ending in October 2019, down from 3.0 percent during that same span a year ago.

“[Limited-service] has seen pretty healthy performance, but they’ve also seen a lot more competition,” says Freitag. “Developers like them, lenders like them, owners like them and guests like them. We will see more of them.”

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