HENDERSONVILLE, Tennessee—There has been a lot of discussion about the number of distressed hotels in the marketplace and their fate once financing returns. During this discussion, the topic of hotel conversions naturally arises.
Before considering a hotel conversion, it’s important to understand the current hotel supply, room supply and room revenue. For example, the luxury chain scale represented 1 percent of the U.S. hotel supply and 6 percent of the hotel industry room revenue year to date ending April 2009. Compare that to the economy chains, which represent 20 percent of hotel supply, yet only 7 percent of the industry’s room revenue.
Smith Travel Research categorizes hotels into six chain scales and groups independents. We examine the way hotels change affiliations within these chain scales and convert to or from the independent segment. Below, we examine hotel conversions three different ways: chain to independent, independent to chain and chain to chain.
Chain to independents
Starting in 2003, we saw an increase in the number of chain-to-independent conversions, and the growth has continued to remain steady. One main catalyst of this type of conversion has been the enforcement of brand standards. When an organization realizes a property isn’t delivering the brand promise continuously, the property will be deflagged and removed from the portfolio.
Chain-to-independent conversions peaked in 2007 when more than 660 hotels converted to independent hotels. The number declined slightly by year end 2008, as about 640 chain hotels converted to independents. It appears, from the STR data, most of these conversions came from the midscale-with-food-and-beverage and economy chains.
Interestingly, it wasn’t until 2000 when independent hotels experienced positive net room growth from conversions. But overall, their share of room supply has declined because of the higher number of hotel closings. Year-end 2000, independent hotels represented 37 percent of total room supply. Year end 2008, independent hotels represented 31 percent of total room supply.
Independent to chain
In 2008, more than 570 independent hotels converted to chain hotels; which was down from 2007 when more than 640 independent hotels converted. Independent-to-chain conversions are driven by the additional distribution channels, more sophisticated reservation systems and enhanced marketing-and-sales efforts offered by the chains.
Independent hotels appear to be more likely to convert to midscale-with-F&B and economy chains verses luxury through upper upscale. This could be because of the large amount of brand offerings within the two scale segments.
Chain to chain
2004 through 2007 were some of the most profitable years for the hotel industry. Financing was readily available for renovations and property improvements, which often led to a brand conversion within the same chain scale or a conversion to a brand in other chain scale.
At the peak in 2007, the total number of hotels changing flags (1,331) was more than twice the number of hotels moving into independents (661). This would imply that the capital available for hotels pursuing new flags is more readily available by owners than giving up a chain affiliation completely.
As 2009 progresses and lending begins to return, hotel conversions likely will be a predominant topic of discussions among the industry leaders. Will the lenders and owners only consider chain-to-chain conversion projects? Based on a simple cost-benefits analysis, does the chain affiliation really drive a higher return on investment? STR will continue to watch conversion trends and report on any new data findings.