It's in the Numbers

The statistics concur with the optimism of extended-stay lodging executives. The segment is the strongest one in the hotel industry and should remain so for the foreseeable future. The Highland Group's recently released mid-year update on the U.S. extended-stay market shows consistently high occupancies, rates and RevPARs. In addition, supply continues to expand, although in line with increases in demand for the product. All in all, it's a great time to own, operate or be developing extended-stay properties.

Compared to last year, extended-stay demand grew by 4.3 percent in the second quarter and by 3.0 percent for the first half of the year. By contrast, demand for all U.S. lodging was up by 1.6 percent in the quarter and by 0.9 percent for the first six months. It was a similar story for RevPAR and average rate. Extended-stay RevPAR was up 5.1 percent for the quarter and 4.7 percent for the half-year, with average rate driving most of the increase.

While rates rose 4.5 percent for the quarter and 5.7 percent for the half-year, occupancies slipped by 0.9 percent, or one-half percentage point, for the six-month period. In the second quarter, occupancy was a very healthy 77.2 percent, up slightly over 2006's mark of 76.8 percent.

As with most property types, operating results differ by price segment. In general, the upscale portion of the market (brands like Homewood Suites, Hyatt Summerfield Suites, Residence Inn) fared the best in the first half of the year. Rates for the group were up 7.1 percent for the six months, while RevPAR grew by 4.7 percent. Occupancy leader is the economy segment (Suburban, Value Place, Studio 6, etc.) at 80 percent for the second quarter and 79.2 percent for the first half of the year.

Even a slowdown in the overall economy shouldn't affect the premiums in occupancy and rate the segment enjoys over the rest of the hotel market.

“It's a myth that extended stay isnt' affected by what happens in the economy, but even in the last downturn the segment continued to outperform the rest of the industry,” says Mark Skinner, a partner in The Highland Group. “However, extended-stay tends to lag the economy by two quarters, both on the downswing and the upswing.”

As Skinner explains, the kinds of business activities that generate a lot of extended stay demand — for example, large construction projects and software implementations — don't stop once an economic downturn begins. Conversely, when the economy begins to improve, general business travel picks up before companies resume the execution of large projects that require extended-stay lodging.

A lot of development is in the works in the extended-stay market. At the end of the second quarter, nearly 35,000 rooms were under construction, a 51-percent increase compared to the same time last year and the most in a decade. A recent phenomenon is that it is taking a lot longer for projects in the pipeline to reach opening than in previous construction booms. According to The Highland Group, about 10,000 of the rooms now under construction will open this year, with the remaining 24,000 to open next year or in 2009. During the last development cycle, an average of more than 24,000 extended-stay guest units opened each year. By 2011, according to the firm's estimates, the total number of rooms in the segment will rise from the current 273,410 to 336,167, for an annual growth rate of 4.7 percent.

While more than half (19,000 rooms) of the new construction in the works is in the upscale segment, the biggest rates of increase are in the economy and mid-priced markets. The number of economy rooms under construction (6,395) at mid-year was 159 percent higher than mid-year ‘06. Mid-priced rooms are up 50 percent over last year (9,055 rooms today versus 6,017 in ‘06).

Companies like Hyatt and Starwood, which both have aggressive expansion plans in upscale extended-stay (Hyatt Summerfield Suites and Starwood's Element brand), account for a lot of the expected growth in the segment through 2011.

The slowdown in the extended-stay construction pipeline mirrors the rest of the industry, says Skinner. “All hotels, including extended-stay, are taking longer to build than in the last boom in the market,” he says, citing rising construction costs as the culprit.

“Developers plan properties, but when the bids come in the costs are often higher than they planned,” says Skinner. “At that point, they have a couple of options, including stopping the project, redesigning it or finding additional investors or financing. More likely, however, they will realize that room rates are rising faster than inflation, so they can redo the feasibility study to reflect these factors. No matter what, it takes longer to develop the property.”

While extended-stay hotels are traditionally found in suburban markets, Skinner sees other opportunities for the product. “Urban centers may be the biggest untapped location for extended-stay,” he says. “But it can be a lengthy and costly process to build in center cities.”

Resort markets are also ripe for the product, says Skinner. “They're a good alternative for families on vacation who would rather not stay with friends and other family members.”

While extended-stay lodging has traditionally been a U.S. product, Skinner believes “it's inevitable” that the product will spread elsewhere, including Canada, the U.K. and Europe. “There is a vast untapped market for the extended-stay concept in many part of the world,” he says.

He cited InterContinental Hotels Group and its expansion of Staybridge Suites abroad, first in the U.K. and then into Europe. Also, Choice Hotels recently made a commitment to grow its MainStay Suites and Suburban Extended Stay brands north of the border. Whereas extended-stay supply in the U.S. represents a little more than six percent of the total room inventory, the 40 branded extended-stay hotels in Canada account for about one percent of that market.

U.S. Extended Stay RevPAR
Segment Mid 2005 Mid 2006 Mid 2007 Change 2006/2007
Economy $24.01 $27.22 $27.25 0.1%
Mid-Price $40.77 $43.61 $45.46 4.2%
Upscale $78.84 $85.94 $89.96 4.7%
Total $50.80 $55.90 $58.55 4.7%
Source: The Highland Group

Extended Stay Rooms Under Construction
Segment Mid 2005 Mid 2006 Mid 2007 Change 2006/2007
Economy 2,385 2,467 6,395 159.2%
Mid-Price 3,658 6,017 9,055 50.5%
Upscale 11,025 14,425 19,191 33.0%
Total 17,068 22,909 34,641 51.2%
Source: The Highland Group

Extended Stay Supply Projections
Segment Mid 2007 2011 CAG*
Economy 54,911 67,235 4.6%
Mid-Price 114,859 127,466 2.3%
Upscale 103,640 141,466 7.2%
Total 273,410 336,167 4.7%
Source: The Highland Group *Compound Annual Growth

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