NEW YORK—Select-service hotels have performed well for many years, and now the segment is in demand by institutional and individual investors, said speakers during a panel at last week’s 36th annual New York University International Hospitality Industry Investment Conference.
“In today’s environment this type of real estate has greatly increased in popularity,” said Mark Fraioli, senior VP with JLL’s Hotels & Hospitality Group, during a panel titled “What’s next for limited service and extended stay?”
“The model has a lot to do with it, specifically the clarity of the expense profile and the margins these properties produce,” he said. “Another element that appeals to investors is the diversification of risk. … You can cut your risk in half by owning nine or 10 individual select-service hotels rather than one larger (hotel).”
The development and performance metrics of select-service hotels make them attractive to investors, said Rajiv Trivedi, executive VP and chief development officer of La Quinta Inns & Suites.
“The segment does better (than others) because of the low cost of construction and the low cost of operations,” he said. “Generally you’re not tying up a large sum of money to build a hotel. You can develop one, anywhere from the economy segment up to the upper-mid-market, for $5 million, $7 million or up to $10 million.
“And your margins are close to 50%, which is not the case for full service. When you look at leverage and return on investment, select service has always presented a great scenario for investors, and while in the past it was mostly smaller investors, now institutional investors are getting into (the segment) in a big way,” Trivedi said.
Transparency and stability of the segment are also draws for investors, said C.A. Anderson, VP of development for Choice Hotels International’s Cambria Hotels & Suites brand. He said the increase in industry data has made investors more comfortable about hotels in general, and select service specifically.
“Over time, institutions have become more familiar with how lodging products work, and as more information has become available they are able to analyze the industry,” he said. “And in the past it was a size question. If you had $1 billion to (invest), putting it out at $10 million a clip could take a long time. Today, with the availability of larger portfolios, investors can move into the sector very quickly.”
Select versus limited
While much investor and consumer interest has been in the midscale and upper-midscale hotel segments, Jim Amorosia, CEO of G6 Hospitality, made a case for economy limited-service hotels, such as his company’s Motel 6 and Studio 6 brands. He drew a distinction between select-service and limited-service brands.
“When we talk about this segment, select service is just one piece of it,” he said. “There still is a large population of user who wants the ability to decide what or what they won’t pay for. The frugal traveler wants good value and also a good deal based on what it is they anticipate.”
He said the challenge for owners and operators of economy hotels is remaining disciplined in adding amenities or overreaching to compete with select-service properties.
Development opportunities
City-center locations, oil and gas markets and markets outside the United States are ripe development opportunities for select-service and limited-service hotels, the panelists said.
“While everyone is always looking at urban gateway markets, we’re still seeing a lot of opportunity in energy markets,” Amorosia said. “For us, it’s a win-win: The wildcatters in the oil fields can’t go home for the weekend so the extended-stay product is perfect for them. Suppliers and others coming in to do business during the week look for select-service or limited-service hotels.”
Amorosia said developing in these locations can be a challenge and require a lot of local knowledge.
“You want to get in there before the real estate values get out of hand, and you also want to be sure you have a handle on the construction phase because labor is in tight demand in a lot of these places,” he said. “In the end, all hotels are local, and local (developers) probably know the opportunities from a construction and land standpoint. They have the ability to put together the necessary groups to make these projects happen.”
Fraioli said investors need to approach these kinds of cyclical markets with caution.
“We would generally recommend to anyone who develops in those markets that they should plan on owning for the long haul because it is very hard to time an exit, and when you do you might not have as wide a buyer audience as you might expect,” he said.
The brand executives said that while development opportunities exist in a range of markets in the U.S., they are actively pursuing new-construction or adaptive reuse projects in urban centers. Anderson said because Choice Hotels has generally been unable to penetrate city centers with its midscale brands, the focus now is on its upscale Cambria Hotels & Suites and Ascend Collection flags.
“It’s very difficult to make an acquisition of a land site or a building for an adaptive reuse project in an urban core without playing in the higher-tier spaces,” he said. “As part of our strategy with Cambria and Ascend, we’re able to generate the higher rates in those cities to justify the development costs of those projects.”
Amorosia said he believes limited-service brands in city centers also can work for investors.
“While the logic of an economy brand isn’t easy in an urban market, I disagree that there isn’t an opportunity, and that opportunity is through conversions,” he said. “Some would say if you’re going to convert why not convert to something that has (higher) rate. But if you can get (market) share that’s going to compensate for the rate and, more importantly, if you can offer the ability to generate margins in regards to the ancillary expenses, then as an investor you’re going to look at it and say, ‘If I can bring home as many dollars as I would on the other side and my exposure as a capital investment is less, why wouldn’t I consider that?’”
Global markets, and Latin America in particular, are on the growth radars for La Quinta and G6.
“International markets are great opportunities for select service,” Trivedi said. “Latin American countries are doing exceptionally well. Colombia has emerged into a great economy. Mexico is finally stabilized from a security point of view. The smaller Central American countries are becoming capitalistic. In those markets, most or all of it is through new construction because select service doesn’t exist and no model is in place.”
Amorosia said G6 recently signed its first contract for Mexico with more development in the works, particularly for its Studio 6 extended-stay brand.