Softer Occupancy Growth To Press Ext. Stay Rates

Occupancy reached record levels for upscale and economy extended stay hotels in 2006, but the segment has less room to grow this year, so hoteliers will focus even more on increasing rates to sustain company growth.

The latest numbers from the Atlanta-based Highland Group, a hospitality consulting and research company that specifically focuses on extended stay lodging, showed that occupancy through the third quarter of 2006 was at 78.7 percent for the upscale tier, a slight increase from 78.6 percent for the same period in 2005. Economy properties were at 80.8 percent, up from 80.2 percent the year before.

Occupancy in the midprice range, however, was down to 71 percent, compared with 73.3 percent in 2005. These numbers are skewed from an occupancy boost in September 2005 following Hurricane Katrina, according to the Highland Group. The storm also affected overall occupancy rates, with occupancy through the third quarter down to 75.8 percent overall compared with the Katrina-inflated rate of 76.7 percent in 2005.

The occupancy drop is likely to appear even sharper when the fourth quarter results are released in the coming weeks because of the ongoing impact of Katrina, said Mark Skinner, a partner with the Highland Group.

"It's still going to be a strong year in 2006," Skinner said. "We have the underlying hotel trends—a growth in demand and big increases in average rates—and a growing economy and employment growth. Businesses are spending money again."

Extended stay occupancy through the third quarter, in fact, remained more than 10 percentage points higher than the hotel industry overall, according to the Highland Group. In addition, demand growth was up 3.5 percent, more than double the growth rate of the industry.

"The strength of the category will be driven by consumer demand," said Robert Radomski, vice president of brand management for InterContinental Hotels Group's Staybridge Suites. "We still believe that we're at a point where the demand growth still exceeds the supply growth. That's a function of there being a lot of extended stay travelers out there."

Extended stay hoteliers said the corporate economy is strengthening, so there are more long-term educational and training opportunities. Employees attending those programs are some of the most likely users of extended stay properties, hoteliers said.

"The principal driving force of that growth is that the corporate cultures have gotten stronger," said Jim Chu, senior vice president of owner relations and franchise services for Hyatt Hotels Corp., which owns the Summerfield Suites brand. "There's more service training and product training, so one-week to three-week stays have really strengthened over the last 18 to 24 months, and that's really the bread and butter of our business."

Although most major extended stay brands have several new properties in their pipelines, most also agreed that revenue in 2007 will come primarily through rising rates.

This follows strong 2006 rate growth, in which extended stay properties posted double-digit percentage growth on average for the first nine months of the year, according to the Highland Group.

Overall, rates were up 10 percent for the period compared with 2005, according to the Highland Group. Midprice hotels saw the strongest growth, up 10.7 percent to a rate of $63.33, and economy was close behind with growth of 10.3 percent to $33.68. Upscale growth was a bit slower, up 7.6 percent to $112.16.

Revenue per available room also showed solid growth for the period, the Highland Group reported, with RevPAR up 8.8 percent overall for extended stay hotels. The biggest growth was in the economy segment, in which RevPAR increased 11.1 percent to $27.21. RevPAR for midprice hotels was up 7.1 percent to $44.93. For upscale hotels, it was up 7.7 percent to $88.32.

This year, extended stay hotels are looking to push rates and revenues even higher than in 2006.

"Rate growth was more like about 4 percent year over year," Rebecca Wyatt, senior vice president of brand management for Homewood Suites by Hilton Hotels Corp., said of her brand. "This year, we're looking for growth of about 6 percent or so. This year will be less about occupancy and more about rate."

The strength of the overall hotel industry's rate growth will buoy some rate increases, Staybridge Suites' Radomski said. In addition, extended stay properties benefit from the spillover from markets in which transient hotel rooms are in short supply, he said.

Extended stay hoteliers also said improved properties and amenities will provide justification for those increases. In the end, hoteliers aim to be realistic, according to Radomski.

"Product improvements have given us the ability to grow our rate," said Gina LaBarre, vice president of brand management for IHG's Candlewood Suites. "Most of our growth has got to come through rate, but we are still anticipating RevPAR growth year over year."

Most analysts agree that supply growth finally will outpace demand growth in the hotel industry by next year. Because extended stay properties make up only about 6 percent of the total U.S. supply, their supply and demand curves do not move at the same rate. "To say they're completely independent of those numbers, however, is incorrect," the Highland Group's Skinner said. "The segment mirrors the trend of the overall hotel industry, so there generally is a lag effect."

Skinner said to expect average rate increases above the rate of inflation for extended stay hotels in 2007. Occupancy rates might start to plateau or even decline, but RevPAR growth also would remain higher than inflation, he said.

Looking even further ahead, Staybridge Suites' Radomski said he expected the segment to remain strong regardless of what happened to the hotel industry overall, based on past performances.

"I think that we are less vulnerable, and we always have been," according to Radomski. "Even in the post-Sept. 11 market situation and when the Iraq war started in 2003, we were still running occupancy and exceeding RevPAR growth when transient hotels were not. Even with the seasonal patterns, you don't see the extremes that you can sometimes get for the transient side."