Economy Hotel Owners Face Tough Challenges

NATIONAL REPORT— Owners who have embraced the economy segment as their “field of dreams” have not been “sleeping” peacefully in recent years as performance levels continue to bear the brunt of the stress-of-the-month, be it from political, climactic, or especially, economic tension. With tight margins, segment owners have been not been able to do much in response to generous rate discounts by their midscale-and-above brethren who can leverage their position as a “step-up” for the traditional economy hotel guest. Similarly, while terrorist acts continue to impact overseas travel plans, the escalating cost of gasoline in the United States this year is expected to become a significant detriment to extended vacations via automobile, thereby diluting much of the benefit of being a “drive-to” property, which makes up the bulk of the economy segment. And economically, while the nation and industry head toward a so-called recovery, the segment’s key customer group— the budget-conscious leisure traveler— remains focused on tightening a grip on their disposable income in a still-uncertain job market. “From a demand point of view, I think many customers that use economy hotels have been hit fairly hard by the economic slow down we’ve experienced in the past two years,” said Bobby Bowers, vp/Smith Travel Research. “Folks at the lower end of the economic spectrum seemingly have been hit disproportionately hard with job losses. I think this has created some of the segment’s problems. Hopefully, this is turning around.” Recently, PricewaterhouseCoopers forecasted industry-wide lodging demand, after three years of contraction, would increase 4.5% and supply would grow 1.4% this year. Overall occupancy is expected to advance by 0.9 percentage points to 61.2%, and industry RevPAR is forecast to increase by 5.3%, according to PwC. While a rising tide lifts all ships, the economy segment this year is expected to experience improvement to a lesser degree than recovery leaders upper upscale, upscale and midscale without food and beverage. Still, economy demand and ADR will increase by 2.6% and 1.1%, respectively, with occupancy expected at 54.6% and RevPAR growth at 3.2% in 2004, noted PwC. Performance levels in 2003 for the segment showed occupancy at 53.4%, ADR at $47.17 and RevPAR at $25.29. Closer in, looking at trends in the key performance indicators as of March 13 (latest STR figures available), segment occupancy stood at 54.6%, down 0.2% from the year-ago period, while ADR increased 0.1% to $47.47 from $47.44 in the week ending March 13, 2003. RevPAR was flat at $25.94. On the development side, “Economy has been losing supply for the last year or so, due primarily to conversions out of the segment, mainly to independent,” said STR’s Bowers, adding there are currently about 4,500 economy rooms under construction. “So no great worries of large supply growth in the next year.” According to data compiled by STR, PPR and F.W. Dodge, as of February, economy had 9,825 existing properties (770,030 rooms) with 105 hotels (6,909 rooms) recently opened, representing 20.3% (17.2% rooms) and 17.6% (10.7% rooms) of the total national supply. Economy projects (hotels/rooms) and their project phases and representation (percentage) in the overall market showed 62/4,118 in construction (9.9%/5.6% rms); 7/532 in final planning (5.4%/3.1% rms); and 41/2,824 in planning (3.0%/1.6% rms) for a total of 110 properties (7,474 rooms) representing 5.1% and 2.8%, respectively of the overall pipeline. Twenty-four hotels (1,455 rooms) were in preplanning with no architect selected. Financing remains a mixed bag for the segment. Those who want to use economy as a stepping stone into the industry often have high hurdles to jump, particularly over the past several years as lenders shied away from the industry. Those with skin in the game find it easier in some cases. “My company has a long track record with several local and regional lenders and our size ope