Secrets of Select Service Success
By Mark Ricketts President & Chief Operating Officer, McNeill Hotel Company | March 15, 2020
Select service properties hold great appeal to hotel investors and operators at the present time. Contributing factors include their reasonable development costs, favorable staffing levels and the ability to fit in well across a broad range of market types and sizes poised against potential operating stream and return on investment.
Also, the major brands are giving developers increasing freedom to stretch the envelope of this property class, whether we are talking about amenities, food and beverage services, physical configuration of rooms and, even, exterior landscaping and features.
This article will discuss factors driving success in select service today and what the future may hold for this increasingly attractive and malleable class of property.
No hotel classification is rigid. Select service properties fit somewhere between the traditional limited service asset class, a room and the bare necessities, and the traditional full service property. Initially, a core distinction between the limited service and select service asset classes has been the addition of a modest food and beverage component, everything from an on-property grab-and-go market or lobby bar to a small restaurant with limited hours and reasonable ambitions.
Certainly, the guest appeal -and resulting prevalence - of increasingly hearty complimentary breakfasts has helped thrust select service into the food and beverage "game."
Additional select service possibilities include modest meeting and business space, health and fitness activities, or outdoor amenities. We can perhaps consider a typical select service property akin to the best baseball utility players or all-rounders in soccer, able to take on many roles or positions, just not all at the same time. Many extended stay properties fit this model in terms of having a carefully curated selection of services and amenities, practical staffing levels, and favorable development and ongoing operating costs in respect of potential asking rates.
In this discussion, we are primarily considering conventional and extended stay properties in the Upper Midscale and Upscale Smith Travel Research (STR) chain scales. Familiar (not exclusive) brands in this arena include aloft, Courtyard by Marriot, Fairfield Inn, Hampton, Hilton Garden Inn, Holiday Inn Express, Home2 Suites, Homewood Suites, Hyatt Place, Residence Inn, Springhill Suites or TownePlace Suites.
What Makes Select Service Properties Appealing to Investors and Operators?
The appeal of a select service property starts with its manageable platform, perhaps 100 to 140 relatively heterogeneous rooms. Even if the construction costs per room is similar to other asset classes, select service properties can be completed in time frames that are shorter than full service properties, leading to an earlier revenue flow for the investment.
These platforms generally require less staff per room and fewer specialized positions at the property level, which translates into reduced training costs and less overall labor expense. Extended stay properties introduce additional cost efficiencies, as less housekeeping and check-in services are required and extended stay guests typically consume less complimentary food. We can expect the brands to apply some of these extended stay lessons to conventional properties, an example being the ability for a guest to decline some housekeeping services in return for other perks.
In the present industry environment, select service hotels appeal to value-conscious corporate and leisure travellers, who have an ever-wider choice of brands to select from; investors and property managers; and also lenders. In fact, STR reported in 2018 that the select service category, which represented about a quarter of all development in the early 2000s, grew to 58 percent of the development pipeline in 2008. That figure has remained steady thereafter, reaching 63 percent of the hotel development pipeline in 2018. At any given time, the percentage of select service hotels under active construction may be even higher.
The favorable profit margins achievable in select service operations were borne out in the most recent research conducted by CBRE Hotels Americas Research, "Select-Service Hotels Prove Efficient, Profitable," which looked at 233 Upper Midscale and Upscale select service hotels among CBRE's Trends in the Hotel Industry survey each year from 2010 through 2015. About one-third of these hotels offered some level of food and beverage service.
As reported by Robert Mandelbaum, the entity's Director of Research Information Services, in 2015, this select-service sample achieved a gross operating profit (GOP) margin of 44.2 percent of total operating revenue, compared to a 37.5 percent average GOP margin for all properties in the CBRE Trends survey. We must remember that overall profits may be greater in property classes with higher average daily room rates.
