In a lot of ways, the extended-stay segment of the hotel industry reflects the conundrum many lodging owners find themselves in: Demand and occupancy are at near-record levels and new supply is nearly non-existent, but lots of properties can’t realize higher rates?

That existential and realistic conversation dominated a panel discussion at this week’s Midwest Lodging Investors Summit in Chicago among a group of extended-stay hotel executives. Lodging Hospitality, in association with HVS Hotel Management, sponsors the Summit, which was held at the Hyatt Regency McCormick Place in Chicago. The School of Hospitality Business at Michigan State University is the academic partner.

Extended-stay panelists included (left) Liz Perkins, Apple REIT Cos.; Kevin Lewis, AHLA Extended Stay Council; Bill Duncan, Homewood Suites & Home2 Suites by Hilton.

“Extended-stay hotels need to raise their rates,” moderator Mark Skinner declared. According to The Highland Group, at which Skinner is a partner, during the first quarter the segment was only able to raise rates 3% despite a 4.8% jump in occupancy and minimal addition (2.1%) of new rooms. In 2010, demand rose 13.4% but rates fell 2%. “Room demand and revenues are near all-time highs, and the fewest number of extended-stay rooms are under construction than we’ve seen in 15 years.”

The panelists offered several reasons for slow rate growth. Bill Duncan, global head of brand management for Hilton’s Homewood Suites and Home2 Suites flags, said it’s partly due to last year’s cuts in travel per diem by the federal government, which “suppressed rate growth in an important category of business for us.”

And, as is even true for transient-oriented hotels, many extended-stay customers are booking under lower group rate agreements negotiated last year or in 2009 during the economic downturn. “We’re doing what we can to prepare our properties for the upcoming RFP season,” said Duncan, “including scheduling 15 meetings around the country with franchisees and their sales teams.”

Apple REIT Companies, which own nearly 80 extended-stay hotels, invested in high-level aggressive sales people in anticipation of the coming upturn in business. Even so, said Apple Senior Asset Manager Liz Sumner Perkins, “we need to build their confidence to partner with the right accounts and to negotiate the right deals.”

Despite the concern over rates, the panelists remain bullish on the extended-stay segment. As Skinner pointed out, demand for the sector has never gone down on an annual basis and it typically maintains a 10- to 14-point occupancy premium over the rest of the industry. Typical length of stay even climbed by two nights between 2008 and 2010.

Calling it a “nearly dip-proof product,” Perkins of Apple REIT said even though transient business in extended-stay hotels “dried up during the downturn, our typical extended-stay guest got us through the period, and transient is now beginning to come back.”

The panel also believes supply growth will remain muted for the next few years. Kevin Lewis, former head of extended-stay hotels at Choice Hotels and current chairman of the AH&LA Extended Stay Council, said it will be franchisees and not brand companies that will drive new supply growth in this cycle. “Even so, it won’t be until mid-2013 or beyond before supply growth in extended stay shifts upward.”