Demand Pushes Ext. Stay Hotels To Keep Multiplying

Extended stay hotels in the past year have gained in all areas of performance, while the robust property-development pipeline—which has grown at a staggering pace throughout the past decade—continues to give buyers enough supply to satisfy demand.

Although revenues per available room and average daily rates at extended stay hotels fell shy of industrywide averages, the segment has witnessed growth rates surpassing those of the U.S. lodging market at large. Meanwhile, occupancy at extended stay hotels exceeds overall industry averages.

"Extended stay demand is growing faster than overall hotel demand and, thus far in 2005, faster than the rate of increase in supply," said Mark Skinner, a partner with hotel consulting firm The Highland Group. "Consequently, gains in occupancy, ADR and RevPAR for the extended stay hotel industry have been greater than for the overall hotel industry."

According to the 2005 U.S. Extended Stay Lodging Report: Mid-Year Update, which The Highland Group released this month, RevPAR has grown year over year since 2002 across all extended stay segments. "RevPAR in the economy extended stay segment is at its highest level ever," the report said. "Midprice and upscale segment RevPARs are approaching peaks achieved in mid-2001 and may exceed them by the end of 2005."

Marriott International, in its second-quarter earnings report, said RevPAR among its extended stay brands, including Residence Inn, increased 9.2 percent over the same period last year. The company said the gains were "driven by an 8.8 percent increase in average daily rate and a slight increase in occupancy to 76.6 percent." However, the 9.2 percent gain in RevPAR for Marriott's extended stay brands came in short of the 11 percent average across all of Marriott's brands for the second quarter. Likewise, Hilton's extended stay brand, Homewood Suites by Hilton, witnessed a 7.3 percent increase in RevPAR last quarter. Yet, the number fell short of overall RevPAR gains of 9.4 percent across Hilton's owned hotels.

Although extended stay RevPAR and ADR fall below industry averages for all hotel segments, extended stay properties are among the strongest beneficiaries of soaring demand and high occupancy rates. Extended stay hotels boasted a mid-year occupancy rate of 74.7 percent, compared with the overall hotel market's 62.2 percent rate for the first half of 2005.

The gains in the occupancy have been driven by strong demand, The Highland Group's Skinner said, which increased by 7.2 percent during the first half of 2005 compared with the same period in 2004. The overall U.S. hotel market witnessed an average demand increase by 3.3 percent from the same period, according to Smith Travel Research data.

Developers and hoteliers are matching continually growing demand with an ongoing boost in supply. The Highland Group study found that growth in demand this year so far is outpacing that of room supply. "Although demand growth is currently exceeding the 6 percent annual increase in extended-stay supply," the report said, "there is some concern whether this can be sustained over the next six quarters because of the accelerating increase in supply."

"On a national basis, I don't think you'll see oversupply," Skinner said, "but history suggests that some markets will experience an oversupply."

On the supply side, 16,921 extended-stay rooms were under construction at the end of the second quarter, which marked a 71 percent increase in development from the same time in 2004.

"Extended-stay hotel construction increased significantly during the last year," the report stated. "The upscale segment reported the largest gain in number of rooms under construction but the economy segment had the greatest growth in the rate of new construction. Some 9,300 of the 16,921 rooms under construction are projected to open by year-end 2005, resulting in 260,792 rooms open and a 6.3 percent increase in supply compared to year-end 2004."

The report continued: "The biggest rate of increase came in the economy segment as the new Value Place brand accelerated its franchising program."

Jack DeBoer—founder of Candlewood Suites, which InterContinental Hotels bought in 2003—is continuing to push his new economy extended stay chain, Value Place. Since its launch in 2003, DeBoer and company have opened seven Value Place properties, with 38 more under development. The company said 10 properties are slated to open this year.

The number of rooms in the extended stay market has grown exponentially during the past decade, as only about 50,000 were available in 1995. "There was unmet demand, which meant travelers were staying in non-extended stay facilities—generally traditional hotels. Then, in the early and mid-1990s, the extended stay supply was concentrated in the upscale segment with nothing in the economy price tier. Even with such a strong supply growth, it was absorbed, with one or two hiccups along the way. The occupancies now are getting up there. In the economy segment, they're getting up there toward a record high."

Although growth rates were the highest in the mid- to late- 1990s, supply continues to grow at a healthy pace. "Extended stay hotels continue to capture developer interest and extended-stay supply is now growing at three to four times the rate of supply growth in the overall hotel industry," Skinner said.

In addition to development, the extended stay market also has seen a rash of consolidation through mergers and acquisitions, most notably by HVM LLC, a Blackstone Group affiliate that operates Extended Stay America.

Most recently, the company is reflagging 16 Sierra Suites hotels acquired in May from LodgeWorks as part of its Extended Stay Deluxe brand, one of four brands operated by the company, including Extended Stay America, Crossland Economy Studios and StudioPlus.

ESA owns and operates more than 670 all-suite properties in 43 states. Through acquisitions, ESA last year overtook Marriott International for dominance in the extended stay segment.

Yet, consolidation should not impact pricing, Skinner said. "Nobody has that much of a monopoly or concentration that they'll be able to dictate price like that," he said. "In fact, in real dollars, rates are lower than they were in 2000 because they declined significantly."