NATIONAL REPORT—By the looks of it, despite challenges—many of which are impacting the hospitality industry as a whole—the economy segment is well positioned for 2019.
“The fundamentals within the economy segment remain sound—supply and demand changes are in balance and are likely to remain so,” said Mark Woodworth, senior managing director at CBRE Hotels’ Americas Research. “Specifically, supply change has been essentially zero in recent years while demand has expanded slightly.”
At year-end 2018, in the economy segment, occupancy hit 58.6%, ADR increased by 2.1% (reaching $63.78), RevPAR jumped by 3.2% (increasing to $37.36), supply decreased by 0.7% and demand increased by 0.4%.
“Our research reveals that changes in demand for lower-priced hotels (midscale and economy) correlates closely with changes in the level of employment,” he said. “The fact that job growth has been (and is expected to continue) slowing down does not represent a threat to the prosperity of the economy segment given the limited change in supply.”
“Economic experts keep predicting a downturn, but the economy lodging segment is pretty well positioned to withstand high winds,” said Mike McGeehan, chief development officer, G6 Hospitality. “The demand for affordable lodging remains strong, and it should continue to grow as value becomes more important than ever to the guest.”
The economy segment is facing many of the same challenges other segments in the industry are facing, including the increase in land and construction costs, and labor shortages.
“Low unemployment rates in the U.S. mean it’s harder for hoteliers, especially in the economy segment, to recruit and retain talent,” McGeehan said. “We need to better showcase how entry-level jobs in our industry can turn into long-term career paths, and we need to support those stories with training, more scholarship programs, loan-forgiveness programs, etc.”
Of course, management companies are on the front lines of labor issues. “Labor costs have outpaced ADR growth for the last two years and hiring and retaining strong team members in a competitive job market has been extremely difficult,” said Ian McClure, CEO of Gulf Coast Hotel Management Inc. “This is not different than any other segment but is magnified in an economy hotel where the number of team members per property is significantly less than in a select- or limited-service hotel. We at Gulf Coast Hotel Management Inc. are focused on hiring the right team members and investing in them for the long term with upward mobility in order to create a strong culture where they enjoy coming to work. Employee retention is essential in a competitive job market.”
Negatively impacting the economy segment specifically is its rate ceiling in various markets. “This, coupled with increasing operation costs, reduces the owner’s potential for a strong return on investment in the economy segment,” said Ron Pohl, SVP/COO, Best Western Hotels & Resorts.
In the segment, consistency is another challenge. “Red Roof is actively tackling this challenge, engaging with properties to complete their property improvement plans, creating a consistent stay for our guests,” said Phil Hugh, chief development officer, Red Roof.
Year-end 2019, CBRE’s report is projecting occupancy to hit 55.3%, ADR to increase by 3.5%, RevPAR to increase by 2%, supply to decrease by 0.6% and demand to increase by 0.1%
“We see positive but slowing RevPAR growth in 2019 for the economy sector,” McClure said. “However, we feel we are more insulated than the other hospitality segments due to the fact that most of the recent supply has been delivered in the midscale and upscale segments. The economy segment has seen a fraction of the supply growth over the years compared to the rest of the market, which allows more upside potential for us and protection during a downturn.”
There are 105 projects with 11,330 rooms in the total economy pipeline, according to Lodging Econometrics’ Q4 2018 data. Properties currently under construction are 38 projects with 3,719 rooms. Scheduled to start in the next 12 months are 42 projects with 3,879 rooms. There are 25 projects with 3,732 rooms in the early planning stage.
“The economy segment has two critical characteristics that developers and owners/operators like: In terms of cost per room, economy hotels fall at the low end of the range for all hotels—this is primarily a function of their size and limited (or focused-service) orientation; and they do not require as many employees as do hotels in the higher-priced chain scales,” Woodworth said. “With the cost of labor evolving into an even greater issue for all hotels, this characteristic adds to the appeal of economy-oriented lodging operations.”
With regard to the future, some are banking on extended-stay properties. “The demand for long-term business stays is increasing, which is why the extended-stay segment is one of the fastest-growing in the hotel industry,” said Ralph Thiergart, VP and GM of extended-stay brands, Choice Hotels International Inc. “There is a greater need now for jobs in areas like construction, nursing, and education, and that’s driving more economy extended-stay hotel development. Guests value affordability and they want what they want, and nothing more.”
Not surprisingly, then, the top new-construction brand within the economy chain scale, in terms of pipeline, is WoodSpring Suites, which has 24 projects with 2,851 rooms scheduled to open this year. “The WoodSpring brand has picked up momentum since being acquired by Choice Hotels in late 2017,” said Bruce Ford, SVP and director of global business development, Lodging Econometrics.
As guests demand more from economy brands, technology becomes a factor. “Growth and expansion will attract the attention of technology innovators—bringing another layer of compression to the market; businesses like OYO and Treebo are players to keep a close eye on,” McGeehan said.
“Technology is on the rise in all segments, and it is no different in the economy segment,” Hugh said. “From the ease of booking on mobile or social media, free WiFi, a flat-screen TV—guests want their stay to be tech-driven with fast and easy delivery.”
Not only are travelers looking for more when it comes to technology, they’re also paying more attention to the quality of the product in the segment, especially with regard to a property’s look and feel.
“In an effort to meet the changing expectations of customers, the product in the economy segment must become more contemporary,” Pohl said. “This will provide potential for increased rates and will be balanced through fewer or reduced services to keep costs neutral.”
“We believe 2019 will have modest overall growth both in the hospitality industry and within the economy in general,” McClure said. “However, we continue to be cautiously optimistic. It will be important to continue to monitor operating expenses like labor, insurance and property taxes, among other items.” HB