Upscale hotels, which did not perform as well as midprice hotels during the recent downturn, this year have rebounded more quickly than their midprice counterparts.
Travel buyers have a particular stake in the economics of such upscale chains as Hilton, Hyatt, Marriott and Sheraton, since this caliber property typically is a staple of their hotel programs. In the annual Business Travel News Top U.S. Hotel Chain Survey
(BTN, Feb. 9), the popularity of the segment among business travelers traditionally makes the upscale category the most crowded. This year, buyers named 13 brands as having had significant enough usage to warrant inclusion in the listing.
"Having been hit the hardest, we believe the full-service sector has the most to gain in the recovery of the transient business traveler," said Keith Mills, lodging industry analyst for UBS.
While the strategy of trading down from full service to midprice was discussed widely during the downturn and may have appealed to some buyers, most opted to keep upscale properties well represented in their programs, while possibly adding more midprice alternatives.
"We've tried to broaden the range of price points we include in the list of preferred hotels to some degree, but for the most part hotels we use remain full service," said Erin Barth, vice president of global travel for JPMorgan Chase in Jersey City, N.J. "They tend to be situated in the best, most central locations, plus they're the properties that are most likely to have the kinds of amenities and services our travelers need to be productive on their trip." According to Barth, these amenities include onsite restaurants, 24-hour business centers, fitness facilities and room service.
During the downturn, Brian Nichols, hotel and ground transportation manager in strategic procurement services at Deloitte in Wilton, Conn., reconfigured his hotel inventory in each key city to ensure that upscale hotels no longer dominated. "We were doing some business in moderate, extended stay and moderate full-service hotels, but we weren't really including those on a proportionate basis," he said
(BTN, June 7). After reconfiguring, however, upscale hotels still remained most heavily represented. Based on volume in a city, Deloitte's 2004 program typically includes one deluxe, one midprice and one extended stay choice, but multiple full-service options.
Year-to-date through May, occupancy rates at upscale U.S. hotels increased 5.8 percent, compared with the same period in 2003, according to Smith Travel Research. By comparison, occupancy levels at midprice hotels with food and beverage and midprice hotels without F&B increased 4.5 percent and 4.3 percent, respectively, during the same period.
Upscale hotels also held their own on average daily rate. "An issue for the entire industry has been getting rate back up after occupancy levels started to return and the upscale category has done well, relatively speaking," said Randy Smith, STR president, speaking at the NYU Hospitality Investment Conference in June. Upscale hotels through May saw average rate increases of 2.3 percent year over year. "The midprice without F&B segment came close to this—ADR was up 2.2 percent. Midprice with F&B, however, lagged behind, with rates rising only 1.6 percent," Smith said.
Revenue per available room is considered the most critical industry measure because it measures profitability. "After three straight years without RevPAR improvement, we estimate that the upscale segment will achieve modest RevPAR growth in 2004 of approximately 5.1 percent," said Michael Fishbin, national director of Ernst & Young Hospitality Advisory Services.
Through April, RevPAR for the upscale segment jumped 8.2 percent, significantly outstripping the gains in both the midprice with F&B and midprice without F&B segments, which increased 6.3 percent and 6.6 percent, respectively.
Evidence of the turnaround already was clear at the end of the first quarter. At Starwood Hotels & Resorts Worldwide, for example, first-quarter RevPAR at its midprice Four Points by Sheraton brand was up 3.7 percent year over year, while RevPAR gains were more than double that (7.5 percent) at the upscale Sheraton chain.
Despite the overall optimism, however, not all upscale brands are thriving. As in any market cycle, some chains prosper, while other chains' fortunes decline. Adam's Mark and Wyndham are examples of chains that are losing inventory, either through asset sales or changes in management contracts.
Adam's Mark inventory has shrunk by nearly half in recent months. Among other flag changes, its Houston property became a Marriott in June, while its Indianapolis hotel will be reflagged a Hilton in August. In an unusual two-for-one conversion, the Adam's Mark in Winston-Salem will be divided into both a Marriott and an Embassy Suites with completion scheduled for next summer. Meanwhile, Wyndham last month sold four hotels, two of which will be rebranded, while in a separate transaction, four Wyndham hotels were reflagged as Prime Hotels.
One of the factors underlying these market shifts is the aggressive expansion strategy outlined by such multi-brand companies as Marriott, Hilton and Starwood that only partially can be realized through new construction. Marriott, for example, expects to open 95,000 additional rooms through 2007 across all of its brands worldwide.