NEW YORK CITY—Every day at RLJ Lodging Trust, the letters keep coming.
Kate B. Henriksen, senior VP of investment and portfolio analysis for RLJ, said she is constantly being notified by various brand companies the real estate investment trust is affiliated with that another select-service property is about to enter one of the REIT’s markets.
“I’m definitely seeing an uptick in the development pipeline and new supply,” she said during a breakout session titled “Select service” at the 37th annual NYU International Hospitality Industry Investment Conference.
“I’m spending more and more time understanding the implications of the letters we get every month from brand parent companies and them notifying us of new hotels they plan to put in our existing markets. We probably get 10 to 15 letters a month from our three different brands,” she said.
Select-service hotels have been the darlings of the hotel industry for some time now because of the product’s low cost of ownership and strong flow-through, panelists said. That means more players are likely to enter the space, which also means added supply.
“One risk of select service is oversupply,” said John Cantele, senior VP of Hyatt Place and Hyatt House operations for Hyatt Hotels Corporation. “How long can we continue to grow rate? Everyone’s margins are really robust and occupancy has been strong for a long time. Are we going to kill the goose that lays the golden egg?”
Thoughtful growth
Eric Jacobs, chief development officer for select-service and extended-stay lodging brands for Marriott International, said the brand company tries to be careful in how it grows its system so as to provide as little disruption as possible for its franchisees. Still, he added that owners should keep in mind that they should expect brand companies want to grow.
“We’re very thoughtful about how we grow,” he said. “It doesn’t benefit anybody to have two underperforming hotels in the market.”
Henriksen responded: “I understand the need to grow and that they need to keep developing brands because I keep buying them. It’s one thing to add one hotel, but the cases where they cause us the most concern is when a lot come in. It’s a compounded effect of new supply.”
Cantele said it doesn’t seem to matter how well a particular property might be performing; all owners are sensitive to how market supply dynamics can evolve when new select-service product is added.
“I have an owner running 90% occupancy saying, ‘You’re going to kill me,’” he said.
It’s important for brands to let all owners in a given market know if there is going to be any type of increased supply from the brand, Cantele said.
“Even if you’re just adding a 150-room Hyatt House, you should let the 1,000-room Regency know,” he said.
Jacobs elaborated on how Marriott approaches adding supply.
“If we have a Courtyard and we’re adding a Fairfield, we’ll notify the Courtyard and give them a chance to have a third-party study done” to figure out the impact on demand in that market, he said. “We look at unaccommodated demand. If we don’t (develop), Hyatt House will show up and they’ll capture that unaccommodated market.”
Market-based offerings
The way brands operate their select-service offerings could differ based on market, panelists said. Jacobs said consumers today are more sophisticated than they have been in the past and are demanding more personalization.
“You have to be flexible in certain markets based on the competition,” Jacobs said. “If three or four of your competitors are doing a free beer and cocktail hour, and that’s not traditionally part of your brand, then we would try to come up with a way for that owner to be competitive.”
One example of this, Jacobs said, would be to offer more king-sized beds in a business park but more two-double-bed rooms at Disneyland.
Now is the time for brand companies to be more aggressive in pushing through property upgrades to help boost the guest experience, said James Carroll, president and CEO of Crestline Hotels & Resorts.
“The brands don’t maintain the product,” he said. “They don’t force upgrades. During the good times like now is when they really need to do it.”