US extended-stay hotels thrive in face of supply growth
 
US extended-stay hotels thrive in face of supply growth
26 JUNE 2017 8:34 AM

Despite significant new supply, extended-stay hotel demand remains high, beating expectations of investors and analysts.

Editor’s note: Later this week, Hotel News Now will publish a look at extended-stay hotels in Europe.

REPORT FROM THE U.S.—Robust demand growth in the U.S. extended-stay hotel sector continues to stave off any ill effects of new supply, despite the hefty current pipeline. Aside from current demand declines in specific, economically depressed markets, it appears the hospitality industry is still nowhere near the growth ceiling for extended-stay products, sources said.

Extended-stay hotels continue to outperform expectations, enjoying enough demand to remain ahead even as new supply weighs down occupancy numbers in some markets, sources said.

“Demand has been growing between 5% and 7% a quarter for basically two years,” said Mark Skinner, partner with The Highland Group, a hotel investment advisory firm. “Although we’re having strong increases in supply, demand is close to catching up. Occupancies this year were projected to show a slight decline, but based on the first quarter, they’re not—although there is a record number of rooms under construction: more than 40,000.”

Data from STR, parent company of Hotel News Now, shows U.S. extended-stay supply was up 6.2% year-to-date as of April 2017, compared with the same period in 2016, while demand in the sector was up 6.3%.

Skinner noted that supply growth has been concentrated in some markets. “Out of the 100 largest markets around the country, probably 35% or 40% reported no extended-stay rooms under construction at the end of 2016,” he said.

“Some of the under-served markets, especially for economy extended-stay product, have very high barriers to entry,” he said. “If you can get (it) open, you’ll do very well, but you won’t be opening it in the 1.5 years of you conceiving to do it. The entire process is slow, and so developers are prone to go to areas with lower barriers to entry.”

New builds and conversions
When they do build, most developers are selecting upscale extended-stay brands for their new construction projects. Sources said popular upscale and midscale brands* like Residence Inn, Staybridge Suites, TownePlace Suites and Home2 Suites are common flags among projects in the active pipeline, for several reasons.

“The majority of extended-stay rooms in the U.S. total pipeline are in upscale and upper midscale—two-thirds of all rooms are in those segments,” said Jan Freitag, SVP of lodging insights for STR. “That’s where the action is for a lot of the developers. The reason for that is they’re fairly easily built, banks will give construction loans on those hotels, and the price point is very healthy. That’s what I would project going forward: That we’ll see more of this coming together along the upscale and upper midscale price point between supply and demand.”

Currently, many of the properties in the extended-stay economy pipeline are conversions—either converted from standard hotels, or from aging upper-tier extended-stay hotels to a lower-priced tier to avoid renovations that are necessary to meet the latest brand standards. Demand for this type of development also is strong.

“There may be a midpriced hotel that has a good position, with a lot of contract business in the area—whether it’s construction, training, etc.—and that hotel is retrofitted with the kitchen facilities and the necessary amenities to make it extended-stay, and they’ve been very successful,” said Douglas Collins, president of Atlanta-based hotel brokerage firm DC Hospitality. “It’s a very hot product. There’s a lot more money out there chasing that product than there are sellers.”

Broader appeal
The appeal of extended-stay hotels seems to be expanding, too, with much of the new demand coming from consultants and other traveling professionals.

“With corporate profits being at all-time highs, Fortune 1000 companies are sending their salespeople on the road, and their installers, and you have more demand from consultants, because we’re very long in the economic upcycle,” Freitag said.

“It’s the time when people start thinking about cost-cutting, cost adjustment and being more efficient,” he said. “That breeds more demand for consultants, who then work in specific markets for more than two or three nights; it could be five or six weeks. That’s very welcome demand on the extended-stay side.”

Hoteliers also see opportunities to convert traditional hotel guests into future extended-stay customers, through loyalty program points and tailored marketing, and by raising awareness of the benefits of extended stay. The idea behind this push is that most hotel guests would appreciate the added amenities of an extended-stay hotel, even if their stay is less than a week. The key is making these guests aware that the option exists.

“When you look at some of the brands that have recently launched, like Element or Home2, you’re not only looking at extended-stay travelers; this really suits the everyday travelers on the two-night stay,” said Tim Horan, VP of sales and marketing for Peachtree Hotel Group.

“A lot of these products have things like complimentary breakfasts and larger workspaces. Those things attract the extended-stay traveler back into extended-stay hotels, as well as the non-extended-stay traveler. When the demand is there, the supply will grow, and it balances itself out. As supply grew, the visibility became greater for these brands, which then moved the needle on the demand.”

Peachtree has several extended-stay hotels in its portfolio, including* a TownePlace Suites, a Marriott International brand.

Eye on the economy
Broader economic and political trends are expected to further shape the extended-stay market in the coming years. A rebound in oil- and energy-producing markets would have an appreciable impact on demand, as would an increase in construction resulting from an uptick in nationwide infrastructure development.

“Any time the economy moves in the right direction, there’s always going to be new opportunities—whether it’s training a new workforce for solar energy, or new retail opening up across the country—that drives extended-stay business,” Horan said. “With new product development, as we continue to reinvent ourselves and roll out new technology, there comes training and installation, which really drives those brands.”

As long as demand levels and rate growth remain high, sources said, the hotel industry will continue to build extended-stay hotels.

“As long as the occupancies are well into the 70s, that always makes any type of hotel very attractive to developers,” Freitag said. “As long as occupancies are so high and room rate growth outpaces the national average, you will see developers interested. The problem is, we know they overbuild two years after the fact, and it’s too late to put the toothpaste back in the tube, so to speak. But right now, it’s a very healthy sub-category of hotels, and that’s going to continue to attract developers and visitors alike.”

*Correction 26 June 2017: A previous version of this story featured and listed a property and brand that does not meet the criteria of extended-stay, which is that rooms include a stovetop, cooking area and full refrigerator.

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