When you last traveled, where did you stay and what was your experience like?
If you went the conventional hotel route, maybe you visited the on-site spa, enjoyed room service, and had a drink or two in the bar adjacent to the lobby.
But I bet if you traveled with kids or pets, you either went the Airbnb route or found yourself pleasantly surprised at the selection of and amenities offered by a seemingly new version of the traditional hotel stay.
It’s possible you had the pleasure of discovering a fresh new asset class storming the scene: Select-service hotels.
I’m going to assume select-service or limited-service hotels were conveniently available near your must-see attractions and, to boot, you found a cute little kitchenette inside, making everyone in your minivan much happier! And then you thought to yourself, “Hmm, I wonder what it’s like to invest in these kinds of places?”
If the hotel asset class has popped up on your investor radar, it’s important you know the features and differences between the various types of hotels and which one(s) have the potential to support your financial goals before you start browsing potential opportunities.
We’ve been exploring the select and limited-service hotel asset classes lately because there’s more focus on a comfortable, convenient stay for travelers and less emphasis on lavish amenities, which makes it so our investment dollars can go further.
Low operating costs, the potential for value-add, and a growing market trend make them an excellent choice for investors who want to take advantage of this growth sector!
What is a Full-Service hotel?
To understand the various levels of the hotel industry, let’s start at the top by defining what you probably imagine as your typical, conventional hotel stay with all the bells and whistles.
A full-service hotel is one that provides a variety of services to please its visitors and may be mid-priced, high-end, or luxury. The food and beverage element is the simplest distinction between full and limited-service hotels.
There are almost always restaurants on-site in addition to other features like larger and more comfy rooms, laundry, security, food and beverage service, shuttle services, spa services, fitness center access, room service, concierge assistance, and bell-hops to assist visitors with their luggage.
Full-service hotel guests expect an all-inclusive-type stay with a higher level of attention and quality service as a result of the price they are paying with no extra “nickel and dime” fees.
Hotel rates will generally be higher than at limited or select-service hotel brands, simply because of the staff and equipment required to provide all of the amenities guests expect at this level.
What Is An Extended Stay Hotel?
Now that you have a sturdy mental picture of what a full-service hotel is and what guests may experience during their stay there, you’re wondering what the difference would be between that and a stay in a limited-service facility (also called extended-stay). These are the two polar opposite types of facilities along the hotel asset chain, with select-service hotels being in between.
An extended-stay hotel is a type of limited-service hotel that serves guests for an extended period of time. They are generally inexpensive, basic in nature, and lack many amenities, emphasizing price, function, and convenience as their primary selling points.
You might recognize brands like Extended Stay America, The Residence Inn, Comfort Inn, Holiday Inn Express, or Hampton Inn. They’re a cost-effective and convenient choice for budget-conscious travelers on trips that are longer than usual but too short to require apartment rental.
Limited-service properties provide features such as self-serve laundry and in-suite kitchens, which make them an economical and practical option for cost-conscious travelers. They’re also attractive for families who might want to eat in, who need the kitchen facilities for convenience (like with a newborn, pump supplies, and formula/breast milk – I remember those days!), to store and warm up leftovers, and/or save on dining costs.
Extended stay hotels, like traditional hotels, vary in price and style. Some extended stay apartments or studios provide apartment-style living, while luxury choices have additional bedrooms, more square footage, and special features such as private patios.
They also provide features that a typical hotel would have, such as daily room service, WiFi, gym and pool facilities, grab-n-go breakfasts and snacks, and easy access to local transportation to/from the airport, attractions, and business districts.
These hotels could, in theory, accommodate visitors for a night or two; however, the majority of them see clients who stay for at least five to seven days. Extended-stay hotels are often referred to as apartment hotels, long-term stay hotels, or short-term apartments and usually provide reduced rates based on a sliding scale based on the number of nights booked.
What Is A Select-Service Hotel?
Select-service hotels are a sort of hybrid between full-service and limited-service. As the name suggests, combine the basics of limited-service premises with a variety of services and amenities typically available at luxury establishments.
Generally, this means there are certain restaurant and banquet facilities on site but on a less elaborate scale than one would find at full-service hotels. Overall, it’s fair to say that properties in the select-service category have more in common with limited-service hotels because hotel amenities offered on select-service properties vary.
Select-service hotels keep operational expenses low by providing services and amenities in moderation. As a result, select-service hotel brands usually do not offer many restaurants, large catering services, or much meeting space. A select-service hotel’s restaurant, for example, is more likely to have a restricted menu that is not open for all three meals seven days a week.
In-room amenities, on the other hand, may meet or even surpass those provided by conventional hotels. Demand for select-service hotels has increased gradually since 2007 as corporate travel budgets tightened, giving select-service hotel brands the competitive edge since they provide in-room facilities comparable to those of fancier hotels at a lower price.
