The hotel industry has no shortage of brands, and while the segments at either end of the spectrum are top of mind for investors and guests, the midscale segment is looking to take its next big leap.
The survival of mainstream midscale brands depends on fine-tuning brand relevancy to the new guest, said David Anderson, divisional president for Europe, Middle East and Africa at Aimbridge Hospitality EMEA during Alvarez & Marsal’s European Hospitality Investment Conference.
Anderson and his fellow panelists in the session titled “Evolution of Mainstream Hospitality Development” represent 88 different hotel brands. Many of these are midscale brands that are legacy members of their parent companies’ portfolios.
Willemijn Geels, vice president of development for Europe at IHG Hotels & Resorts, said 35% of the hotels she has signed in her region have been in the midscale segment.
“There is big demand for midscale with families, such as for Holiday Inn, Voco and extended stay. These brands are very resilient, and they have proven again that it is an interesting model both from operational and investment viewpoints,” she said.
Geels added some Holiday Inn hotels are gaining more resort and leisure offerings, and the tweaked Holiday Inn Express & Suites model is debuting in more markets.
Investors need to be on board, too, said Camil Yazbeck, senior vice president and head of development for Europe at Accor.
“Office has gone, but what is the profile of the investor? Extended stay stabilizes risk and gives a base occupancy," Yazbeck said. “We can do branded residential, and we now own [food and beverage] concepts, which a few years ago was a no-no in hotel firms. With experiential hotel brands, this gives you the ability to fine-tune offerings and depress cap rates for investors."
Yazbeck said midscale hotels have their place if owners and trends within a market are fully understood. He added brands are becoming more hybridized to favor specific demand generators in a market.
“You need flexibility within brands for this. I do not see the pipeline becoming diluted because of this, and Europe is especially ripe for this,” he said.
Tim Walton, regional vice president of international hotel development for Western Europe at Marriott International, said as the market evolves so do contractual terms for hotel management agreements.
“For the most part, [HMAs] are easier and more flexible,” he said.
In Europe, Marriott has only 6% market share of branded hotels as opposed to 22% in the U.S., which means there is room for growth, Walton said.
“Ninety percent of hotels in Italy are unbranded, and some for good reason. Everyone is after the same deals, and deal terms have become more flexible,” he said.
Most hotel firms have pipelines in Europe that are broadly 50% new-build properties and 50% conversions of existing properties, with conversions likely to grow in share a little.
Experiential Versus Brand
The emphasis on hotels being experiences has blurred the traditional lines of brands, said Tobi Weissinger, partner at owner Hamilton-Pyramid Europe. Investors favor a particular brand if it is the best in terms of performance and later offers an exit strategy, he added.
“It always comes down to the assets and their circumstances. Ultimately, it is always a commercial decision. How do we maximize performance over the entire ownership?” he said.
Weissinger said key money has regained importance.
“Hotel fees really are no different across the brand board, so we are looking at flexibility on the exit. That is not to say that will always be used because if the business goes to plan, then everyone does well, but it does provide a possible solution,” he said.
Patrick Fitzgibbon, senior vice president of development for Europe, the Middle East and Africa at Hilton, said 65% of his deal flow is with existing owners who have always possessed clarity on performance and market economics.
“That is quite easy, but the challenge is to identify what is the right product type and how consumers understand this. We have to be quite thoughtful, but that allows us to yield them," Fitzgibbon said. “The solution is not just to stick a flag on a conversion but to inject the right capital to allow it to drive premiums to owners. If we are not laser-focused on this, things will drop back."
Yazbeck said debt will start to play a big part in the equation in 2023 and will create much scope for joint ventures that inject fresh capital and initiatives.
“We are now seeing deals signed in 2019/2020 where loans are maturing, and this is where we are going to see some movement with the banks in 2023 and beyond. Banks are much more savvy than before the Great Financial Crisis. They won’t be selling all through [non-performing loans] as they are well-capitalized," Yazbeck said.
“We’re more likely to partner up with private equity or others with the right asset-management skills. This is where experienced management teams like Aimbridge or Hamilton come in,” he added.
Marriott is doing more franchised deals, Walton said, but it is “shying away from leasing."
“We try to solve that by working with third-party operators, with some credit support, to play in that market without entering into leases ourselves,” he said.
IHG’s Geels said she has a large lease portfolio in the United Kingdom.
“That was good as we learned a lot from this along with our owners. We have largely divested,” she said.
Yazbeck added investors are looking to diversify risk and unlock value through mixed-use projects.
“A mixed-use, amalgamated offering helps securing debt. Fixed income and mixed use also help to compress cap rates at financing or exit,” he said.
The Power of Positivity
Typically not short on optimism, the hotel industry could use more positivity, panelists said.
“We have to remain optimistic for travel across the long term,” Fitzgibbon said. “One challenge is the availability of airline seats, but some of the short-term bookings we’ve seen are amazing, 200 people at three weeks’ notice, for example. There is opportunity in every market."
Yazbeck said he tells his teams that if opportunity doesn’t come knocking on the door, then they have to build that door.
“How? Keep a positive and determined mindset, understand customer trends and provide the right brands for them. Think like owners and understand their investment criteria and [return on investment] requirements. You will then be able to create limitless opportunities, be the best in your remit and sign the best deals,” Yazbeck said.
Investors remain confident in hotels as an asset class, he added.