Lodging's Best Kept Secret?
While the high-flying lodging industry's up-cycle has made many hotel developers and operators very happy (and very rich), none can be more pleased than those who've hitched their wagons to the extended-stay workhorse. This small and low-key segment of the business is also the industry's strongest, regularly outperforming the industry at all price points, in rate, occupancy and RevPAR.
Since the late 1980s, when the segment started registering on lodging's radar with the incredible success of Residence Inn, growth in the segment has mainly occurred with smaller, independent chains. But in the wake of private equity behemoth Blackstone's recent acquisition of Extended Stay Hotels — with its 680 properties across five brands — and the major franchise companies scurrying to ramp up their extended stay offerings, the tide may turning.
Still, just six to seven percent of current U.S. rooms inventory comprise extended-stay product. And a whopping 40-60 percent of the top 100 MSAs don't even offer extended-stay lodging. There's plenty of room for new development.
The Highland Group is a hospitality consulting and research firm best known for its extensive research and publications on extended-stay lodging. Partner and segment expert Mark Skinner forecasts “continued increases in room rate and RevPAR above inflation for at least the next year or two, while occupancy plateaus and maybe even declines slightly.” He attributes this to lodging's cyclical nature and increasing supply. Also, the effect of the hurricanes in latter 2005 temporarily but dramatically bumped up occupancy figures, resulting in corresponding decreases in third-quarter '06 statistics.
Since their inception, extended-stay hotels have catered to the growing number of traveling corporate consultants and trainers on long-term assignments, and families and individuals seeking temporary housing due to natural disasters, relocation and transitional situations like divorce. Vacationing families, too, like extended-stay hotels for their roomy accommodations and in-suite kitchenettes.
“Extended-stay is one of the hottest-growing segments with demand very strong and properties continuing to perform well,” observes Kevin Lewis, vice president of extended-stay brands for Choice Hotels and chairman of AH&LA's Extended Stay Lodging Council. “Here at Choice, our Suburban Extended Stay Hotels and MainStay Suites tend to be the top one, two or three (of Choice brands) with the greatest increases in RevPAR year over year.”
Why the strong performance? “There's simply not enough supply,” says Lewis. “There's been a pent-up demand for extended-stay product for some years and while Residence Inn tapped the upper-end market years ago, you're just now starting to see both mid-market and economy product enter the marketplace to satisfy that pent-up demand.”
One has to wonder why, then, if the segment is such a vigorous performer, more developers aren't itching to get in on the action.
Lewis and other industry observers say a lack of understanding of the product is a key reason for the lagging development. The business model for an extended-stay hotel is different from that of a conventional overnight hotel. “When you tell developers that you can run, for instance, a Suburban Extended Stay at 100-130 rooms with just 8-12 employees and have profit margins significantly higher than a transient hotel, they have a hard time comprehending that,” says Lewis. “You have to educate people about the segment: that your margins are dramatically better than that of a transient hotel with fewer employees, limited office hours and less cleaning of rooms. These things drive higher profitability.”
To educate potential franchisees for its extended-stay brands, Choice has “carved out a franchise development team that's specific to extended-stay,” says Lewis. “Traditionally, the MainStay brand was sold by our other franchise development people carrying Comfort Suites and other transient brands and they went with what they knew and the path of least resistance. Our people knew what a Comfort Inn was and they sold that. When we created this new team, we taught them the extended-stay business model so they fully understand why it's so profitable, what the P&L looks like. Then they can approach existing hotel and apartment developers and general real estate developers and explain how the business model makes sense. That's how we attack growing the brand.”
And while developers may better understand the segment now, the all-important lender is another matter. “Lenders typically shy away from concepts or products that don't have scale or name recognition or aren't proven in the marketplace,” says extended-stay developer and former banker Mark Daley of The Generation Companies. The North Carolina-based company is a real estate developer, asset manager and operator of 24 extended-stay hotels throughout the southeast — (and actively seeking new acquisition opportunities in the segment, emphasizes Daley).
SELLING THE CONCEPT
Marketing an extended-stay property follows a different model as well, says Generation's Daley. “The overnight model is that you buy a flag and plug into what you hope is a good reservations system and wait for the guests to come. That's not the model for extended-stay. It's driven largely by direct sales efforts in the markets. It's more of a business-to-business sales process.”
Generation (which flies Suburban Extended Stay, Candlewood Suites and MainStay Suites flags) works at fostering good relationships with local companies that offer regular training or have personnel coming in for relocations or “that company that has a team of 15 auditors visiting for three weeks of audits,” says Daley. “The guests are from out of town but the origination of the business is more local. That can be intimidating for the operator who's only ever had a Holiday Inn Express and relies on that reservations system or the sign to bring people in the door. Extended-stay demands face-to-face sales.”
Daley attributes part of the popularity of the extended-stay product to the newness of the market's inventory. “The vast majority of the segment is new-build because it's typically not economically feasible to convert a hotel built as an overnight hotel into an extended-stay property due to the extra plumbing and electrical requirements of each room,” he says.
While the majority of development has been concentrated in the southern region of the U.S., industry observers are starting to see more development in high barrier entry markets like the west coast and the northeast.
One of the newest extended-stay brands generating a lot of buzz is Element, Starwood's brand extension of Westin Hotels & Resorts. With its modern style and focus on “brand experience,” it aims to set itself apart from what Nicholas Lakas, director of Element hotels, calls “me-too product.”
The first Element will open early 2008 in Lexington, MA with others soon to follow in San Francisco, Hanover, MD and Toronto. “Our goal is to have about 300 deals signed and 150 hotels opened in the next five years,” says Lakas.
“We feel we've really created a smart design with a modern aesthetic,” claims Lakas. “We're using renowned designers of New York residential spaces who bring an urban residential feel to extended stay. If you look at our competitors, they're all homogeneous in their design and aesthetic, with a heavily traditional feel. You will definitely not feel that at our hotels. We have a modern aesthetic with an upscale feel. Our open modular lobby is a real multi-functional space with lots of natural light to work and socialize in, and the outdoor terrace with fireplace and barbecue offers a sense of community.”
“I think what Starwood's doing with Element is a good example of how all the big hotel companies are realizing they need to have a viable extended-stay offering in order to be competitive in the lodging market,” says Daley, who served on the development advisory board for the new brand.
THE BIG IDEAS
Strong RevPAR growth is accelerating developer interest. Extended-Stay hotel supply increased at 12 times the rate of overall hotel supply for the first nine months of 2006.
Extended-stay hotel year-to-date RevPAR has increased 25 percent from its low point in 2003.
Extended-stay hotels' average rate increase of 10.6 percent in the third quarter of 2006 was much stronger than the overall hotel industry's growth of 6.8 percent.
There were 265,043 extended-stay rooms at the end of the third quarter 2006. This was a 4.8 percent increase over the same period in 2005. The growth rate in supply was up from 4.2 percent during the prior year.
There were 22,909 extended-stay rooms under construction at the end of the second quarter 2006, which was a 34 percent increase over the same time in 2005.
Year-to-date extended-stay hotel demand increased 3.5 percent, which was more than double the 1.5 percent growth STR reported for the overall industry.
Source: The US Extended-Stay Lodging Report: Third Quarter 2006, The Highland Group Investment Advisors.
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