RCA Insights

Here Is Why Millennials and Investors Are Favoring Economy Hotels

By on June 7th, 2017

For readers of a certain vintage, mention hostels and an image will come into their minds: dorms full of metal-framed bunk beds, cold showers, communal kitchens, and a certain “institutional” vibe. However much some of us value the hair-shirted travel experience we had during college years, a new generation of hostels in Europe have completely moved away from this image. They boast in-house bars, funky design, en suite bathrooms, and are branded as “affordable luxury”.

Property investors have cottoned on to this trend, as the recent acquisition of the Generator Hostel portfolio by London-based Queensgate Investments for €450m ($490m) demonstrates. The portfolio comprises 12 properties in cities such as London, Copenhagen, Berlin, Barcelona and Amsterdam. And while this is a hostel portfolio, it is very much in step with the increased investor interest RCA has recorded in what could be christened the “upscale economy” end of the hotel sector.

These are often properties located in city centers and targeted to appeal to a generation of travelers who have grown up during the period of cheap overseas travel. Consumer trend analysis shows millennials often prioritize “experience” above the acquisition of material goods, which feeds into a greater appetite for travel. For example, 34% of all passengers who move through Heathrow, Europe’s busiest airport, are between 18 and 34 – the largest segment by age bracket.

Established hotel operators have recognized that millennial travelers don’t want to be in large, impersonal, business-style hotels and are launching new brands focusing on this type of traveler. Starwood introduced Aloft, Best Western launched GLō (complete with funky accented name), and Hilton brought in Canopy. These new brands will compete with European brands such as citizenM, Generator and Motel One for the millennial dollar, as well as with Airbnb. And where the operators are going, the property investors are following.

Investment into the economy sector is currently double the long-term average, with more than €2b in transactions in the last 12 months. Increased investor interest is also reflected in pricing. The amount investors are paying per room for hotels in the economy sector has increased over the last three to four years, from around €100,000 per room to the current level of €180,000 per room, and the gap between pricing for economy and luxury/upscale assets has narrowed to a historical low – just €35,000. This increase in economy sector pricing per key is partly because of the central location of many of the assets that have sold, but it also reflects greater investor demand.

1706 Leahy hotels main v2

The International Air Transport Association forecasts that the number of air passengers in Europe will grow by 570 million over the next 20 years, which will affect demand for accommodation. According to forecaster Oxford Economics, the fastest growth – in the short term – will take place in central and eastern Europe, in cities such as Bucharest, Riga, Vilnius and Kraków. Interestingly, these are the markets that are yet to see a pick up in the economy segment of the hotel market, and these forecasts could be an indication of where activity is headed.

Tom Leahy

Tom Leahy

Senior Director, EMEA Analytics

Tom joined RCA in 2014. In his role as Senior Director for the EMEA region, Tom is responsible for the development and expansion of the market analytics service for RCA’s European clients.

Prior to joining RCA, Tom was an Associate Director and then Head of Research at UK-based property consultancy, Lambert Smith Hampton. He started his career as an analyst at research consultancy Property Market Analysis (PMA).