A quartet of deals this summer—by Homestead Studio Suite Hotels, InterContinental Hotels Group, Hospitality Properties Trust and RFS Hotel Investors—demonstrated that extended stay hotels still are attractive in the marketplace, despite the overall downturn.
In the first transaction, Homestead Studio Suite Hotels agreed to acquire 17 MainStay Suites from Sunburst Hospitality Corp., with the intention of reflagging them with its own name. "The acquisition further expands our brand into the important Miami and suburban Boston and New York markets, which helps improve our national visibility," said Gary DeLapp, Homestead president and CEO. MainStay is the extended stay brand of Choice Hotels International, which has managed the properties. DeLapp also noted that acquiring hotels in this manner can make more sense than building from the ground up. "In this environment, new construction can be uneconomic," he said. Homestead owns and operates 115 hotels overall, so this single acquisition increases its distribution by more than 15 percent.
In the second transaction, InterContinental Hotels Group sold 16 of its extended stay Staybridge Suites to Hospitality Properties Trust. The 16 are located in 11 states on both the East and West coasts. In this case, IHG will continue to operate the hotels under the Staybridge banner. "The deal is consistent with our strategy of selling owned assets and collecting management fees instead," said Richard North, CEO of IHG. Staybridge, a relatively new brand, began operations in 1998 and has 55 hotels.
Hospitality Properties Trust figured in the third transaction as well when it acquired seven Candlewood Suites, an extended stay brand that is not part of a larger multi-brand company. In this case too, the transaction was for investment purposes, as Candlewood will continue to manage the properties, which are mostly in the Northeast.
Extended stay brands also figured prominently in the portfolio of RFS Hotel Investors, an owner/manager, that in July was acquired by a second large owner/manager, CNL Hospitality. In the CNL takeover, almost one-third of the RFS portfolio of 57 properties were extended stay brands. Most prominent were 14 Residence Inns, part of Marriott International. Marriott's other extended stay brand, TownePlace Suites, also was among RFS' holdings, as was Hilton Hotel Corp.'s extended stay brand, Homewood Suites by Hilton. For its part, CNL's portfolio of 61 hotels includes 12 Residence Inns and five TownePlace Suites.
For travel buyers trying to make their hotel programs more cost-effective, these brands increasingly work for both their true extended stay travel and transient stays. Shifts in brand distribution or ownership, therefore, could affect the list of approved properties in certain markets.
According to the hotel committee of the National Business Travel Association, use of the extended stay module of its electronic request for proposals format has increased in each of the two bid seasons since it was introduced in the fall of 2001, reflecting buyers' growing comfort with the extended stay value proposition. However, committee chairman Beth Caligiuri noted that the module was intended specifically for buyers' extended stay requirements. Conceivably, buyers might bring transient bookings to some of these same hotels, but those bookings would be covered in the RFP's core pricing module. In other words, a buyer might solicit an extended stay hotel with two RFPs, each for a different aspect of the buyer's program.
Speaking last month at the annual NBTA convention, Caligiuri said the hotel committee determined the extended stay module was so successful that it was considering developing a module that would address a related aspect of buyers' lodging needs. "We know the extended stay module doesn't address corporate housing and are looking to add that as a separate module," said Caligiuri, who is a strategic procurement manager for travel at The Coca-Cola Co.
While Extended Stay America, a fast-growing brand in the category, reported weak second-quarter earnings along with other lodging companies
(BTN, Aug. 11), analysts continue to be bullish on extended stay's long-term prospects.
According to research issued by Mark Skinner, a principal in The Highland Group consulting firm, which specializes in the extended stay marketplace, Extended Stay America's second-quarter RevPAR decline was consistent with the sector's recent performance. In fact, extended stay hotels in 2002 hardly were immune from the malaise affecting the hotel industry generally. "Extended stay hotels' average occupancy fell below 73 percent for the first time since 1990," Skinner said. By comparison, occupancy in 2002 for U.S. hotels overall was 59.2 percent. The Highland Group's research also showed extended stay hotels' average daily rate fell sharply in 2002, despite what Skinner saw as an increase in demand, especially for brands at the high end of the market, such as Residence Inn, Homewood Suites, Summerfield Suites and Hawthorn Suites.
