Midprice Hotel Brands Stay On Development Path

Strong performance by brands within the midprice sector and indications of continued growth have left hotel companies eager to expand their brands and prompted developers to reach out for new contracts. Most of this growth has been among midprice without food and beverage brands, primarily because limited-service properties tend to operate more efficiently and net higher profits than full-service, due to lower operating costs. Developers also are attracted to these projects because they are cheaper to build than upscale or luxury properties.

With building costs continuing to soar, midprice properties remain attractive to developers due to desirable prototypes and profit margins that typically are higher than other types of properties.

"From a feasibility study for new hotels, midprice hotels are where it is at," said Bruce Baltin, senior vice president and executive in charge of PKF Consulting's practice in Los Angeles. "Midprice properties are what we are seeing developed these days because of availability of land and construction costs opposite a strong market within the hotel industry. Construction costs are so difficult that it is tough to develop more upscale, higher-quality hotels. Midprice brands are more prototypical with more economies of scale."

Development plans for more midprice properties already are rising. According to Lodging Econometrics, a company that specializes in U.S. lodging development, pipeline project counts for midprice without F&B increased 36 percent in 2005 from 2004 to 1,181 projects. Baltin said midprice pipeline counts also are higher in terms of "real deals" that are going to get done. Smith Travel Research data confirm why the project counts are on the rise in the midprice tier. STR estimated that the midprice without F&B segment will continue to outpace most other tiers in 2006, with revenue per available room expected to increase 8.7 percent to $55. Smith Travel Research also predicted that RevPAR in the midprice with F&B segment would jump 5.2 percent to $48. The data suggested that the midprice without F&B segment will continue its deep penetration of the hotel market while simultaneously seeming to outperform its sibling.

As performance signals continue to point upward, hoteliers actively are attempting to grow their midprice offerings and capitalize on burgeoning customer demand for the product by converting or building new properties in high-demand areas as well as gateway cities. Hampton Inn, Hilton's midprice without F&B offering, announced late last month that it was on pace to open approximately 100 hotels during 2006 and, perhaps, set a record for openings in 2007.

"Based on the number of projects underway, we are close to achieving record growth this year, and, if the pace continues, expect during 2007 to surpass our brand record of 127 openings, set in 1998," said Phil Cordell, senior vice president of Hampton brand management.

This expansion will notably include downtown, urban areas such as Manhattan's chic SoHo neighborhood and Chicago's theater district.

"Urban centers are very hot for Hampton right now, as travelers seek more affordable options when traveling to major destinations," Cordell said. "We have developers looking in nearly every major city center where Hampton currently doesn't already have an active presence."

Choice Hotels, a company with brands well represented in the midprice tier, is focused on growing its Comfort Suites and Sleep Inn brands—both in the midprice without F&B segment.

"Going into 2006, we see strong interest, particularly in Comfort Suites and Sleep Inn," said Ron Burgett, vice president of franchise and sales and development for Choice. "We are looking to grow the brands through new construction development and focus on putting these properties in high-reservation demand areas that we don't currently fill."

Midprice hotels without F&B typically have lower operating costs, as not having a restaurant on site or other amenities like a gym cut down on overhead and results in having to employ less staff.

At between $45,000 and $60,000 per key to build and a prototype that usually consists of 75 to 80 rooms, Burgett said that the Sleep Inn brand would be Choice's "largest growth vehicle going into the next couple of years." While each Comfort brand—Inns and Suites—is a new build, the Quality and Clarion brands are conversions. "For Clarion we look exclusively at gateway cities and resort-type destinations," said Burgett. "You won't typically see Clarions in secondary markets."

Best Western International, a single-branded company with more than 4,200 properties worldwide, isn't laying off the gas when it comes to its development plans. "There's a lot of money out there for development and we are trying to do at least 50 percent, if not more, new construction," said Mark Williams, vice president of North American development for Best Western. "These are taking place in secondary and tertiary markets, but we'd like to attract larger, high-profile properties in the gateway cities." Williams said that he is focused on plans for new construction in Manhattan and Denver. Best Western has four discrete prototypes, depending on the region, and each property costs about $65,000 per key to build.

Even smaller hotel chains in the midprice tier are ramping up development efforts. Red Lion Hotels, which was originally WestCoast Hospitality, bought the brand from Hilton in 2001 and currently maintains 66 properties—concentrated mostly on the West Coast. During the past few years, Red Lion set out to develop its strategy and essentially relaunched the brand last year in Phoenix at the 2005 Lodging Conference. Barry Hughes, vice president of marketing and distribution, said the company is set to broaden the brand and steadily move it east. "Our strategy in growth is to fill in areas in the West where we see great opportunity and, as that network grows, to begin an aggressive migratory strategy east," said Hughes. "It's all about building the network. To grow too aggressively without filling out the footprint would not do our hoteliers a good service." Hughes said that the brand intends to expand into 100 markets within the next five years by way of conversions.

Although supply is low in the midprice tier, the next few years will see a pickup in construction and conversions—especially the reconstitution of midprice with F&B properties to those without F&B. According to Smith Travel Research, 80 percent of the midprice properties in varying development stages are without F&B. Further, 30 percent of properties are scheduled to start construction within nine months. Saturation is the only barrier facing development. "The next three years we see strong growth," said Choice's Burgett. "We are working toward a saturation point, but don't know exactly where that is yet."