While the phrase “select-service” may be relatively new to the lodging industry, the concept is not. For most people, a Hilton Garden Inn, a Courtyard by Marriott, or a Hyatt Place conjures up an image of the classic select-service hotel. The phrase also refers to specific properties from primarily limited-service brands such as Best Western, Days Inn, and Clarion that have on-site restaurants or a more extensive range of in-room facilities.
Similarly, with the introduction of a number of new prototypes by conventional brands such as Holiday Inn and Wyndham, the distinction between the tiers has blurred. The reimagined hotel experience, which includes less extensive food and beverage service, a smaller building footprint, and reduced labor costs, as a result, offers increased operational efficiency at a lower cost.
What is the Difference Between Full, Select, and Limited-Service Hotels?
In the United States, there are no formal regulations defining what constitutes a limited-service hotel and what constitutes a full-service hotel; hotels are free to advertise as they choose. The basics of both types of hotels, on the other hand, are generally agreed upon by the hospitality business.
Limited-service hotels usually have the lowest operating costs of the three hotel categories, due to their slim amenities. They appeal to cost-conscious travelers and provide just a few services; guests get a room for the night, but not much else.
Over time, however, the standards for limited-service hotels have improved: Many limited-service accommodations now provide food and beverage service, a business center, small gym, washing machine and dryer, and swimming pool. Their comfortable rooms are not elaborate and usually include microwaves and mini-fridges, as well as cable TV and Internet, typically appealing more to leisure travelers.
The absence of in-house bar and dining choices is one of the most significant distinctions between limited-service hotels and full-service hotels. Full-Service Hotels frequently have at least one cocktail lounge and restaurant, whereas limited-service hotels rarely do.
Full-service hotels generally need a larger staff and more space to provide for guests who demand greater attention. A full-service hotel, such as a Marriott or Hilton, usually offers its visitors services such as bed turn-down, newspaper delivery, security guards, wake-up calls, room service, and a shuttle to and from the airport or other entertainment venues.
Full-service hotel guests are usually conference attendees and business people who expect access to a business center, a large lobby, all the amenities, multiple restaurants, and attention from the staff. They may contain more lavishly designed, spacious rooms with high-speed wireless Internet and premium cable TV with movies and other entertainment choices. Traditional hotels also commonly provide things like spas, banquet rooms, dry cleaning, concierge, and valet parking.
Select service hotels are a happy medium where, if you do your research well, you can pick a place to stay that offers only what you want and none of the amenities you never use. This results in a more cost-friendly travel experience while also providing you with the perks and experiences you expect.
Hotels in the select-service segment have a smaller footprint, fewer large banquet rooms, and fewer restaurants on site. There are probably no spas or luxury treatment options either, but, with fitness centers, a pool, and their convenient locations, they do have a high-value place in the range of options generally accepted in the travel industry.
With a lower percentage of operating expenses than their full-service counterparts, and more amenities than extended stay properties, travelers of all ages are jumping on the mid-range select-service hotel trend.
How Select-Service and Extended Stay Hotels Stand Out
We anticipate that the majority of hotels we invest in will be select-service properties. Both millennials and baby boomers, no matter why or where they’re traveling, frequently stay at hotels known as select-service or focused-service property types.
These hotels offer more amenities compared to limited-service options, such as a small amount of meeting space and a casual restaurant, but fewer features and services than full-service properties, which may offer full-time concierge service, bellhops, and room service. Most of them offer loyalty programs just like the big hotel brands and rooms are easily booked using points and miles and on all the usual travel sites.
Alternatively, some amenities and services might be provided on an a la carte basis, or even outsourced to other providers (think gym access via 24 Hour Fitness and food delivery via Uber Eats or a partnership with a couple of nearby dining options). As a result, select-service hotels are less costly to run than full-service hotels and profit margins are greater.
Select-service hotels allow patrons to enjoy simplicity and pay lower average daily rates than full-service hotels. Customers have increasingly chosen hotel properties where they believe they will find a consistent product at a fair price during the recent recession, according to TripAdvisor reviews.
Moreover, business and leisure clients appreciate a high-quality guestroom (often with design and fixtures comparable to or exceeding full-service and more upscale hotels) as well as important services such as free Wi-Fi, technology-enabled rooms and common areas, a quick breakfast, meal or snack option, and a lobby or lounge to visit in the evenings.
The rise of select-service hotels reflects the changing preferences of customers and hoteliers. Select-service is expected to be favor by hotel investors and builders seeking a hotel product that meets the demands of today’s travelers because of its higher operating margins and lower construction expenses. It is generally acknowledged in the hospitality industry that select-service hotels are among the industry’s most dynamic segments.
