Why Select-Service Hotels
The Rise of Select-Service
We expect that the majority of hotel properties that we acquire will be Select-Service hotels. We believe that millennials, baby boomers, and business travelers alike are frequenting hotels commonly categorized as Select-Service and/or focused-service properties. These hotels offer more amenities than Limited-Service properties, such as a small amount of meeting space and a casual restaurant, but fewer features and services than Full-Service properties, which may offer full time concierge service, bellhops and room service. Alternatively, certain amenities and services may be offered on an a-la-carte basis, or even outsourced to other businesses (e.g., gym use and restaurant delivery). As such, these Select-Service properties are less generally expensive to operate than Full-Service hotels and operating margins are higher.
Average daily rates at Select-Service hotels are typically slightly lower than Full-Service hotels. We also believe that customers who frequent Select-Service hotels appreciate the streamlined nature of the hotels. Even following the 2008 – 2009 recession, customers have increasingly chosen hotel properties where they believe they will find a consistent product at a reasonable price. Specifically, business and leisure customers appreciate a quality guestroom (often with design and fixtures equal to or exceeding Full-Service and more upscale hotels) along with essential amenities, such as free Wi-Fi, technology-enabled rooms and common areas, a quick breakfast, meal or snack option, and a lobby or lounge to go to in the evenings for a bite to eat and a drink.
According to Ernst and Young, “the rise of Select-Service hotels is indicative of the shifting preferences of travelers and hoteliers. Due to the segment’s higher operating margins and decreased construction costs, Select-Service is expected to remain favored by hotel investors and developers seeking a hotel product that addresses the value and convenience preferences of today’s traveler.” It is generally accepted in the hospitality industry that Select-Service hotels are the fastest growing segment of the hospitality industry.
We believe the Select-Service segment has established itself as the preferred product for owners, investors and, most importantly, guests.
As noted previously, millennial travelers place increasing importance on “experience” when they travel. While still focused on reasonable pricing, they generally want to spend time outside the four walls of their hotel rooms, whether at a local establishment or even in the lobby where they can work, socialize, and have a drink. Most major Select-Service brands have been quick to react to this growing trend. Residence Inn by Marriott, for instance, recently re-launched their evening social as the Residence Inn Mix program, which, according to their website “provides an ideal setting for mingling with co-workers and other guests. You bring the conversation, and we’ll add some tasteful food and beverage options.”
Better Operating Margins
Due to the streamlined nature of Select-Service hotels, operators and owners of these assets have the opportunity to achieve better profit margins. According to a recent study conducted by CBRE Hotels’ Americas Research, Select-Service hotels achieved a gross operating profit margin of 44.2% versus all other types of hotels, which achieved a 37.5% margin. (1)
In sum, we believe that the hospitality industry is poised for continued success based upon changes in millennial spending, baby boomer spending, and the emerging global middle class.
Supply growth, while increasing, remains modest and we believe will continue to remain modest, given increasing construction costs and financing challenges. In the Select-Service and Focused-Service segments, we believe the industry fundamentals remain solid and that continuing increases in demand should allow hoteliers to grow room rate, revenues, and operating profits.
Based on the positive economics of these types of properties, our sponsor’s previous experience in the hospitality sector, current economic conditions and the favorable projections for our targeted segments, we believe that investing in this segment, in accordance with our investment strategies and objectives, may maximize risk-adjusted returns for investors.
(1) Robert Mandelbaum, CBRE, Select-Service Hotels: Efficient and Profitable, Hotel Online.com, April 2017.
Past
performance is not a guarantee of future results, and there can be no assurance
that we will achieve comparable results of Procaccianti Companies and its affiliates. We can provide no guarantee that we will achieve our investment objectives or
be able to acquire a diversified portfolio. Further, we cannot guarantee
that any trends or forecasts will occur, continue, or that we will be able to
take advantage of them.
