The continuing strong room demand through the first half of 2012 is the reason for rising occupancies and more pricing power for U.S. hoteliers. At the same time, however, the number of rooms in the under-construction pipeline is still very low, standing at approximately 60,000 as of the end of May 2012. Companies face the dilemma of needing to grow their respective stable of brands with barely any new hotels to flag. To grow in this environment, owners must be persuaded that their current brand is no longer “right” (whatever that means for the parties involved) and to change franchises, ultimately converting from one flag to another.
This article looks at the historic patterns of room conversions in and out of the STR chain scales. We are focusing on the most recent past, starting in the year 2000. This allows us to understand one full cycle, from the recessions in 2001 and 2009, and the impact on conversions. For this article, we are only discussing conversions that had both a change in flag and a change in scale. For example, we’ll look at conversions from an upscale brand to an upper-upscale brand. Obviously for a number of flag changes the scales stayed the same. In other words, the brand change was within the scale (e.g. from midscale to midscale). These intra-scale changes are not shown in the numbers for this article.
Table 1 shows the number of rooms that were brand conversions and in the process changed chain scales.
After a low point of fewer than 145,000 converted rooms in 2002, the peak conversion activity was reached in 2006 with just under 225,000 converted rooms. From that peak, the number of converted rooms decreased again in 2010 to fewer than 175,000 rooms.
The conversion numbers for 2011 are somewhat inflated and in need of some additional explanation. That year Best Western decided to create a new brand in the upper-midscale segment, Best Western Plus, and to convert some of its existing Best Western hotels to that brand, increasing the number of properties converted from midscale to upper-midscale. As of May 2012, some 66,000 rooms were flagged as Best Western Plus, with most of the activity taking place during the year 2011. Subtracting the Best Western Plus conversion activity of 66,000 rooms from the total of 234,000 rooms yields a number around 170,000 converted rooms—a number very much in line with the declining conversion trend since 2006. Arguably this specific brand-building exercise was a one-time event, which did not reflect changes in ownership but simply a corporate realignment.
Over time, the total number of rooms has increased in the U.S. as has the conversion activity as shown by the following table:
The following section outlines the conversation activity by scale, examining the number of rooms converted and highlighting noteworthy trends.
Luxury hotels, because of their fewer numbers and their capital requirements, have registered the smallest numbers of conversions each year. On average, 2,400 rooms convert in and 1,400 rooms convert out of the scale. But actual results diverge widely from this average; in the last four years, more than 1,600 rooms were converted out of the scale, culminating in 2011 with almost 3,000 rooms. It is certainly possible that financial problems of luxury hotel owners during the downturn led to a lack of spending for furniture, fixtures and equipment, which then, as ownership changed, led to a deflagging. It also is noteworthy that in only three years of this series, more rooms flowed out of the scale than into the scale.
Over the past four years, the upper-upscale chain scales registered decidedly less activity than in the early 2000s. In 2010 and 2011, fewer than 10,000 rooms were converted into the scale, and since 2008, fewer than 10,000 rooms were converted out of the scale. Interestingly, leading up to the height of the boom in 2005 and 2006, the chain scale saw a massive outflow of rooms, with more than 20,000 in each year. The lack of activity in this segment could speak to the need of an upper-upscale hotel owner to maintain the reservation system and loyalty program of the brand to fill these oft-large hotels. Therefore, owners are probably trying to remain in this scale, if not with the same flag, at almost any cost.
In the upscale chain scale, the trend of conversions in and out the scale has been remarkably similar. On average, 15,000 rooms enter and 15,000 rooms leave the system each year. The highest activity was recorded in the year 2007, the peak year for the industry, pointing at a continued desire for brands to strike while the iron is hot and increase their room counts while the performance metrics for these hotels were very favorable.
As mentioned above, the upper-midscale chain segment has seen an enormous influx of rooms in 2011. This influx ran counter to the prevailing trend over the observed time period where in every year (but the last one) more rooms exited than entered the scale. On average, 32,000 rooms left the scale and only 24,000 were newly flagged. In the years 2006, 2008 and 2010, more than 40,000 rooms left brands associated with this scale. To exclude the Best Western Plus conversion activity and get a better sense of actual influx, we can subtract those 66,000 rooms from the 76,000 total converted rooms. This yields a very small net inflow of 10,000 rooms into the category.
The midscale category conversion number in the last year is almost exactly the reverse as the upper-midscale data, as Best Western hotels changed scale. Some 88,000 hotels changed out of the scale while only 32,000 rooms converted in. On average, this scale saw a net rooms outflow over 11 years. Also, on average 40,000 rooms were converted out and only 28,000 were converted in. However, it is remarkable that during the period between 2005, 2006 and 2008, the net outflow was fewer than 4,000 rooms as conversions in and out were almost in balance.
In the economy scale, we observed by far the largest average room count conversions into a scale (outside of independents), approximately 39,000 rooms. However, since almost 38,000 rooms changed flags and converted out of the scale, the overall average net gain was minimal. Only in the three years from 2001 to 2003 did the economy scale actually lose rooms from conversions. In all other years, the net gain ranged from 200 rooms in 2010 to almost 9,000 rooms in 2007.
Since the independent chain scale characterizes all non-chain affiliated hotels, it is the largest scale with roughly 1/3 of the total U.S. room supply. Not surprisingly, the conversion activity in and out of the scale also is the largest with, on average, approximately 62,000 rooms converting in and some 46,000 rooms converting out. In each one of the years since 2000, with the exception of the year 2009, more rooms converted in than out. Conversions into the scale peaked in 2005, with approximately 75,000 rooms, and after the recession in 2010 with around 70,000 rooms. This most recent activity is probably a sign of hotels losing their flags because of financial troubles in their respective ownership groups. In 2005, around 18,000 rooms were lost by the upper-midscale chain scale; some of these rooms probably added to the increase in independents that year.
Overall, approximately 183,000 rooms are converted in and out of a scale every year. This does not take into account intra-scale conversion, so the overall number of flag changes most likely is quite a bit higher. The highest average conversion activity takes place with independent hotels and the lowest in the luxury chain scale. Upper-midscale and midscale data is slightly skewed because of the Best Western reclassification to Best Western Plus, but for prior years it was within the same range between 20,000 and 27,000 rooms for both scales. From our data, it is clear that brands continue to look for fast ways to build critical mass and portfolio strength. Therefore, reflagging existing properties will continue to be a critical tool to increase room counts.