The study also confirmed the more favorable labor costs at select service properties. Again, in 2015, "the combined costs of salaries, wages, and benefits equaled 22.6 percent of total operating revenue, or $8,109 per available room (PAR). This compares to 31.6 percent, and $22,224 PAR for the overall Trends sample."
Perhaps surprisingly, in the time span from 2010 to 2015, the research showed more efficient labor costs at hotels with food and beverage operations. Also, in 2010, hotels without food and beverage operations generated more gross operating profit on a per-occupied room basis than those with them, a relationship that had flipped by 2015. We will revisit this issue later in this article.
Overall, we will likely see a continued proliferation of distinct select service platforms from the major brands, backed by substantial development and marketing muscle. From the guest standpoint, times have never been better, as they have a broad array of guest experiences and a wealth of possible amenities from which to choose. For owners and property managers, the challenge will be to drive rate due to the greater attractions offered (F&B, meeting space, fitness and recreation, etc.), while keeping development, technology and labor costs in check.
An appealing, potentially profitable property model and platform demands an equally sound operating environment. The relative ease with which the select service platform can fit into many markets and locations does not supplant basic fundamentals: community attractiveness; demonstrated demand drivers; and the existing and prospective competition.
Developers and investors will favor markets with growing economies, excellent demographics, good quality of life and multiple demand generators. These demand generators include state government, education, hospitals and medical centers, regional corporate headquarters, centers for research and technology, and advanced manufacturing.
These dynamics fit many of today's best secondary and, even, tertiary markets, many of which we find on those "Best Places to Live" lists in consumer magazines. College towns, in particular, are attractive options, thought to be relatively recession resistant. Parent weekends, sporting events, visiting professors, corporate neighbors or university medical centers all add to the favorable mix.
It is also important to be alert to our changing economy, including new industries of the future and the job potential for different business types as they mature and evolve. Amazon's recent "contest" among communities to host another headquarters - and some of the resultant fallout as it played out nationally - threw an interesting lens over contemporary business attraction issues.
Tweaking the Physical and Operating Platforms
Perhaps as never before, the major brands are allowing "trusted" developers to tinker with their select service platforms. Examples include food and beverage operations, lobby layout and design, underground parking, outdoor amenities, exercise and fitness facilities, or, even, an expanded footprint.
This design freedom allows select service hotel developers to take advantage of warm weather climates, tourist locations or social trends. For example, guest zeal to lead healthier lives can be aided through expanded fitness facilities, as well as in providing thoughtful choices for our breakfast offerings or restaurant menus. Similarly, outdoor experiences are popular with guests, which we can fulfill with larger outdoor seating areas and outdoor entertainment. Witness the current popularity of fire pits or open, rooftop bars. The challenge here includes controlling staff costs and the housekeeping required to maintain amenities that are not directly revenue-generating.
Which brings us to food and beverage operations. As noted in the CBRE research cited earlier, by 2015, select service hotels with food and beverage operations were more profitable on a per-occupied room basis than those without, demonstrating careful management of resources. Going forward, we expect similar careful analysis of when expanded food and beverage services make sense. Thus, the current vogue for "grab and go" markets or food vendor services, which require less capital investment and labor. An excellent example is vendor-operated food trucks, which can impart a local flavor to the guest experience. The goal here is flexibility as consumer preferences evolve.
Community Involvement: Our Best "Tweak"
Represented by an ambitious development pipeline, the major brands are hard at work crafting select service brands aimed at distinct guest niches. At the same time, developers are enjoying, within platform guidelines, greater freedom in the physical layout, fit and finish, and amenities for these select service properties. This development is backed by excellent brand training programs, reservation systems and marketing.
But how do we distinguish our property from competitors in an increasingly crowded select service market place? The answer lies in a staff that understands and embraces our corporate mission and is enthused about serving guests, along with genuine contributions to the host community. Our role as hoteliers aligns naturally with so many community efforts to improve overall wellness and quality of life.
Along with careful market selection, excellent brand relationships, and alert training, operations and sales efforts, this is one of the real secrets of select service success.
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