The Biggest Trends in Hotel Franchising - 2017 Edition
As 2017 comes to a close, it is important to reflect on some of the key trends in the franchised hotel space this year. With purchase and sale activity continuing to slow, owners are focusing more on new development and renovating and maintaining their existing properties in order to keep their portfolios fresh and competitive heading into 2018 and beyond.
Capitalization rates rise as profits and asset quality decline, and they are often subject to cyclical underlying economic trends which drive inflation and interest rates overall. As has been the case for the last several years now, cap rates in 2017 remained flat to slightly up across most select and full-service property types.
According to Chris Williams, Managing Director of Western Alliance Bank’s Hotel Franchise Finance department, cap rates will remain relatively stable in 2018, but the risk for rising cap rates will continue to increase as the economic expansion continues into its later stages. In general across the U.S., blended cap rates for full-service franchised hotels remained stable year-over-year, at or around 8%, while select-service properties saw a slight increase to about 9% over the same period.
What Are The Big Brands Doing?
The short answer is: planning for and opening a lot of new properties. According to Lodging Econometrics, Hilton, Marriott and IHG will see their current room inventories grow by 4.8%, 3.9% and 4.5%, respectively, in 2017 with all three majors expected to grow at or above these levels in 2018 and 2019.
As is often the case during these periods of expansions, the majors launch new brands to better compete up and down the Average Daily Rate (ADR) curve, while vying to be the front runner for ever-changing consumer trends.
With the success of Hilton’s Home2 Suites product, IHG and Marriott are increasingly focused on their new brands like Avid for IHG or refreshing existing flags such as Fairfield, TownePlace Suites, Courtyard and Hampton Inn to further penetrate the Upper Midscale market segments.
So, what are some of the top hotel chains doing in 2017?
Hampton by Hilton (including Hampton Inn by Hilton and Hampton Inn & Suites by Hilton) was the number one ranked franchise in 2011, 2012, 2013 and 2015, according to Entrepreneur. The chain of hotels “serves value-conscious and quality-driven travelers” with more than 2,100 properties in 18 countries. Hampton is also planning on opening an additional 38 hotels soon, according to its website. One of the signature amenities is a suite with two bedrooms, a living room and kitchen area. These properties offer complimentary hot breakfast and fresh coffee.
Courtyard by Marriott Hotels is the 8th largest lodging brand in the world. The brand has over 1,100 properties currently in 47 countries, and another 271 to open soon, according to its development website. Courtyard is known to suit the modern business traveler with smartly-designed guest rooms, lobbies and public areas.
Which Markets Are Seeing New Supply?
While new supply trends are increasing in most markets across the U.S., the supply/demand imbalance many were expecting in 2017 has failed to materialize as the pace of underlying economic growth continues to accelerate. According to Lodging Econometrics, the new supply pipeline bottomed out in 2011 and increased at a measured pace through mid-2017 across most of the top 50 markets. However, while the overall pace of projects being delivered is starting to plateau across the U.S. in the aggregate, there are markets such as Nashville, Denver, NYC and Seattle where the pipeline will see significant project deliveries through at least 2020.
In general, new supply is projected to be manageable at or below 2.5% of existing room inventory in regions such as New England, the South Atlantic, Midwest, Mountain and Pacific regions. It’s the East, West and South Central U.S. regions, consisting of the Gulf Coast states outside of Florida and states into the Ohio River Valley, which will see new supply being delivered through 2020 in excess of 3% of existing room inventory. Extra caution should be taken if one is looking to enter one of these markets.
According to Hotel Management Magazine, select-service hotels account for the bulk of new rooms under construction and this has been a unique aspect of the current inventory expansion within the space when compared to prior cycles. As the cost to build new properties continues to increase, owners are focusing their efforts on projects that can be delivered quickly, stabilize in less than 24 months and generate stable returns with less oversight than what a full service hotel development project would entail.
With more than $20 billion in assets, Western Alliance Bancorporation (NYSE:WAL) is one of the country’s top-performing banking companies and is ranked #2 on the Forbes 2018 “Best Banks in America” list. Its primary subsidiary, Western Alliance Bank, is the go-to bank for business and succeeds with local teams of experienced bankers who deliver superior service and a full spectrum of deposit, lending, treasury management, international banking and online banking products and services. Western Alliance Bank operates full-service banking divisions: Alliance Bank of Arizona, Bank of Nevada, Bridge Bank, First Independent Bank and Torrey Pines Bank. The bank also serves business customers through a robust national platform of specialized financial services including Corporate Finance, Equity Fund Resources, Hotel Franchise Finance, Life Sciences Group, Mortgage Warehouse Lending, Public and Nonprofit Finance, Renewable Resource Group, Resort Finance, Technology Finance and Alliance Association Bank.
Recent NewsCytoSorbents Refinances Existing Debt with New $15 Million Debt Facility with Bridge BankBridger acquires Old Mill BrickWestern Alliance #2 on Forbes 2018 "Best Banks in America" ListBIOLASE Secures $6 Million Revolving Line of CreditBridge Bank Finalizes $8 Million New Credit Facility with ANEXIO
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