Extended-Stay Report: Segment still tough enough for tough times
The extended-stay product historically has been considered a “resilient” lodging model by owners and developers, particularly in traversing tough times, and the segment did not disappoint in terms of weathering the past few years of coronavirus chaos.
“Resiliency is a good way to frame it,” said STR President and CEO Amanda Hite. Indexed to 2019, she noted year-to-date revenue per available rooms for extended-stay hotels set against non-extended-stay hotels is nearly equal. This, she added, is “largely due to stronger demand for extended-stay hotels and slower rate growth than all other hotel types.” However, non-extended stay hotels have reported stronger year-over-year key performance indicators growth than extended-stay hotels.
“Over the past four years, extended-stay supply grew 17 percent, while all other hotels have only seen a 2 percent [increase]. That segment recovery remains both in line with non-extended-stay hotels and is largely driven by demand growth, which speaks to the popularity of the segment and its continued ability to absorb new supply,” Hite said.
That segment recovery may account, in part, for the relatively recent spate of extended-stay hotel brand introductions, extensions and reinventions from several of the industry’s major players, among them Choice, Extended Stay America, Hilton, Hyatt, Marriott, Sonesta and Wyndham, some of whom acknowledge they’ve been considering entering the segment for years.
Asked if the pandemic helped serve as a catalyst for advancing some players’ plans in this direction, Hite noted since extended-stay hotels did relatively better through 2020, this piqued developers’ attention.
“Anecdotally, because the length of stay is so much longer, the labor cost is lower and ultimately, profitability compares favorably to other hotel types. This is what gets investors and developers excited,” she said, adding customers also voted with their wallets and made their voices heard through their travel patterns. “I think the interest [in extended-stay hotels] comes from both sides: owners and guests.”
“Ownerships we work with are building new extended-stay hotels, from more traditional brands with Marriott and Hilton to newer concepts such as WaterWalk,” said Gregg Forde, president and COO of Florida-based Island Hospitality Management. IHM currently manages 91 properties, including many branded upscale, extended-stay hotels.
Forde noted many assets were in the pipeline prior to the onset of the pandemic, but felt the newer economy extended-stay concepts underway “definitely target the learnings from COVID, where guests were seeking a great room type and willing to sacrifice complimentary offerings and daily service in exchange for a reasonable price.”
With more than a quarter-century in the industry, Forde observed, “The segment has always thrived; it is just that the extended-stay concept outshines in difficult economic times. This brings more attention to the fundamentals of the segment that make it an area investors are keen to have in a portfolio.”
Investment Capital
Given that, where investment capital might trend in the space (e.g., a legacy extended-stay brand versus a new “by” brand launched by a chain) might depend on a variety of factors.
“This is partially a question of owner preference and partially determined by the availability of the franchise in the market,” Hite said. “In some instances, owners and brand have long-standing relationships, and if the developers have worked with another brand in the stable of brands, both sides may be more comfortable working together. Sometimes, the new brand has already been signed and the investor must choose one of the legacy brands if they want to get into the extended-stay game.”
When it comes to legacy, Ryan Rivett knows the term well. Scion of a hospitality family with its roots in the economy sector, the executive helms My Place Hotels as president and CEO of the extended-stay brand that he co-founded with his grandfather, Ron Rivett, in 2011.
With a growing domestic portfolio of 113 owned, managed or franchised properties, the company’s sole focus had been on the segment up until 2020, when it launched Trend Hotels & Suites, a collection of midscale, upper-midscale and upscale limited-, select-service and extended-stay hotels. Rivett considers “iterations” a good characterization of what’s being put into, or proposed for, the extended-stay marketplace.
“There simply isn’t much practical basis or tangible diversification associated with the most recent crop of brand announcements,” he said. “On that basis, I’d say it’s not the developers, operators or consumers that are driving the most recent round of yet-to-be-named hotel brands. It’s really a demand for relevance in the competitive landscape of hotel branding that stimulates the creation of duplicative product.”
