NASHVILLE, Tennessee — With economic and financial market conditions stymying both new hotel development and transactions, many hotel owners have focused on conversions to revamp their portfolios.
While certainly not a new concept, changing brand flags gives owners an opportunity to try something new and potentially give their hotels a performance boost.
During his presentation, “The Role Conversions Play in the Pipeline” at the Hotel Data Conference, Michael Stathokostopoulos, senior director of hospitality market analytics at CoStar, said there are five ways a hotel can convert. A hotel can transition from an independent property to a branded one as well as the reverse. A branded hotel can change flags to another brand within the same brand family or switch to one under a different brand franchise company. The last way is for a closed hotel to reopen through one of the aforementioned ways.
The conversion data available does not track whether a hotel has never converted, those that have closed and reopened under the same affiliations or other permanent and temporary closures, he said.
“The majority of hotels that have been through a conversion have been through multiple conversions,” he said. “Actually, 60% of hotels have converted between two and four times, and all the conversion frequency drops after four events.”
Nearly 30% of hotels have converted from five to 16 times, he added. The total average time of affiliation decreases as conversion frequency increases mainly due to the fact that some branded hotels moving to another brand will briefly go independent for a few months or years.
Existing inventory
In 1999, 12% of the U.S. hotel inventory was branded, but within 20 years, brand-affiliated hotels reached 41% of the market, Stathokostopoulos said. Today, that figure is 57% of hotel properties. Out of the 65,000 hotels in the mix, approximately 37,000 are affiliated with a brand.
Most hotels are located in suburban and small metro areas, he said. Small metros have more independent properties than branded, and the opposite is true of the suburbs. Among the chain-scale segments, branded hotels have the biggest concentration in the upper-midscale and economy segments.
Since the early 2000s, at least eight out of every 10 hotels that open are affiliated with a brand, he said. On the other end of things, the majority of hotels closing permanently are independent, also eight for every 10, up until the pandemic.
“Since the pandemic, we did see an increase in the number of hotels closing, but in the branded hotels closing as well,” he said. “And putting things into perspective, we have roughly 650 hotels opening per year, mostly branded. We have 500 hotels on average closing per year, mostly independent.”
Conversion activity
The number of hotel conversions has grown since the early 2000s and reached its first peak in 2007, and it has been elevated up until the pandemic, Stathokostopoulos said. It slowed in 2020, but there has since been an uptick in activity. Also, since the pandemic, many hotel owners found a way to exit their brand agreements through negotiations, but most of them moved to another brand instead of going independent.
When comparing conversion activity to new hotel openings, the two tend to trend inversely, he said. There were some periods they trended together, such as 2004 to 2007, but those are the exceptions.
“It takes time for new hotel openings to gain momentum, but once they do, obviously they limit the upside of new volume of conversion activity,” he said.
Before the pandemic, the elevated level of new openings muted conversion activity, but the pandemic upended everything from new builds to conversions to transactions, he said. As the hotel industry recovered, conversion activity picked up and owners have favored branded properties.
“There is a clear preference toward branded products,” he said. “Capital providers are becoming even more risk-averse, favoring branded products, and owners want to get access to established distribution channels.”
According to data since 1990, most owners changing hotel flags do so to change both the brand and parent affiliation, Stathokostopoulos said.
“It’s clear that whenever a hotel is changing a brand, they’re going to change both the brand and the parent, six out of eight, three out of four — however we want to slice it, they’re changing both,” he said. “Market participants are claiming they’re able to get better incentives by seeking a competing brand and brand company, and they’re able to achieve greater diversification with their assets within the market.”