Through Q3 2024, the overall U.S. hotel industry experienced general stability with steady growth driven by tourism resurgence, strategic development and improving economic conditions. Key performance metrics indicate national average occupancy rates of 66.8%, average daily rates increased by 1.4% year-over-year and revenue per available room grew 0.9% nationally. While new hotel development has been somewhat muted due to high interest rates and construction costs, there remains a healthy development pipeline going into 2025 and beyond. In general, The U.S. hotel sector is expected to experience moderate growth in 2025, driven by increases in average daily room rates and stable occupancy levels.
Limited-Service Hotel Segment Focus
Limited-Service hotels (including extended-stay) often positioned as upper-midscale or midscale, continue to show strong performance and adaptability in the evolving hospitality landscape. Limited-Service hotels posted record-high demand, ADR and RevPAR despite reporting a third consecutive occupancy decline during the third quarter of 2024. Occupancy declines have been minimal and average occupancy remains more than 8.9 percentage points above the overall hotel industry year-to-date through Q3 2024. The Limited-Service hotel segment has historically enjoyed an occupancy premium over the broader hotel industry. Outlined below are the current key highlights and attributes of this market segment:
Performance
- RevPAR Growth: Limited-Service hotels in the upper-midscale chain scale outperformed other segments, with a compound annual RevPAR growth of 2.3% (2018–2023). The appeal of Limited-Service hotels remains strong for guests trading both up from economy brands and down from full-service options.
- Occupancy & ADR: Complimentary amenities, like free breakfast, contributed to occupancy and ADR gains, with brands offering breakfast achieving double the RevPAR growth compared to those that do not.
Key Advantages
- Cost Efficiency: Limited-Service properties typically have lower operating costs than full-service hotels, making them attractive to investors and operators.They are less labor-intensive, helping offset rising payroll and utility costs.
- Guest Appeal: Strong brand recognition and affordability attract both leisure travelers and budget-conscious business guests. The lack of resort fees and inclusion of essentials like parking and breakfast further enhance their value proposition.
Challenges
- Rising Costs: Increased financing, construction, and operational costs pose challenges for new Limited-Service developments. Margins are being squeezed by inflation, with payroll and utilities leading to profitability pressures.
- Competitive Pressures: The segment faces competition from newer midscale brands, which sometimes overlap in terms of pricing and amenities.
Development & Investment
- Pipeline Growth: The Limited-Service segment remains a focus for development due to its resilience, with robust construction pipelines in key U.S. markets.
- Investment Trends: Investors are increasingly favoring Limited-Service hotels due to their ability to generate steady cash flow in economic downturns. With declining interest rates, transaction activity is anticipated to increase.
Capital Markets
- Financing: The financing market for Limited-Service hotels (refinancing or construction) is relatively healthy and while regional banks have reduced their LTV levels, non-bank lenders (debt funds, bridge lenders, CMBS, C-PACE, etc.) are filling the void. Construction loans in the 65-75% LTC range are currently pricing at SOFR + 400-600 bps. In the bridge and permanent loan market, 65-75% LTV pricing is in the SOFR + 300 – 500 bps range.
- Equity: While equity and preferred equity availability has been muted, it is anticipated that as clarity surrounding the economic environment and interest rate reduction impacts come into focus, equity participants should become more engaged.
Conclusion
Limited-Service hotels are well-positioned to capture demand as leisure travel stabilizes and cost-conscious corporate travel continues to gain momentum. The segment versatility in serving both short-term and longer-stay travelers is a competitive edge and thus will hotels remain a high-performing segment, balancing affordability with amenities that meet traveler expectations. Their operational efficiency and adaptability position them as a key driver of the hospitality industry’s growth.