While this summer's deals affected ownership and, to a lesser degree, management contracts of extended stay hotels, the sector's leading brands continued to open new properties across the country and, to a very limited degree, internationally. Like other aspects of the lodging industry, these brands' aggressive expansion plans have been tempered by the contraction in the development pipeline due to the economic downturn
(BTN, Aug. 25). Yet, the slowdown hasn't been as marked in this sector as in the upscale and deluxe transient hotel category. Besides, projects opening in the second half of 2003 typically received the green light to proceed 18 to 24 months ago, when the market for new development still had some signs of life.
In some cases, the new extended stay properties are owned by the chains themselves, but in most instances ownership is in the hands of outside developers or investors with the brand acting either as manager or simply franchisor.
Marriott, for example, in June and July, opened TownePlace Suites, its midprice extended stay entry, in Lubbock, Texas, and Bentonville, Ark., respectively. In terms of size, the properties fall in the mid-range. The Lubbock hotel has 88 suites, while Bentonville has 78 suites. Because each of the new TownePlaces is in a suburban location, Marriott recommended the developers select a traditional brand prototype. "Resembling a row of townhouses in a residential setting, these TownePlace Suites hotels offer an alternative to more standard hotel rooms designed for shorter stays," said Laura Bates, brand vice president.
By comparison, the upscale Residence Inn in Houston, which opened in July, is a downtown property, an adaptive re-use that was carved out of a historic landmark building that was not a hotel. Consequently, the prototype is unique to that site. In addition, the 171-suite Residence Inn is not a standalone structure. The building also contains a 191-room Marriott Courtyard and 82 luxury apartments. "Originally, the building was the headquarters of Humble Oil and Refining Co. and actually is a complex of three structures that were phased in at different times," according to Paula Blackwell, general manager of the Residence Inn. "The original 1921 structure now houses the Courtyard. The next phase, which was completed in 1936, contains the apartments, and a 1940 building houses the Residence Inn."
While the number of hotels built from the ground up greatly exceeds the number converted from non-hotel uses, such projects have become more common in recent years. Many are eligible for investment tax credits, which make them easier for developers to finance.
Likewise, the number of hotel projects incorporating two separate brands and hotel types is on the rise, though it is still a small fraction of all new hotel projects. As is the case in Houston, one of the two brands typically will be extended stay or all suites to target travelers on different types of business trips. For buyers, these projects are intended to provide something of a one-stop shop, where they can book travelers with different travel requirements into essentially the same location.
With significantly less distribution in the sector than Marriott, such brands as Homewood Suites and Staybridge Suites are eager to build their market penetration. At Homewood, its 64-suite Houston Beltway 8 project, which opened last month, is its fifth in the Houston area. Yet, Jim Holthouser, senior vice president for brand management, noted that the need for upscale extended stay housing still exceeded the available supply.
Meanwhile, Staybridge in July opened its most recent property, a 124-suite unit in Chattanooga, Tenn. "The hotel is in the heart of downtown and adjoins the city's convention and trade center, which recently expanded," said Jim Anhut, senior vice president for brand management, adding that the location was unusual for the mostly suburban brand. While Marriott has more than 400 Residence Inns and 100-plus TownePlace Suites in its portfolio, the latest Houston project is Homewood's 125th hotel. The Chattanooga property is Staybridge's 56th.
In terms of distribution, only Extended Stay America rivals Marriott. At the end of the second quarter, it had 463 hotels in operation, spread among three brands. During the quarter, six properties opened and an additional 12 were under construction. However, unlike Marriott, Hilton or IHG, which franchise a majority of their inventory or manage the hotels on behalf of others, Extended Stay America's policy consistently has been to own its assets.