In the hospitality sector of commercial real estate, the last decade has seen greater investment and development activity in select-service versus full-service hotels. Why? Because of the relative ease of operations. Without the extensive array of facilities, services and amenities, select-service hotels require less labor force and thus are more efficient to operate. However, in recent years, the full-service hotel is making a comeback. Before we take a closer look at this trend, we’ll explore the difference between select-service and full-service hotels.
Select-service hotels are positioned between limited and full-service properties and offer a few services such as breakfast, a fitness center, grab-and-go food offerings and limited bar and evening food service. Designed and targeted for the business traveler, select-service hotels have hit the sweet spot by balancing amenities, quality rooms and value for the typical “road warrior.” Common examples include Courtyard by Marriott and Hilton Garden Inn. On the other spectrum, full-service hotels focus on offering a wide range of amenities, often including conference and banquet space, upscale dining options and gym and spa facilities. Examples of full-service hotels include Hilton, Marriott and Hyatt Hotels and their luxury counterparts.
“The significant lodging trend since 2012 or so is the proliferation of development of limited-and select-service hotels across primary, secondary and tertiary U.S. markets,” says Rich Lillis, executive managing director of Colliers’ Hotels group. “However, the tide may be shifting. We are starting to see a resurgence of interest in full-service hotels, both in development and investment sales,” added Lillis.
So, why are investors and developers shifting their attention more toward full-service hotels? More money in the market—and the ability to tap into multiple revenue segments and types of consumers—are some of the factors we’ll explore.
More Money in the Market
The biggest catalyst in this shift toward full-service hotels is amount of capital available in the present market. The lodging sector is awash with investors searching for attractive returns. As a result, full-service hotels have been gaining more attention. “The development of full-service hotels has increased, as investors realize that new hotels with trendy brands and upmarket “lifestyle” execution can produce much higher room rates than older or outdated full-service competitors, as well as a higher margin of food and beverage operations with an emphasis on beverage sales,” says Lillis.
Development costs are somewhat contained by building smaller, boutique style full-service hotels with little expensive-to-build banquet space. These full-service developments of fewer than 300 rooms feature trendy and profitable rooftop bars and are most commonly located in central business district areas of the top U.S. markets. For instance, hotel guests, locals and tourists alike flock to Boston’s Envoy Hotel, a boutique hotel which features a popular rooftop bar overlooking the Boston skyline and waterfront.
The Ability to Profit from Different Revenue Segments
With more money in the market, investors and developers also see that investing in full-service hotels gives them the ability to profit from many different revenue segments. Aside from different room offerings, full-service hotels focus on offering more amenities to guests, such as upscale food and beverage options—sometimes run by celebrity chefs and all the more appealing—convention and meeting space, catering services, spas and more. This diversity means that investors have more ways to capitalize on larger revenue streams in full-service hotels verses their select-service counterparts.
The Ability to Target More Consumers
In the hospitality sector, there are two types of consumers targeted: business travelers and leisure travelers. “Most full-service hotels target both business and leisure travelers, while select-service typically chooses to focus on one or the other,” says Mike Mixer, executive managing director of Colliers Las Vegas and an expert in the resort and gaming market. “Focusing on both types of consumers, as full-service hotels often do, makes it more viable for investors and developers, and also means it’s a safer investment during slowdowns, since the consumer base is larger.”
Outdated Space: The Surge in Revamping Older Full-Service Space
Since there hasn’t been much development activity in the full-service hotel sector in the last generation of building, a lot of the existing full-service properties are outdated. This is attracting reinvestment and creating demand for new product. Lenders are more likely to give the green light to develop new full-service hotels because they know they’ll be the best and “shiniest” star in the subgroup of competition, which will in turn create more demand for business and leisure travel.
New convention and conference space is also needed. The current trend in convention space focuses on a marriage of highlighting indoor and outdoor features to create a more lively, energized space. “Older full-service hotels are attracting investors in search of higher yields as they afford attractive returns through acquisition well below replacement cost, CAPEX investment to improve the guest experience, rebranding and up-branding, improving food and beverage offerings and deploying sophisticated new management to improve the guest experience and overall profitability,” says Lillis.
What’s Next for Hospitality?
While reinvigorated interest in investment and development in full-service hotels has not replaced the strong interest, but rather added to select-service hotels, what will this trend bring to the market going forward? Signs point to a continuation of more “upper-upscale” luxury lifestyle brand development of full-service hotels, with tailored urban offerings and a unique food and beverage experience. Another trend emerging in many U.S. markets that is likely to grow in conjunction with full-service hotel growth is the micro-room, with trend-setting Yotel, Motto by Hilton and Moxy by Marriott as shining examples. And finally, full-service mid-market resorts remain in demand, especially among young families and extended families—many offering family-friendly recreational activities and multi-generational accommodations.
This article was written by the U.S. Colliers Editorial Board, whose mission is to produce new and noteworthy commercial real estate thought leadership pieces to create conversation around proactive content. The Editorial Board focuses on CRE trends in the United States, and is comprised of Colliers marketing, research, communication and service line leaders.