It doesn't take a luxury spa, golf course or Michelin-starred restaurant to make a hotel a top revenue performer.
U.S. hotels in the middle-priced segments have performed quite well and dependably over the last few years. These hotels reside in the upper-midscale and upscale classes and are also known as "limited-service" hotels. Often, they don't have a full restaurant open for three meals a day and just serve breakfast. They might have a pool or a few meeting rooms, but don't offer spa services or have space to host conventions with hundreds of attendees.
But upper-midscale and upscale hotels have multiplied across the country and are some of the most well-known brands to consumers. As a whole, the hotel industry has moved up toward the "middle" in the last few decades, said Hannah Smith, senior analyst at STR, during a data presentation at last month's Hotel Data Conference.
"You look back to the end of the '80s, and the industry was much more heavily concentrated in lower classes. It was a very economy- and midscale-driven industry," she said. "But when you think about the last 30 to 40 years, a lot of that growth in the industry has been focused on this limited-service segment, especially once you start to think of what are the new brands that have been launched in the last five to 10 years. ... Maybe they have a lifestyle focus or a wellness focus, but a lot of these new brands are still coming into this limited-service space."
Both lenders and developers like the brands in the upper-midscale and upscale spaces. In terms of U.S. hotels in construction, upper-midscale brands such as Home2 Suites by Hilton, TownePlace Suites by Marriott and Holiday Inn Express lead the way. Among upscale brands, Marriott International's Residence Inn, SpringHill Suites and Element brands have the most hotels in construction in the U.S.
"When we take a look at that supply growth going back to 2010, upper-midscale and upscale properties consistently outpace the rest of the industry in terms of supply growth," Smith said. "You see that even today; we have a slower construction cycle right now, post-COVID, financing is tight, but even then, what's driving a lot of the supply growth in the industry is still these two classes. These are the types of properties that developers are still most interested in."
The growth of the upper-midscale and upscale hotel segments is unlikely to slow anytime soon. Both segments lead the way in terms of hotel rooms in development, but the good news is that pipeline is only a small portion of upper-midscale and upscale hotel rooms open today, Smith said.
"Even with all of these rooms coming in, we're still not talking about a large supply growth. ... You're talking 3% to 4% supply growth if they all open tomorrow. And we know that that is not how construction timelines work, especially right now," she said. "When we look toward the future, we're talking 1.3% to 1.5% supply growth for the next few years in these two segments. So still very moderate growth, much lower than that long-term average trend."
But even with that supply growth, demand is there and travelers still are flocking to book hotels in these segments.
"While that supply growth has been outpacing the rest of the industry, demand has also been keeping up," Smith said. "So when you look at that long-term occupancy growth trend, it's basically keeping up with the rest of the industry, in some cases still outpacing it. So with that strong supply growth, we are seeing the consumer respond in kind of they want to stay in these types of properties, too."
The middle hotel segments also still command a respectable nightly rate. Average daily rate continues to climb in the upper-midscale and upscale classes, which makes them stand out even more from the "lower end" of the hospitality industry's economy and midscale hotels, Smith said.
"What we're seeing is the gap between low end and these middle properties is growing. So these properties are differentiating themselves more from those low-end properties, whether that's in the amenities they're offering, the services they're offering, the customers they're trying to attract, but certainly in price, where we're seeing that spread grow 12 points relative to the low end, versus only 10 points relative to the high end. They are breaking away a little bit from those low-end properties in terms of price," she said.
Business travel is thriving in the middle
Upper-midscale and upscale hotels are also popular with business travelers and small- to medium-sized groups.
The cost of staying at hotels in the middle segments is still perceived as relatively affordable among business travelers, Smith said.
"If we look at the midweek rate growth since 2019 for the middle and for high end, the middle has grown 10% since 2019; that is not even keeping up with the pace of inflation. Today, that midweek room at an upscale property is cheaper to the customer than that upper-upscale and luxury room relative to 2019," she said. "Those business travelers, maybe they're starting to get more price-sensitive, maybe their companies are requiring them to be a little more price-sensitive. They may be looking more at those upscale properties, they're still offering some of the amenities that a business traveler is looking for. They may start to be seen as a more value-add option for a business traveler, just relative to the pricing they've seen since 2019."
What's more, upper-midscale and upscale hotels aren't sacrificing as much nightly rates in the middle of the week compared to the weekends since their midweek demand among business travelers and groups is so steady.
"Low-end hotels, you see that their rate during the week is 21% lower than what they're charging on the weekends to their leisure customers, versus you look at those upper classes and the middle, it's only about a 10% to 11% difference," Smith said. "And what's happening here isn't that [the middle hotel segments] aren't trying to be cheaper to those leisure customers, but rather, they're trying to push that midweek rate to those business travelers. ... Those middle classes are really performing very similarly in terms of that week-to-week trend, in terms of that business travel and customer they're attracting and very similar to the trends we're seeing at the high end of the industry."
While upper-midscale and upscale hotels don't have the same meeting-space capacity to host large meetings or conventions, they're still popular with smaller corporate or sales meetings or travel sports teams.
"They're attracting groups like youth sports teams or smaller meetings that just need a small boardroom to meet in. These were still groups that were traveling [during the pandemic], especially as we get into 2021. These are not groups that fell off in the same way that those big conferences and conventions did," Smith said.
The popularity of middle-priced hotels outside the US
Internationally, travelers tend to look for hotels in the middle segments since they often get more for their money, said Kevin Sahara, director of market management, lodging at Expedia Group.
A year ago, Sahara and Smith examined how consumers shop for hotels before they book and how they might "trade down" to a lower chain scale or book a hotel outside busy urban centers to stretch their travel budget further. This year, not much has changed.
"As we're looking at value, as potentially you're looking at review score, all those other factors that would influence your booking, we're seeing a little bit more of a trade down in the middle," Sahara said.
Sahara also researched how people booking an international trip are affected by the room rates they see when trying to book a hotel. Some destinations such as parts of Mexico, Japan or Canada jumped out where Expedia users were a bit more flexible with their travel budgets or they were able to save more on their hotel they chose thanks to a favorable currency exchange rate.
"As we're thinking about the exchange rate for yen, the exchange rate for Canadian dollars, the exchange rate for pesos, how much of an advantage is it in the buydown and the value that you're getting in some of these other accommodations that you're potentially looking at," he said.