NATIONAL REPORT—Late last month, Chesapeake Lodging Trust agreed to acquire a 185-room, select-service Hyatt Place hotel that was still under construction in Midtown Manhattan for $76.5 million from the McSam Hotel Group. A month earlier, Annapolis, MD-based Chesapeake completed the acquisition of another Midtown Manhattan, select-service property—in this case, a recently developed 122-room Holiday Inn—for $52.2 million.
Both purchases pinpoint a trend that has been driving development of the select-service industry tier for the past 18 months and shows every sign of continuing to drive it for the foreseeable future. On the one hand, hotel companies are increasingly zeroing in on downtown and close-in suburban locations for their high-end, select-service brands, including Courtyard by Marriott, Hilton Garden Inn, Aloft, Hyatt Place and Cambria Suites, in addition to Hyatt Place and Holiday Inn. Often, they’re seeking out sites slightly outside the center city core, but still close to the action—locations where land might be less expensive and the barriers-to-entry a bit lower. In Manhattan, for example, this would mean emerging neighborhoods like Times Square South, West Chelsea, Clinton and SoHo.
On the other hand, developers and franchisees like Chesapeake are looking to build distribution in desirable, highly profitable markets like Manhattan, but with a product that is cheaper than full-service to build and a labor model that is equally cost-effective. ADRs are significantly higher than these brands can command in traditional, select-service locations along highways and in secondary and tertiary destinations. So the growth of these brands in downtown markets is a win-win for hotel brand companies and owners/developers alike.
“The strength of the Hyatt and Holiday Inn brands and their reservations systems” were part of the appeal of the respective deals as was the “very compelling per key price” ($414,000 for the Hyatt Place, $428,000 for the Holiday Inn), according to James Francis, Chesapeake president & CEO. The Hyatt Place is due to be completed in the third quarter of this year.
According to Smith Travel Research’s data for 2011, presented at last month’s ALIS conference, the upper-mid-scale segment in the U.S. outperformed all other industry segments. While most industry segments enjoyed strong demand growth during the year, the upper-midscale tier led the pack with an 11% increase, year-over-year, the highest percentage increase of any segment. The closest competitors were the luxury and upscale industry tiers where demand growth increased 6%.
The supply story in 2011 was equally upbeat. In a period where supply growth was generally muted across the industry, the upper-midscale segment saw supply jump 5.5%. By contrast, supply growth for most other categories was flat or rose slightly. Of course, significant supply growth, generally speaking, isn’t a good thing because it helps dilute the benefit of demand growth. But given the segment’s 11% jump in demand, no one seemed too worried.
Data for the midscale category in 2011 told a vastly different story. In fact, it was the one industry category where demand growth actually fell, year over year. It decreased 5.5%.
Steve Kisielica, a principal in Lodging Capital Partners, LLC, liked the strong name recognition and business model of the Courtyard brand when he and his partners were looking to rebrand the former Wyland Hotel in the Waikiki section of downtown Honolulu. Lodging Capital Partners and Rockpoint Group acquired the 401-room property with $47.5 million of financing arranged by Cushman Wakefield Sonnenblick Goldman.
“Courtyard’s a name that’s top-of-mind with consumers. Then you back that up with the strength of the distribution system,” Kisielica explained. Courtyard currently has more than 900 locations in 35 countries.
Like Chesapeake’s Francis, Thomas Baltimore Jr., president & CEO of RLJ Lodging Trust, prefers the value proposition of select-service hotels located in what he terms “urban or dense suburban markets.” What particularly appeals to Baltimore and his team are these hotels’ compact nature. “The food and beverage is likely to be outsourced, the hotels have little meeting space and, therefore, lean staffing. They make for a very efficient box,” he told HOTEL BUSINESS®.
Like Lodging Capital Partners, RLJ will convert hotels that have operated as full-service to select-service, if the decision makes good business sense. Last month, for example, RLJ completed the conversion of former Wyndham hotels in Pittsburgh, PA, and Durham, NC, to Hilton Garden Inns. RLJ spent a combined $17 million on renovations, including satisfying the Property Improvement Plans (PIPs).
As high-value downtown locations have become more the rule, select-service owners and developers have begun repositioning their portfolios and, in the process, disposing of what are now considered “non-core” assets. Last August, for example, Hersha Hospitality Trust disposed of 18 such non-essential assets, selling the hotels to affiliates of Starwood Capital Group for approximately $155 million. Among the brands were SpringHill Suites and Fairfield Inn, as well as Holiday Inn and Courtyard. Among the secondary/tertiary locations were Glastonbury and Norwich, CT, and Carlisle and Selingrove, PA. “Over the past few years, Hersha has been focused more on urban core markets, primarily the four Northeast markets of Boston, Philadelphia, New York and Washington, DC,” explained CFO Ashish Parikh.
In certain cases, owner/developers have partnered with hotel companies to build distribution for their select-service brands to mutual benefit. Last July, for example, Noble Investment Group entered into a joint venture agreement with Hyatt Hotels Corp. to fuel the growth of Hyatt Place (along with extended-stay Hyatt House hotels) in the U.S.
Under the agreement, the joint venture acquired a number of Hyatt-owned hotels for $110 million. “They’re all in the Top 10-Top 15 MSAs. They’re prominent assets in those in those marketplaces and are strong performers,” explained Mit Shah, Noble Investment senior managing principal & CEO. “We believe that long-term, these assets will be great performers for us from an investment perspective.”
Locations include Hyatt Place properties in the New Jersey suburbs of Paramus and Princeton, the Fort Worth suburb of Hurst, and the Minneapolis suburb of Eden Prairie, among others.
In addition, going forward, Noble is expected to invest up to $48 million in new Hyatt select-service development projects. “Hyatt has sites it has incubated, while we’ve got sites that we’ve held on to,” Shah concluded.