Lower costs and higher margins drive extended stay
 
Lower costs and higher margins drive extended stay
24 APRIL 2018 7:30 AM

Speakers at Serviced Apartment Summit Americas said they expect the extended-stay segment will continue to thrive and grow.

NEW YORK—Revenue from extended-stay hotels has more than quadrupled since 1998, according to Mark Skinner, partner with The Highland Group, who cited the number to introduce a panel at the Serviced Apartment Summit Americas titled “Why are extended-stay hotels doing so well and where do they go from here?”

The success of the segment continued in 2017 with a 12.8% rate increase, the fastest since 2009, Skinner said. He also said the number of extended-stay rooms is growing four times as fast as regular hotel rooms in response to accelerating demand. He called that acceleration “contrary to what’s typical at this stage of the cycle.”  Today, 8% of total U.S. hotel rooms are extended-stay, and they represent $12.4 billion in room revenue in 2017.

On the question of comparative return on investment, Jon Benowitz, VP of capital strategy and investments at Chartwell Hospitality, said the extended-stay segment performs better than traditional hotels because it can take advantage of the “ups,” but also when the economy is down these properties can focus on long-term business.

Stephen Davidson, a partner with DC Partners, said with upper-end extended stay, the company aims for returns of 9.5% to 10% with that moving to 11% or better on economy properties—and some are performing even better than that.

Laura Benner, SVP of hotel asset management for Colony NorthStar, said the company owns extended-stay and select-service properties as part of a real estate investment trust and does see higher profit margins on extended stay because of higher occupancies and lower costs on items like housekeeping.

Asked how long his company expects to hold these properties, Davidson said that since DC Partners uses mostly family capital, it can look at a seven- to 10-year hold but can hold indefinitely if necessary. He said the industry is in a cycle that is very advantageous if a company can hold onto assets.

“There’s so much uncertainty, it’s hard to know where fundamentals are going,” Davidson said.

Benner said that while older extended-stay properties like first-generation Residence Inns might require a lot of capital investment, they still provide excellent returns. She said Colony NorthStar will start pruning lower revenue-per-available-room hotels at around the five-year mark and hold those with higher RevPAR for longer periods.

Nick Newman, president and managing partner of Soundview Real Estate Partners, said his company is performing due diligence when considering extended-stay development opportunities.

“We are prepared to hold into the next cycle, and we’re fine with that, but we are being more selective right now in what we do develop,” he said.

Davidson said the cost to build depends on the product and market. He said his company is about to break ground in “a dense part of northern New Jersey” on a Home2 Suites by Hilton and has also built WoodSpring Suites hotels that cost between $65,000 and $70,000 pre-land and $80,000 “all-in” that are doing well on yield. He added that constructions costs have really gone up in the last two years, so DC Partners is being careful about underwriting. Development costs in some markets could be as much as 25% lower than in others, he said.

Benowitz said a new Home2 Suites that Chartwell is developing in Colorado Springs, Colorado, cost $150,000 per unit “all-in.” He said Chartwell usually surpasses brand standards with partial brick construction and design features in markets that will support higher rates.

On exit strategies for older properties, Benowitz agreed that older Residence Inns and other well-known brands still make a lot of money even though they might be dated. He said he recently went to Alpharetta, Georgia, where an older Residence Inn was getting almost as high a rate as a new high-end hotel.

“You just keep taking out money from these hotels,” he said.

The panelists said they aim for an ideal mix of extended-stay and transient guests that maximizes rates and minimizes costs. In the last couple of years, Davidson said, there has been a move to transient business to drive rate and fill rooms on weekends and slower times of the year. He said operators must be careful not to put a strain on operations or precipitate a decline in the guest experience in hotels not designed for high turnover.

A Candlewood Suites in Charleston, South Carolina, that is all extended stay enjoys high margins while one outside Savannah, Georgia, has a different mix and does well, he said.

“You have to find the right mix based on the market,” Davidson said.

The panelists agreed that lenders continue to be positive about extended stay, which is why the segment is leading the way in terms of supply. Benowitz said the segment “generally makes plenty of money and retains value.” He said a sweet spot for equity is 35%.

Davidson said the financial markets are “pretty stable,” though interest rates have gone up and construction financing is “rougher.” Newman said any asset with cash flow can be financed but development “gets trickier, though with strong sponsorships and strong guarantees, money is still available.”

Finally, panelists looked ahead to when RevPAR might turn negative. Newman said there would have to be an event that “shocks” the market.

“If you look back at the last three cycles, you never see the downturn coming, and then when you look back, you say you should have seen it,” he said. “Barring an external shock, markets should stay strong.”

1 Comment

  • Bhupi Patel April 29, 2018 8:17 AM Reply

    Do think Candlewood Suites as old brand and at disadvantage compaired to newer generation extended stay ones

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