ATLANTA—Extended-stay hotels attracted significant investment and demand during 2012—a trend that’s likely to continue in the year ahead.
The segment saw more than $1 billion in new investment during the 12-month period. Economy extended-stay hotels alone drew more than $800 million with Starwood Capital Group’s purchase of Intown Suites in October and Lindsay Goldberg LLC’s $100-million capital investment in Value Place. Sonesta launched Sonesta ES Suites by rebranding more than 2,000 mainly upscale segment rooms. Following Hyatt’s $800 million investment in the Hyatt House brand in 2011, investor activity in 2012 signified growing confidence in the fundamentals of low supply growth, increasing demand, high occupancy and strong gains in average rate.
Another indicator of confidence in the sector was the marked increase in conversions and rebranding of extended-stay hotels, some of which will have come out of foreclosure. At the end of 2011, another record low supply increase was expected during 2012. Actual new construction of rooms did decline to a new low, but conversions and rebranding boosted the annual change in room supply. While still small compared to the longer-term average, the 2.5% increase in extended-stay room supply during 2012 was twice what was forecast a year ago.
New room construction almost doubled compared with the end of 2011 and reached its highest level since 2008.
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Construction is likely to increase, especially in the economy segment which is chronically underserved in many markets.
The rate of increase in new supply is not a major concern in the near term. No rooms were reported under construction in 60 of the largest markets in the country. If all rooms under construction open in 2013, extended-stay room supply will increase by approximately 3%.
Annual extended-stay hotel demand has not declined in 20 consecutive years. Even in the deep recession of 2009 extended-stay hotels reported a small increase in demand.
Demand increased by 2.5% during 2012 compared with 2011. The rate of change in demand was quicker in the second half of 2012, and the fourth quarter gain of 2.9% was the fastest quarterly increase of the year.
If this momentum is maintained, demand growth will exceed the increase in supply in 2013 and occupancy will move closer to record levels.
Extended-stay hotel occupancy rose to 74.8% in 2012, which was its highest level since 2005.
Occupancy approached 75% despite a very large number of extended-stay rooms under renovation in 2012. The completion of most brand-wide renovations in early 2013 should boost both occupancy and average rate for the year.
Average daily rate
The 6.9% gain in extended-stay average rate during 2012 was the fastest annual increase since 2006. Although growth was quicker in the first half of 2012, this was mainly due to the mid-price segment becoming less aggressive with rate increases as the year progressed.
Despite such growth, extended-stay average daily rate is still below its prior peak set in 2007 (economy segment) and 2008 (mid-price and upscale segments). The economy and mid-price segments have the slowest supply growth, and their average rates are further away from previous peaks than the upscale segment.
The economy segment accelerated rate increases throughout 2012, and this should continue in 2013 as supply growth is forecast to be minimal and occupancy approaches 80%. The mid-price segment has the highest concentration of newly renovated rooms that should command higher rates. Upscale extended-stay hotels also are expected to increase rates in 2013, but they are not likely to rise as fast as the mid-price and economy segments.
Anecdotal evidence and historical trends suggest extended-stay hotel ADR will increase faster in 2013 compared with 2012. First quarter results should be a good indicator within a few weeks.
The opinions expressed in this column do not necessarily reflect the opinions of HotelNewsNow.com or its parent company, Smith Travel Research and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.
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