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Hotel Industry Moves Upscale to Attract Millennials

Hilton Worldwide (NYSE: HLT  ) , Marriott International (NASDAQ: MAR  ) , and InterContinental Hotels Group (NYSE: IHG  ) are leading a boom in U.S. hotel development, and much of it is aimed at younger travelers. The number of U.S. hotel rooms in the construction pipeline rose 20% in the second quarter of this year from the same period of 2013, and more than 60% of those rooms will be in upscale and upper-midrange new hotels. By contrast, economy hotel construction comprises only 2% of the development pipeline.

Young travelers with high expectations

What is driving the move away from budget hotels toward fancier properties with better gyms, faster Wi-Fi, and expanded dining and takeout options? While the rebounding economy has produced an all-around resurgence of travel, the major hotel chains are pursuing the millennial market in particular.

Some 74 million strong, the generation that's currently between the ages of 18 and 35 is the focus of a lot of attention from the travel and tourism industry. Despite (or perhaps because of) the very real issues of student debt and sometimes-challenging job prospects, this age group consistently says it values experiences more than material things -- and it's putting its money where its mouth is.

Millennials are now edging out mid-career Generation Xers and rapidly retiring baby boomers as the top-spending travelers, and they tend to travel more frequently. For this age group, the thrill of getting a rock-bottom rate on a room is trumped by the joy of spending time in a hotel with the amenities they want. And as the first true Internet generation, they use social media and travel sites to check out destinations, hotels, and neighborhoods before they go.

It turns out that doing that homework pays off. These research-happy travelers, who some dub "scrutinizers," are the most-satisfied hotel guests as a group, according to Hotel News Now. By contrast, price buyers who typically seek out economy lodgings are always the least satisfied of all types of traveler. And their numbers are shrinking while the number of scrutinizers is climbing, hence the drop in budget hotel development.

A focus on upscale hotel development

The hotel construction pipeline is full of fancier lifestyle properties and freshly face-lifted existing brands. Overall, the upscale and upper-midscale properties make up 62% of what's under way. And more than half of the pipeline consists of projects launched by Hilton, Marriott, and IHG.

According to Lodging Economics, Hilton has 648 projects in the works for a total of 76,169 new rooms, mostly under the upscale Hilton Garden Inn brand, which already has 600 properties worldwide, and the upper-midscale Home2 Suites and Hampton Inn & Suites brands. Marriott is adding upscale Courtyard and Residence Inn properties, as well as upper-midscale TownePlace Suites and Fairfield Inn locations. Overall, Marriott has 638 projects under way, for a total of 79,543 rooms.

IHG, meanwhile, is focusing on Holiday Inn and Holiday Inn Express. These two upper-midscale brands make up a big chunk of the company's 552 projects (56,388 rooms) in the pipeline.

Lodging Economics said the average project takes just under two years to complete, so many properties that have been announced will come online in 2016. LE forecasts 871 hotel openings in 2016, which would add more than 97,000 rooms to the market.

Room for more growth

It appears that there's room for all those rooms. Hotel rates are up this summer and have been trending upward for a while, due to the rebounding economy and the continued growth of leisure travel, especially among those all-important millennials.

If demand stays strong, industry analysts say even more new projects could be announced, leading to a big increase in new hotels opening through 2019 to cater too experience-hungry travelers. Right now, it looks like Hilton, Marriott, and IHG are in the best position to greet to those guests.

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Casey Kelly-Barton

Casey is a writer and journalist who follows the consumer goods, travel, and tech industries for The Motley Fool.

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