A panel of hoteliers at Meet the Money 2019 said select-service hotels haven’t yet become a victim of their own success as they continue to provide reasons for brands and owners to build them.
LOS ANGELES—Select-service hotels have been a popular option for developers over the years given their low cost to build and flexibility.
As more developers build select-service hotels and brand companies keep adding new brands to the space, that leads to questions over whether there will be too many properties that are similar. Hoteliers sitting on the “Is select service still everyone’s favorite? Where does it go from here?” panel at Meet the Money 2019 established that yes, select service is still a favorite and should be for quite some time.
At select-service hotels, customers are paying for what they want to pay for, said Taylor Jacobs, director of acquisitions and development at NewcrestImage. The company makes sure there is nothing else in the room and no other experiences in its select-service hotels that guests don’t use and don’t want, he said.
“We’re making sure the products we’re offering, the guest is using and paying for and not wasting any dollars,” he said.
Guests are looking for value and they are changing what they’re looking for, he said. Younger guests want to redeem points in different ways and are looking for more technology in their rooms. The proposition hasn’t changed much for select-service customers, but they are changing some of their needs, he said.
The select-service segment aims to make the lobby space more active and has a greater focus on social areas in general, said Mark Younadam, regional VP of development at Hyatt Hotels Corporation. Hyatt encourages developers to use their imagination and customize their lobbies, especially to make them feel more like the locality. A lobby in Los Angeles should have a different feel to it than other locations, he said.
Prior to 2006, Hyatt was mostly a full-service management and real estate company, Younadam said. Then Hyatt launched its select-service brands Hyatt Place and Hyatt House, and from then on it accelerated the franchising of its brands. Last year was a record year for both Hyatt Place and Hyatt House, and that’s coming off of several record years, he said.
The brands have had more than 40 openings this year and have more than 150 deals in the pipeline, Younadam said. They are reaching an inflection point where there is solid distribution, solid performance and a lot of availability in markets they haven’t entered yet. There’s strong developer interest, and as long as the economy holds strong, that interest should continue, he said.
The gross operating profits have grown for select-service hotels as their design and food-and-beverage offerings have become more sophisticated, said Chris Dobbins, VP of upscale development at InterContinental Hotels Group. The GOPs were originally in the high 30s but are now in the high 40s and nearing 50%, he said.
“That’s why developers want to develop these hotels, because it’s the replacement of the ’80s and ’90s when they were building big Hiltons and Marriotts in the suburbs, and they can’t do that anymore, no one will finance that,” he said. “That’s why select service is more popular as the GOP has risen and they’ve become more sophisticated.”
Making the decision
The main goal EKN Development Group is trying to achieve is meeting the demands of the customer, CEO Ebbie Nakhjavani said. The company looks forward and backward at demand, and that shapes how it selects the products and where they go, he said. Most of its properties are located in markets with high demand generators, in urban areas and with high barriers to entry.
“We feel that at the end of the day, for us as developers, NOI determines the majority of our decisions,” he said.
One of the benefits of select-service hotels is the general ease in the approval process through different local agencies, Nakhjavani said. Select-service hotels drive much larger economic benefits to a city, so his company has been more successful in getting select-service products approved than they would for full-service properties, he said.
“To us, it’s really the optimum brand that allows you flexibility and to provide the amenities people are looking for,” he said.
NewcrestImage starts with two major questions before deciding on a new project, Jacobs said. First it asks whether there is a market niche. Usually the company struggles to find pockets with brands it wants to play with, he said. It looks for markets with demand generators and a story that can drive more guests into the market.
The second question is about the exit, Jacobs said. NewcrestImage is opportunistic, so while it has some long-term holds, it’s also heavy into transactions. When developing a new asset, the company takes into consideration what the institutional players want to buy, he said. Full-service hotels are in a more niche market, so it likes to look at more forward-thinking lifestyle brands, such as AC Hotels by Marriott, Element Hotels and Hotel Indigo.
There’s also the advantage of flexibility when developing in urban core markets, he said. The company can drive more yield and have more rooms.
“A lot of select service allows us that flexibility to shape the room better,” Jacobs said. “Full service is more strict on their offerings. The lower cost to build is a huge advantage.”
Although Interstate Hotels & Resorts is not a hotel investor, when it looks at a deal, select-service hotels have the best return on investment out there, EVP of Development and Acquisitions Mark LeBlanc said.
“If you’re looking for a hedge in the hospitality industry against Airbnb, we don’t see them stealing from the Ritz-Carlton anytime soon, but we see them stealing rooms from (Choice Hotels International),” he said.
The more a company makes select-service hotels more staff-efficient, the more profitable they can be, especially on the West Coast, he said.
Looking at the challenges his company faces, Nakhjavani said he’s reminded of when he met with a banker four years ago who stopped lending on hotels.
“My heart dropped,” he said. “Afterward, I realized they stopped lending on hotels because they were overextended just in that industry.”
The hotel industry is perceived as doing well in this part of the cycle, Nakhjavani said, but everyone is expecting an adjustment to come. The perception of doing well is the most challenging thing, because that gives others the impression hotels don’t need any assistance.
“In terms of financing, in this part of the cycle as things are going well, we need even more assistance to make a lot of the projects work as construction costs are going up,” he said.
The biggest challenge on the construction side is by the time a project is ready to be financed, which can take 12 to 24 months, the construction costs continue to escalate, Younadam said. Hyatt is unique in this space as it does some of its own development and enters into joint ventures on some projects, he said.
“We’re up there, we’re seeing the pain and feeling it,” he said.
One thing that is difficult to underwrite is local regulations on labor, LeBlanc said. In some California cities, there are surface cleaning laws that say housekeepers can only clean 4,000 square feet a day or only a certain number of rooms a day, which adds in extra labor costs. Developers who built in these areas last year couldn’t have foreseen that, he said, and that makes people nervous to have these regulations and mindsets present.
“Unions are exempt from that, so if you’re willing to let them flip to union, you can be exempt to it overnight,” he said.
From Hyatt’s experience, the growth of select-service hotels will accelerate, Younadam said. There’s so much momentum behind its two select-service brands and many markets they’re not in yet.
“We definitely see the runway being side open,” he said.
The select-service segment will maintain its strength barring any adjustments in the economic situation, Nakhjavani said. It allows developers to go into urban areas and build new, exciting hotels with all the amenities needed without having to increase the cost per key, he said.
“It can offer a full-service experience to guests at a lower cost and drive revenue up and compete in those markets,” he said.
The lifestyle select-service brands don’t play at a significant discount to some of the full-service brands out there, Jacobs said. They can have rate penetration that is close to—if not the same—as some full-service offerings. That rate penetration makes better sense at less cost per key and better yield, he said.