Extended-Stay Properties Expand Across United States

<B> Extended-Stay Properties Expand Across United States</B>

By Lynn Woods

It's no accident that the extended-stay category was born and bred in the Southeast, where cheaper land values, explosive growth--resulting in brand-new boom communities clustered around such Sunbelt destinations as Atlanta and Dallas--and a quick and affordable permitting process created the ideal conditions for a new-built, suburban-type product that offered guests extra space and the amenity of a fully equipped kitchen. As the extended-stay brands attempt to build critical mass, however, all-suite hotels are proliferating around the country.

"Six or seven years ago, a lot of people thought extended stay was consistent with the Southeast," said Ken Rogers, president and CEO of Parsipanny, N.J.-based Villager Franchise Systems, Inc. "We've since found out that extended stay is nationwide."

As certain Sunbelt markets, including Atlanta, Dallas, Houston and Phoenix, become saturated with extended-stay hotels, many companies are focusing their development efforts in the Far West, the Northeast and the Midwest--although, as always, it's the submarkets in each region (be it a commercial area or a booked-out downtown) that ultimately drive the development patterns of extended-stay properties, noted Daniel Lesser, senior director of the hospitality industry at Cushman Wakefield in New York.

While institutional financing for new projects continues to be tight--the squeeze started earlier in the year due to nationwide financial setbacks last fall--and interest rates are rising, local lenders have emerged as a fruitful resource for developers, spurring growth, said Rogers.

Villager Lodge, which currently has 120 properties--another 30 are expected to open by year-end--is concentrating its new development efforts primarily in the West and Midwest. While 90 percent of Villager Lodge properties are conversions, favorable conditions in the Midwest have enabled the company to develop a new-built prototype, of which two have been built in Illinois.

"The Midwest is way underdeveloped," said Rogers. It's also a fairly easy nut to crack, unlike California and the Northeast, where land is scarce and the permitting process takes years. Candlewood Hotel Co., a mid-tier extended-stay chain, just now is opening properties in the two regions that have been in development for four years, according to vice president of franchising services Gina-Lynne Scharoun. "They're high risk and high reward," she said.

Ditto for south Florida, where the development process, from site selection to cutting the ribbon, can take up to four years, double the usual time, according to Mike Wilson, vice president of marketing of Extended Stay America Inc., based in Fort Lauderdale, Fla.

While Rogers said the challenges in the populated Northeast had discouraged his company from aggressively pursuing a growth strategy in the region--"there are too many roadblocks in the developer's way"--executives at other extended-stay brands said the area's high demand made the headaches and delays worth it. Wilson, for example, said the expansion of his two fast-growing, budget-tier brands, Extended Stay America and Studio Plus--currently totaling 352 properties--are concentrated in the Northeast, Far West and south Florida.

Extended Stay America recently has established a strong presence in California, with 12 properties in Los Angeles and 17 in San Francisco. Currently, 25 hotels are under construction and an additional 39 are under contract. Despite analysts' predictions of a slow-down in growth of the segment, Wilson declared that "we have seen no evidence of any weakness in this category."

Furthermore, "the demand in the Northeast is enormous," he said. "We just opened on Long Island a couple of months ago, and we filled up immediately. The demand justifies the [problems with] development."

Once a hotel company has surmounted the development difficulties and established a product in the region, those very hurdles are an advantage, helping keep competitors out: "What makes it difficult to develop in the Northeast makes it a good investment," said Paul Kirwin, president of Carlson Cos.-owned Country Inns & Suites in Minneapolis. "There are barriers to entry that protect you once you're built."

Kirwin said Country Inns & Suites, which has 40 hotels under construction and another 50 under contract, is focusing new development on the West Coast as well as the Northeast. New hotels also will be opening in the next three years in the Ohio Valley, the Southwest and South Atlantic. In terms of the development process, he said, the West falls somewhere between the pro-development Southeast and the more conservative Northeast, where older, established communities are resistant to new development.

The most difficult area to develop in the West, of course, is the densely populated coast, where a strong environmental awareness adds to the development costs. Though the West Coast was slower to recover from the economic doldrums of the early 1990s, it now is booming, offering persistent and creative extended-stay developers a lucrative market. "It was slower to come out of the recession, but the amount of business in California is now huge," Kirwin said.

By the beginning of October, Country Inns & Suites will open its 200th property. "It took two years to double the size of the chain," Kirwin noted. "Our rev par has grown over 3 percent, and our market share index is up a point." Having reached critical mass, Country Inns & Suites now is engaging in national advertising and marketing, he added.

While new development at Homewood Suites, now numbering 85 properties, is pretty much all over the map--"wherever there are high-growth business centers," said Homewood's vice president of brand management, Doug McCorkle--the chain is paying particular attention to high-tech regions out West, such as Silicon Valley and southern California. In addition, Homewood just opened a property located in an office development on Michigan Avenue, in Chicago, which McCorkle said he hoped would "drive the buildout in the Midwest."

