Part 1 of 3: Limited-Service Hotels

By Chris Elder, Project Manager

Various developments in the lodging industry over the past decade have made it increasingly difficult to determine the official class to which a particular lodging facility belongs.  Hotel* owners, developers, and lenders (not to mention guests) can be forgiven for needing some guidance through the sometimes blurred demarcations that separate one property definition from another.  Yet such distinctions are at the heart of any coherent feasibility study or appraisal.  So how are lodging facilities classed and what are the major differences between them? 
 
The segmentation nomenclature for the lodging industry will always be subject to some vagaries and exceptions.  Smith Travel Research (STR), a leader in data collection for the lodging industry, categorizes the hotel industry into six segments known as “chain scales”: Luxury, Upper-upscale, Upscale, Midscale (with food and beverage), Midscale (without food and beverage), and Economy.  These chain scales are based on the actual system-wide-average room rates of the major chains. 
 
However, rather than examining the multiple chain scales used to compare operational statistics between different property types, this series of articles addresses another industry-wide categorization: asset classes.  In general, all hotels can be broken down into three: limited-service, select-service, and full-service. 
 
Part One: Limited-Service Hotels
 
Originally defined as a hotel without restaurant or banquet facilities, the services and amenities offered to guests of limited-service hotels are typically simple.  However, these services and amenities have expanded over the past decade, and in today’s market a limited-service hotel’s range of amenities might include a business center, a fitness room, a guest laundry facility, a market pantry, an indoor and/or outdoor pool and whirlpool, and small meeting rooms. 
 
“Budget” limited-service hotels offer no-frills rooms at modest prices.  More robust limited-service hotels offer many of the same high-quality amenities that guests would expect from full-service hotels, with one significant difference: limited-service hotels lack a dedicated, revenue-producing food and beverage component.
 
Hence, limited-service hotels typically have the lowest operating costs of all three segments because they don't offer catering services or multiple restaurants.  Room rates are typically on the lower end of the scale as well, because demand for limited-service properties generally comes from price-sensitive commercial and leisure travelers.  The majority of limited-service brands target the price point of $75 per night or less; however, the higher quality of certain brands’ product offering and finish-out can command a premium.
 
Examples of brands belonging to this asset class include:
 

 
Finally, we also note that many limited-service brands are designed to cater to extended-stay travelers.  These “home-away-from-home” hotels offer rooms with kitchen facilities and a small dining table, and may offer discounted weekly and monthly rates.
 
Conclusion
 
Knowing where a hotel property fits into the scheme of things is crucial for owners, operators, and lenders alike.  Our professional standards as appraisers require the staff of U.S. Hotel Appraisals to be keenly aware of how demand segments, market conditions, and competitive supply affect valuations of different property types.  We hope this brief overview of limited-service hotels proves useful.  Look for similar explanations of select- and full-service properties in future articles.


* For our purposes here, both hotel and motel properties are referred to by the term “hotels.”