Mike Francis, Senior Vice President, Select Service Division
In the workshop “Select Service: Surviving and Thriving”, panelists highlighted the positive aspects of the select service hotel market and the ability of the sector to outperform the rest of the industry during the downturn. The panel was insightful and much discussion was devoted to historical underwriting standards and the applicability of history to the future.
Additionally, a key theme that the speakers agreed upon was that the select service sector has fat profit margins, which displayed an unexpected degree of resilience as most investors’ worst case scenario unfolded during 2009.
Some important theories were advanced on the competitive position of the select service hotel market relative to full service hotels and the market as a whole. In the downturn following 9/11, select service hotels generally benefited from consumers trading down from full service hotels to less expensive properties. Though there was some trading down in this downturn, a distinct—and surprising—new trend emerged. Panelists universally cited that full service hotels actually engaged in predatory pricing tactics by lowering their rates significantly, using this as their leverage factor in an attempt to take some market share from select service hotels.
Industry participants to a certain extent first feared that the ADR declines in select service hotels would be particularly detrimental as the hotels already operated a lean operation to begin with. But select service owners and operators have been proven wrong. Through creative cost containment initiatives and restructuring of operations, select service hotels have been able to achieve significant additional cost savings. The speakers agreed that while some operators knew the additional efficiencies adjustments to operating leverage were possible or available, they had simply never been forced to test some of these cuts. The destructive effects of ADR deterioration were thereby moderated.
Looking forward, one panelist commented that occupancy was starting to give him more “pep in my step” and, while rates have not improved as of yet, the groundwork is in place. Not surprisingly, there was universal agreement that feasibility of new development would be slow in coming back.
That all sounds like good news to me.
- Mike
