Select-Service Hotel Boom: Pros & Cons

In 2014 and 2015, select-service rooms accounted for 70 percent of all rooms added to U.S. supply, according to STR. As of February, select-service comprised 67 percent of the U.S. pipeline.

The industry’s steady trend toward select-service may not be great news for corporates that rely heavily on large meetings hotels, but for some programs, the growth of these properties could prove to be a boon, bringing more diverse, higher-quality products into the marketplace.

Select-service, or limited-service hotels, offer some full-service amenities like breakfast and a fitness center but do not have certain features like a dedicated food-and-beverage department or a concierge. While much of the new select-service product in recent years has been in the upscale and upper-midscale tiers, hoteliers like Best Western Hotels & Resorts and Hilton Worldwide are banking on such products in the midscale tiers, crafting boutique-style hotels aimed at modern travelers. “The boutique or lifestyle hotel trend is continuing to grow, and you have a lot of boutique and lifestyle brands in the upper-upscale and upscale segments but none in the midscale segment,” said Best Western CEO David Kong.

Best Western has introduced two midscale select-service brands during the past two years: Vib for urban hotels and GLo for suburban properties. Both feature sleek room design and large, social lobby spaces. Vib offers a grab-and-go food-and-beverage option, while GLo offers hot breakfast and some other basic food options. The first two or three Vib hotels are expected to open in the United States in 2016. Best Western has signed a number of GLo deals, and Kong said there’s a “tremendous interest” from developers.

In January, Hilton unveiled Tru by Hilton, its own boutique midscale brand. Its lobby features “zones” for playing, working, lounging and eating, with a self-service food-and-beverage area. “We listened very carefully to our customers and to our owners to make sure we got all of the details exactly right,” Hilton CEO Christopher Nassetta said at the launch. “We truly believe that Tru could ultimately be our largest brand yet.”

Why Select-Service?

Hotel companies and, more important, hotel owners and investors like select-service products because they’re easier to develop and they offer a better return on investment. “If you’re a new builder, it’s just so much easier to secure the financing for construction of a select-service hotel today than it is a full-service hotel,” said Interstate Hotels & Resorts chief investment officer Leslie Ng. “The costs for building full-service hotels are so high now that lenders are much more comfortable financing select-service hotels. It’s a proven investment commodity. When it comes time to renovate, your costs per key are much lower because you don’t have the public space that a full-service has.”

Ng added that there’s more consistent demand at select-service hotels, which are less beholden to the group market.

Hospitality solutions firm TravelClick indicated that the upscale and upper-midscale tiers, where the majority of select-service brands sit, experienced the healthiest year-over-year bookings growth in North America. Reservations on the books as of February for the first quarter of 2016 are up 3 percent year over year in the upper-midscale segment and 2.8 percent in upscale, while upper-upscale bookings grew only 2.6 percent and luxury bookings declined 1.2 percent.

Another piece of the select-service boom is brand proliferation. A product like Tru is different enough from a Hampton by Hilton that Hilton can build a Tru nearby and grow market share without upsetting Hampton owners. The newer products may even attract a new audience of travelers.

“You’re going to see more brand proliferation because people want a customized experience,” said Stephen Jennings, U.S. hospitality sector leader for Deloitte Consulting. “The problem with the large-scale, mass-market brands is that they are a bit of a generic experience on the whole.”

The Upside

Because the hotel industry cycle has been in its “up” stage in recent years, corporate travel programs searching for savings have been more willing to trade down to lower tiers, and the new select-service supply creates more opportunity to do so.

“Companies are always looking at what else they can do to keep their costs down and to drive savings year over year,” said Marwan Batrouni, senior director and Global hotel practice leader at Advito. “One of the strategies is to tier down, from upper-upscale down to upscale or upscale down to a more moderate-tier hotel. Some of the larger hotel chains are realizing that if they have a good, quality product that caters to business travelers and gives them everything they would be looking for but maybe not at the high cost of some of the upscale or upper-upscale properties, then they would be able to win business.”

Many of the select-service products coming into the market are new build. Tru, GLo and Vib, for instance, all have promised to start as new-build brands. That offers business travelers a fresher product with features like high-speed Wi-Fi, clean design and abundant elec-trical outlets for charging devices but at prices similar to conversion-properties' rates.

Select-service properties also are appearing more in urban areas. During Hyatt Hotels’ most recent earnings call, CEO Mark Hoplamazian said half the hotels Hyatt plans to open this year will be select-service, including the upscale Hyatt Place and extended-stay Hyatt House brands, and their growth will focus on urban locations, lifestyle centers and university markets.

The Downside

Select-service products are not a one-size-fits-all solution. Financial Industry Regulatory Authority corporate travel services manager Carol McDowell said some lack meeting and conference room space. She recalled one employee who needed private meeting space for a one-on-one interview and had no such options.

Some select-service rooms are also smaller, which means sacrificing traditional design features. The Tru prototype, for example, doesn’t call for a desk or a full closet. At a recent BTN Group event, travel managers said they had fielded complaints from employees about boutique-style hotels’ lack of traditional closets, dressers or desks.

Ultimately, select-service hotels’ most competitive benefit—cost—could dissipate. Bjorn Hanson, a clinical professor at the New York University School of Professional Studies’ Tisch Center for Hospitality and Tourism, said some select-service hotel owners estimate their rates will equal full-service hotels’ in a few years “because of the newness of the hotels and concepts and because of older upper-upscale hotels that maybe don’t reflect the current taste and preferences.