More people than ever stayed in an extended-stay lodging property in the first half of 2010. The bad news for owners is these guests paid less for their rooms than they have in recent years. Still, the overall climate is very positive for a segment that has consistently led the hotel industry in performance for many years.

“We’ve had three consecutive quarters of very strong demand growth in extended stay,” says Mark Skinner, noting increases of eight, 16 and 16 percent in the three periods. Skinner is a partner in The Highland Group, an Atlanta-based consulting firm, and author of a quarterly report on the segment. “Demand growth won’t continue at these levels once rates start to rise, but for now it is a good recovery for the segment.”

Rates remain depressed for extended stay, down 3.4 percent in the second quarter and 5.9 percent for the first six months of the year. The mid-price segment of extended stay (chains like Candlewood, Hawthorn and MainStay) was hardest hit, with rates falling 11.6 percent in the half. The upscale sector (Homewood, Residence Inn, Staybridge) experienced the smallest declines in rate, down just 1.8 percent in the second quarter.

Like the overall hotel industry, extended stay should begin to register positive rate trends shortly, within 90 days for the upscale segment and by the end of the year for the other two segments, says Skinner.

Several factors are contributing to the strong extended-stay rebound: the unleashing of pent-up demand, aggressive discounting and historically low levels of supply growth.

“There is more money being spent by businesses on more projects, and that all creates demand for the segment,” says Skinner. “And I don’t know for sure, but I believe the federal stimulus money has also had an impact. Infrastructure projects are always big generators of extended-stay demand.”

Skinner notes that during the economic downturn, a lot of extended-stay properties, particularly in the mid-priced tier, booked more longer-term contract business than usual, sacrificing rate but increasing their proportions of business coming from extended-stay guests versus transient customers.

“You can view this in two ways,” says Skinner. “On one hand, booking long-term business makes it more difficult to raise rates as quickly as the rest of the industry. However, extended-stay RevPAR is rising much more quickly (up 7.5 percent in the second quarter) than overall industry RevPAR, and that’s being driven by its higher occupancies.”

At mid-year, extended-stay occupancy was 71.2 percent, about 15 points higher than the U.S. hotel average. The economy tier led the way at 73.1 percent, but at the mid-priced level, occupancies rose 16 percent over the previous year to 69.4 percent.

Another factor favoring the segment is the sharp decline in new room openings; in fact, says Skinner, the number of extended-stay rooms under construction is the lowest since 1995. “And it will get lower,” he says. “The cycle will repeat itself and construction will start again but not until financing becomes easier.”

About 6,800 extended-stay rooms were under construction at the end of the second quarter, down 62 percent from the same time in 2009. The Highland Group projects annual room supply growth to be just 1.3 percent through 2014.