<B>Northeast Is Next</B>

In the Northeast, Homewood is considering selective conversions in the region, he added. Twenty-eight properties are in the pipeline at the Memphis-based chain. Next year, the chain plans to double its advertising spend to $4 million and begin running commercials on TV for the first time. Once the brand is built out, McCorkle said his company would start considering locations in Canada and Mexico.

Mainstay Suites, with 27 properties open and 60 due to be open by the end of next year, also is looking to the West Coast and Northeast. Yogi Rawal, Mainstay's brand director, acknowledged the difficulties in both regions, but in the Northeast, at least, these are mitigated by a price advantage: "The rates the Northeast drives make it a phenomenal place to do business," he said. "We've signed contracts for four properties in Boston, one in Fishkill, N.Y."--where IBM is expanding a plant--"one in Pittsburgh and one between Baltimore and Washington." Rawal added that the chain's new Annapolis property is "doing better than expected."

With a $59 ADR, Rawal said his brand's performance "across the board is exceptional," with average occupancy, year-to-date in July, at 73 to 74 percent and rev par at $40.

The company also is investigating the Midwest--specifically, sites around Cincinnati, Columbus, Indianapolis and Minneapolis. There, as elsewhere, the focus is on areas on the outskirts of cities that are near corporate parks.

Suburban Lodges of America, based in Atlanta, is targeting the Northeast and California, as well as seasonal destinations in Florida, said president Greg Plank. The brand currently has 104 properties, with another 20 hotels in the pipeline.

Embassy Suites, which is about to celebrate the opening of its 150th property, is focusing new development in urban areas, including New York's Battery Park City, which opened last May, and Atlanta. Future developments are slated for Baltimore, Boston and Chicago.

The slow but steady growth of the premium brand, which was launched in 1984, has served it well, said senior director of brand marketing John Lee. "When you look at the all-suite segment, in every market where there is an Embassy Suites, we lead the market," he said. "Our rates are the highest and so are our returns."

Like Embassy Suites, Marriott's Residence Inn, the oldest and most prolific brand, is looking at urban markets, where it plans to rely on conversions. Unlike so many of its competitors, Residence Inn pretty much has established a presence in every region of the United States. The Northeast, Midwest, Southwest and California are particularly strong markets in which the brand continues to expand, said Tim Sheldon, Residence Inn's vice president of marketing. Even in overbuilt markets, such as Atlanta, however, Residence Inn does well. "Traditional hotels are the ones who take it on the chin."

Rawal was a bit more blunt: "We are cannibalizing different segments in the industry. Extended stay didn't create a whole new marketplace. The perception may be that it's overbuilt, but it's not true. There's still tremendous opportunity for extended stay."

Indeed, the most recent figures collected by Smith Travel Research, the Hendersonville, Tenn., firm that tracks hotel occupancies and other data on a monthly basis, indicated that while the upper and lower extended-stay segments are not reaching the 80-plus percent occupancies of mid-decade, they're still above the levels at traditional hotels.

The first seven months of 1999, the upper tier averaged 78.1 percent occupancy, slightly lower than the same period the year before. The average daily rate was $98.83, just a hair above the year before, and the room supply increased by 20.7 percent, outpacing the 18.4 percent increase in demand--but not by much.

The lower segment saw more dramatic increases in rates. Occupancy averaged 67.3 percent for the first seven months of 1999, with an average daily room rate of $47.16, up 11 percent from the year before. The room supply increased 54.2 percent, slightly outpacing the 52.6 percent increase in demand.

"The high occupancy levels will stabilize and remain at the level they are at now," predicted Rogers. But, he added, rates will continue to rise. "Prices will go up by as much as 20 percent," he said. "Guests are finding the price-value relationship is fantastic, so they'd be willing to accommodate a price increase." Basically, he suggested, the product is underpriced because of lack of precedent: "Being a new market niche, developers like myself didn't know what the right price was," Rogers said.

Rogers also predicted more consolidation would occur. Villager Lodge is looking to acquire a large mid-tiered brand, although he wouldn't name names. In September, Hilton Hotels Corp. announced the acquisition of Promus Hotel Corp. (<I>BTN</I>, Sept. 6), which will result in the blending of the nascent Hilton Residential Suites, with 10 hotels under construction, with Promus Hotel Corp.'s Homewood Suites. Earlier in the year, Homegate Suites was swallowed up by Wellesley Inns, which subsequently was renamed Wellesley Inns and Suites.

Only one executive was a bit sour about the future prospects of extended stay. "Extended stay is so overhyped and overtrumped it's pathetic," said John Leavitt, senior vice president of marketing at AmeriSuites, which caters mostly to transients. According to Leavitt, the market basically consists of training destination cities and large downtowns, and extended-stay properties have been meeting that need for years.