The sky's the limit: the rebounding economy, low financing rates give limited-service franchisors reasons for optimism

Hotel & Motel Management, Jan 12, 2004 by Joanne Harris

Last year might have been the bottom of the growth cycle for hotel development in the limited-service segment, and that's what franchisors and corporate developers are hoping.

Franchise sales and development executives are looking forward to an uptick in new builds for 2004 and 2005 because of low financing rates, a stabilizing economy and strengthening revenue per available room.

"There are still small enough deals that can be financed through the [Small Business Administration], and there are still available markets to build 60- to 100-room limited-service hotels," said Tom Bernardo, executive v.p. of franchise sales and development for Cendant Corp.

David Pepper, v.p. of franchise sales for Choice Hotels International, said that while forecasts for 2004 are all higher throughout the hotel industry, new development in limited-service historically has always been higher than the overall industry, and Pepper sees that continuing.

Many lenders have tightened their equity requirements, increasing the amount of cash needed for a deal from 20 percent to 30 percent.

"That's not true across the board, though," said Terry O'Leary, senior v.p. of business development for Prime Hospitality. "Local lenders or someone who already has a relationship with a lender may not experience that [requirement], but lenders are focusing on successful large or existing groups."

Prime franchises the AmeriSuites and Wellesley brands.

Mike Leven, c.e.o. of US Franchise Systems, said statistics indicate a considerable backlog of development of midpriced properties for the first time since 2001.

"In 2002, we had 20 new properties," Leven said. "In 2003, that number doubled to 40. [This year], we are looking at 40 new franchises."

USFS franchises the Microtel and Best Inn brands in the limited-service segment.

Michael Ferraro, executive v.p. of real-estate, development and franchising for Accor North America, is taking a more conservative stance.

"The worst is over in the economy, but we have not yet achieved a sustained improvement of revenues and profits for at least a six-month period," Ferraro said. "The corner hasn't been turned yet to make economic justification to build new hotels."

Accor, however, opened two new corporate-owned properties and about 35 franchised ones during 2003, and the company expects a higher unit growth through franchising during 2004.

Accor North America's three limited-service brands are Red Roof Inn, Motel 6 and Studio 6.

More unit growth

Brand leaders are looking forward to higher unit growth, but they intend to weave in a few new business models to ensure success.

"[Developers] will be more strategic," Pepper said. "You'll see people do more research before they buy a piece of land and develop it. They'll hire feasibility consultants, as opposed to buying on a whim."

O'Leary anticipates that Prime will probably be up by 20 percent over 2003.

"We currently have 150 AmeriSuites and 80 Wellesley properties," he said. "We are looking to take AmeriSuites over the 200 mark in 2004, and to take Wellesley over the 100 mark in the short term, with a long-term goal of 175."

Cendant experienced moderate growth during 2003, but Bernardo anticipates a 30-percent growth spurt of hotel construction starts during 2004.

"We need to be clear, however, that this was the lowest year we've had in the last five for new construction sites that were executed, opened and under development," Bernardo said. "So, that growth is calculated off of a low base."

Dotting the map

Key areas for anticipated development are in the Northeast, including New York and Pennsylvania, the West Coast, with a concentration in Southern California, and scattered points throughout the Northwest and Midwest.

On the corporate development side, Accor will look for high-profile properties, such as a combination Red Roof/Motel 6 project in San Francisco, Ferraro said. Franchise growth will be concentrated in the smaller cities, he said.

Cendant is looking in the Northeast and Canada to develop Ramada, Wingate and Super 8.

"It is much more underdeveloped, so it is turning out to be a very good market for us," Bernardo said of Canada.

Choice wants to have more of a presence in the drive-to markets more than the fly-to locations so they can have greater distribution, Pepper said.

Overcoming challenges

There are challenges with new developments, such as site locations in the right market, financing and competition; but companies made plans to overcome them.

"Finding new sites is a tougher job," Leven said. "But the competition is already in a lot of areas that Microtel is not, so we have an advantage. If they already have five brands in an area, they can't build more, but I can."

Finding development partners with the right financial strength and the right sites in the right markets is a challenge that O'Leary faces.

"[The solution is] research and finding the right opportunities to place the brand, whether it is through your partners, franchisees or your own corporate development," he said.

Cendant is offering monetary development incentives to developers, ranging from $50,000 for Days Inn and Ramada to $250,000 for Wingate, which Bernardo said he thinks has given the company an advantage over the competition. Cendant also has spent the past 24 months improving its value proposition.