HENDERSONVILLE, Tennessee—No chain-scale segment has made more noise in the U.S. hotel industry during the past decade than the midscale-without-food-and-beverage segment. In nearly every category, the segment has ranked near the top in most measurements, but even it felt the effects of the stalled economy beginning in the fourth quarter of 2008.
The segment includes such brands as Hampton Inn, Holiday Inn Express, Comfort Inn, La Quinta Inn and Wingate by Wyndham. During 2008, the segment suffered its worst-ever declines in occupancy and revenue per available room. At year-end 2008, hotels in the midscale-without-F&B segment reported a 4.8-percent year-over-year decline in occupancy to 62.3 percent, and a 1.5-percent year-over-year drop in RevPAR to US$56.16.
The segment’s 8-percent fourth-quarter 2008 drop in RevPAR was the worst quarterly decline in its history—significantly worse than the previous worst quarterly performance of -6.3 percent in the fourth quarter of 2004.
Meanwhile, the segment enjoyed a 3.4-percent increase in average daily rate to US$90.19. While it was the worst performance for the segment since it recorded a 3.4-percent increase in 2004, it led all chain scales in ADR performance in 2008.
Based on a 12-month moving average, the segment has never experienced negative demand. However, 2008 proved to be a big challenge because it presented the sector with its lowest demand increase in its history (+0.6 percent)—well below some of the heady performances of the early 2000s and even significantly below its performance in the days following 9/11.
The midscale-without-F&B segment remains a popular one for developers. At the end of 2008, it had the most rooms of any established chain-scale segment (the independents segment had more):
• Independents: 1,518,965 rooms
• Midscale without F&B: 776,247 rooms
• Economy: 758,915 rooms
• Upper-upscale: 571,680 rooms
• Midscale with F&B: 511,001 rooms
• Upscale: 460,147 rooms
• Luxury: 96,635 rooms
In addition, of the seven chain-scale segments, it has the most rooms under construction—a lead that it has enjoyed for the past five years. With an existing supply of 776,247 rooms, the 59,200 rooms under construction represent a 7.6-percent increase in supply. The segment’s continued supply growth in 2009 and 2010 means that it will maintain its stronghold on the leadership position in the industry.
Looking further into the construction pipeline, it is clear that there are some dominant brands within the segment. The midscale-without-F&B brands with the top three number of rooms in the pipeline—Hampton Inn, Holiday Inn Express and Comfort Inn—represent more than 37,000 rooms, or more than 60 percent of the rooms under construction in the segment.
The midscale-without-F&B segment gained its prominence as developers began looking for a replacement product for the midscale-with-F&B product that was becoming obsolete about 20 years ago. The fact that it doesn’t have a lot of meeting space and no food-and-beverage has proven to be a boon for developers as they continue to flock to the segment.
In early days of the segment’s growth, development sites were selected by identifying a tired midscale-with-F&B hotel in a good location. Site selection still is done that way in some cases, but many developers are locating new product for the segment in markets that already have a large supply. Because barriers to entry for construction are low and there’s less capital required for construction, there’s a lower risk for developers when building a midscale-without-F&B hotel.
The segment enjoys relatively high margins and most of it is franchised. It presents an attractive investment for development, and even though the current environment has certainly presented challenges, it will remain a viable product for years to come.