That said, Rivett cited a recent deal My Place did with Florida-based Rimrock Companies to franchise and develop 10 extended-stay hotels in Georgia, South Carolina and Tennessee over the next six years.
“Timing of our most recent multi-unit deal was good relative to all of the extended-stay hype in the lodging industry, but this is the second 10-unit deal we’ve closed in the last 12 months [My Place and TGC Group in Q4 2022 did a similar deal for nine hotels],” Rivett said. “Those numbers may not be significant for some of our larger competitors, but for us that’s a unit increase of 25 percent, so it’s a pretty big deal.”
Rivett tagged 2023 thus far as a “maintain your ground year” for extended-stay as the economic landscape continues to shift, but also called business “great.”
“Modest revenue growth, coupled with quickly changing booking and stay dynamics, is keeping operators on their toes. Franchisees and consumers alike are seeking balanced offerings, with quality partners and clearly defined sustainability, which pairs well with our smaller room counts, lower costs and young properties,” he said.
While it also manages select- and full-service hotels, including two independents, privately-held Island Hospitality’s long-standing focus has been on extended-stay assets ranging from the “earliest days of Residence Inn to ownership groups today,” according to Forde, who sees the segment as “holding steady.”
“We fully understand the intrinsic values of extended-stay hotels. The positives are many, from a greater personal guest experience, efficiencies in expenses and stabilized monthly revenues,” he said.
For example, said Forde, “the digitization of the reservation and check-in experience can reduce typical hotel-guest interactions, but in the extended-stay segment, there are so many more guest touch points. The hotel business remains simplistic at its core, which is ‘clean and Friendly.’ In extended-stay, you get more opportunities to make a positive impression on your guests.”
To encourage that result, Forde stressed room functionality, coupled with quality amenities such as a spacious workout facility, was key. He noted over the next 12-18 months “overall dollars are being designated for capital improvements in rooms and public spaces” at its managed properties.
Market Saturation
With some industry players “discovering” extended-stay as the next bright, shiny profit-maker, it raises the question of how much of a good thing might become too much of a good thing over the long term, as enthusiastic investors/developers/ hoteliers/chains expand into the space via their various avenues, possibly causing the segment to saturate markets in some distant future.
“It is certainly a threat to any market that too many new rooms chase too few new guests,” Hite said. “But keep in mind that currently the U.S. supply growth stands at less than one percent and if interest rates remain elevated, new supply will continue to be curtailed. In other words, there is a theoretical threat from overbuilding and in some submarkets that threat is more than hypothetical, but in general, we do not foresee overbuilding as a cloud on the horizon.”
Both Forde and Rivett acknowledged there are general concerns about being in the space, but these are almost overshadowed by the segment’s track record as a strong performer.
“Our concerns mirror those of us all in the industry—a capping out on business travel below pre-pandemic levels, potential over-supply or demand erosion with new extended-stay offerings in the same parent brands and ongoing labor challenges,” said Forde. “The positive is that, historically, the extended-stay segment has always been best-in-class and should continue to do so among all hotel asset classes.”
Rivett also remains bullish on the segment. “We know we’re in the right space with the right product and we have great confidence in the sustainability of the markets we’re selecting. Increasing competition always presents a concern for saturation, but I think extended stay has a lot of room to grow and a good basis to grow from.”
According to Hite, at mid-year, extended-stay growth compared to 2022 had “certainly slowed,” much like that of the total U.S. hotel industry. “Demand continues to rise modestly year over year, although above-average supply growth has led to modest occupancy declines for the last three months,” she said, noting “ADR growth remains a bright spot and has helped drive YTD RevPAR up 7.1 percent year over year.”
Hite said total U.S. industry growth would continue to slow over second-half 2023 and into next year, although RevPAR is forecast to continue growing. “We expect the industry to continue normalizing and reset back into historic trends,” she said.