The select-service category has become the preferred product for owners, investors, and most significantly, guests. Millennials value “experience” while traveling, which is why they demand reasonable pricing. While maintaining an eye on saving money, millennials tend to want to spend more time outside of their hotel rooms, whether at a local attraction or even in the lobby where they can work, socialize, and have a drink.
Many of the most popular select-service companies have responded rapidly to this growing trend. Marriott, for example, recently rebranded their select service segment’s evening social event as the Residence Inn Mix program, which promises a great atmosphere for networking with coworkers and other guests.
Why Invest In Select Service Hotels?
Streamlined operations, technology-focused amenities, and lean staffing models with cross-trained personnel enable select-service and extended-stay hotels to achieve lower operational costs, allowing the sector to enjoy the highest and most stable margins in the lodging industry.
Select-service hotels offer better profit margins because of their streamlined operations. According to a recent CBRE Hotels’ Americas Research survey, had a net operating profit margin of 44.2 percent versus 37.5 percent for all other types of hotels.
Relative to traditional and alternative real estate property sectors, the select-service and extended-stay hotel sector outperforms from an occupancy growth, room-rate growth, yield, and returns perspective. This performance endured multiple economic cycles, highlighting the downside risk protection and durable income stream that the sector offers.
Investors without travel industry or food-service management experience find select service properties to be a more attractive option, minimizing the challenges of operating the major food and beverage component of the full-service property type. These properties are well suited for absentee owners utilizing professional management as well as hands-on owner/operators since the lack of restaurant facilities makes these properties easier to run and improves net operating income.
With the recent attention select-service hotels have been receiving – from the hotel chains, investors, and visitors – the hospitality industry is poised for continued success based upon changes in millennial spending, baby boomer spending, and the emerging global middle class.
Supply growth, while increasing, remains modest and we believe will continue to remain modest, given increasing construction costs and financing challenges. The industry fundamentals remain solid in the select-service segments and a continued increase in demand should allow hoteliers to press room rates, revenues, and operating profits upward.
Based on the positive economics, our research on and previous experience in the hospitality sector, current economic conditions, and the favorable projections for our targeted segments, we believe that this market segment may be the key to maximizing risk-adjusted returns.
Why Invest In Extended Stay Hotels?
The demand for extended stays has been growing steadily in recent years, as they are frequently in direct competition with vacation rentals and provide a more home-like experience.
Previously, these properties were mostly marketed to corporate travelers. Many individuals, however, are changing the way they travel and taking longer vacations so they have time to really explore the area. Plus, if you’ve tried traveling with little kids, having a kitchenette is high on the priority list!
Another factor is that, because tourists generally stay for longer periods of time, from five days to a month or more, occupancy rates are typically far better than those found at conventional hotels. This may lead to increased income over the long term from your extended stay hotel.
Limited-service properties run well on thin operating budgets, signaling that if the property remains attractive and in good condition, profit margins could widen significantly. With few amenities to keep track of, hotel management can pour attention into the guest experience, property upkeep, and simple value-add strategies, making it worth it for travelers’ extra few bucks.
Just keep in mind that extended-stay hotels don’t necessarily thrive in every market. Typically, these are better suited for secondary and tertiary markets, where a lot of travel for work occurs. We always recommend you perform your own due diligence on the market, asset type, and explore how visitors feel about the area. If sentiment is high and there is demand in your market, an extended stay may be a better investment option than a regular hotel.
How You Can Invest In Hotels With No Hospitality Experience
Just as you don’t need experience managing residential rental property to invest in a multifamily syndication, investing in a hotel syndication requires no hospitality, service, or restaurant industry experience.
Of course, if you have that experience, pull from it! But if you don’t, no sweat.
Syndications, which are group investments, and an excellent hands-off way to invest in large commercial properties. You get to rely on a team of experts with asset, market, location, and hospitality management experience to manage the property well, add value where needed, and increase profit margins. Meanwhile, your investment capital grows and you receive distributions according to the business plan.
Here at Goodegg, we’re focused on doing the research, connecting with experienced subject matter experts, and examining the data so that you don’t have to. Then, we present carefully vetted investment opportunities that meet our high standards exclusively to the investors inside the Goodegg Investor Club.
So, if you’re interested in a hands-off way to make your money grow and become a real estate investor without becoming a landlord, join the club today. In our efforts to watch the commercial real estate market carefully, hotels are next on our list of ways to reduce risk and diversify our portfolios.
You’re invited to take an obligation-free look at our existing investment deals, scrutinize the numbers on our past deals, and browse our (hopefully) upcoming hotel opportunities and see if they align with your investing and financial goals. We look forward to investing alongside you! investment opportunity!