NASHVILLE ؙ— The hotel
industry is notably defined right now by a lack of new supply, but there’s one
segment where Jan Freitag sees a lot of new rooms in the near future: upscale.
“We have a lot of new rooms
coming. I keep saying the pipeline is not a headwind. The pipeline, in some
instances, could arguably be considered a tailwind,” said Freitag, national
director of Hospitality Analytics at CoStar, who sat down for an interview with
Hotel Investment Today during the Hotel Data Conference in Nashville.
Freitag said when you look at
the pipeline makeup of the hotels being built, he uses the headline: “We’re not
building ballrooms anymore.”
“It’s very little on luxury.
It’s very limited on upper upscale. It’s upscale and upper midscale. That’s
where the activity is,” he said.
Freitag said the appeal is easy to
understand: owners, developers and customers all like upscale hotels. Lenders
like them, too, because “you have so many of them, and they’re very clearly
understood.”
I have said for 18 months, ‘Oh, but the comps are going to get easier.’ I have been wrong for 18 months… I was talking to some owners of economy properties, and they’re like, ‘Jan, [about] this whole gloom-and-doom scenario. It’s not that bad and we think it will get slightly less bad.’ I think that is a fair way to look at the world.
Jan Freitag
Freitag said that if you take
the total number of rooms in construction divided by the existing supply,
upscale hotel rooms will grow by 4%.
So what happens when all of
those new rooms are open? “You have to hope that there’s
demand that makes up that supply increase, at least, to get your occupancy
right,” he said.
Freitag said he’s bullish on
group in both the short- and long-term. “I talk to operators in the
markets, and I ask them about the group, and they [say it’s] good. That’s the
one-word answer. That makes me feel good. That builds base, and the booking
windows are pretty good or even elongating… Because we’re not always in the
office, we still have to have small group and team meetings. I think those
can benefit are not just upper upscale, but also upscale-type properties.
He said group pace can have
subsequent benefits. “I think that’s going to
continue to materialize at a robust pace, which then hopefully gives you
yielding power for your transient room nights on Tuesday, Wednesday, and
Thursday,” Freitag said.
We also talked to Freitag about
different hotel segments, why RevPAR forecasts are being cut back and why
leisure demand still appears soft.
Hotel Investment
Today (HIT): What are your thoughts on the economy segment?
Jan Freitag: I have said for 18 months, ‘Oh, but the comps are
going to get easier.’ I have been wrong for 18 months… I was talking to some
owners of economy properties, and they’re like, ‘Jan, [about] this whole
gloom-and-doom scenario. It’s not that bad and we think it will get slightly
less bad.’ I think that is a fair way to look at the world. The question is: Will the
American consumer continue to pull back, making it worse, or is it a little
less bad?
We’re still definitely not back to 2019 levels. Room demand is still
down year over year. We’re still missing a lot of room nights, especially on
the weekend… I’m curious to see when the business traveler goes back on the
road in earnest in September and October and how the lower end is going to
fare.
HIT: How do you feel
about the midscale segment?
Freitag: It has also been soft, and there’s the fear that
the softness on the lowest-income level and lower scales then bleeds up into
midscale. So far, for midscale, year-to-date demand is down… and that’s not a
great setup for success.
In the long term, extended-stay is a great… Optionality play. If it doesn’t work as a hotel, it will work as a multifamily apartment very quickly.
Jan Freitag
HIT: What’s your
outlook on extended-stay?
Freitag: In the long term, extended-stay is a great… Optionality play. If it doesn’t work as a hotel, it will work as a multifamily
apartment very quickly. You always have a plan B in your pocket. I think that’s
what developers like about it. It’s already an apartment. It’s just that the
lease is one night, seven nights, or 30 nights. If you just make [the lease]
one year, I don’t think it’s a big switch.
HIT: What about the
luxury segment and potential ADR pushback?
Freitag: There are two arguments. One is that maybe we asked
a lot from a customer willing to pay and now saying, ‘Well, maybe I have other
options.’ The other piece is just math… What used to be true is that a large
percentage of your rooms are leisure rooms. They pay what’s called BAR (best
available rate), which is what’s on the website, versus having an incentive
group where you negotiate a group room rate… and those numbers are lower than
the BAR rate, and it’s just by purely mixed shift. You may have the same amount
of people, but they’re paying different rates, which then puts pressure on
pricing. It’s not bad. It’s just math.
HIT: What are your
thoughts on public hotel companies and REITs cutting back their RevPAR guidance
for the rest of 2024?
Freitag: I always want to point out immediately that we are
still talking about growth. It’s just slower growth. So, cutting guidance does
not mean deterioration or that things are falling off a cliff… This is just
slower growth, and that’s the environment that we’re in, given the
macroeconomics of maybe a little bit higher unemployment, maybe the lower-end
consumer having lots of credit card debt and needing more money to service
that, which comes from that travel budget.
HIT: What are your
thoughts on leisure demand?
Freitag: Overall, this is now a question
of price point. The American leisure traveler on the lower end may be just
slightly more cautious. But that could translate to they’re still going
but don’t book as far out and that the booking window gets crushed. The
unfortunate tag-on effect is that if you’re a hotelier and three weeks out, you
don’t see the occupancy on the books for a coming Friday or Saturday, you may
say, ‘Oh, I must have a deal.’ That obviously has an impact on the
ADR.