Long-Stay Growth Boosts Corp. Buyer Opportunity

<B> Long-Stay Growth Boosts Corp. Buyer Opportunity</B>

By David Jonas

The proliferation of extended stay brands and the increasing distribution of properties throughout the United States is stimulating buyer demand in a hotel segment still in its infancy.

Interest in extended stays has mushroomed over the past few years, resulting in rapid expansion. The upscale segment is seeing particular growth. Property inventory is expected to nearly double within the next few years, led by the three major players--Residence Inn by Marriott, Hawthorn Suites by US Franchise Systems and Promus' Homewood Suites.

Overall, extended stays are in a period of substantial growth across all price points as new and existing chains arrive in countless markets. According to Richard Conti, a principal in Coopers & Lybrand's Hospitality Consulting Group, there are about 700 extended stay hotels, with room for an additional 1,300 properties. "The base is so low that even if you double growth the market can absorb it," he said.

Bob Brunner, manager of corporate travel and executive services for Philips Electronics-North America, is finding that more choices mean more opportunities. "The increase in extended stay hotels makes it easier to get better rates, assuming you can shift volume," he said.

Philips uses extended stay products primarily for relocation, although the corporation is starting to see other benefits of the market segment. Brunner said he is examining 30-plus night situations where one traveler will use an extended stay suite for a week or two and then another traveler will come in. "That gives us two advantages. One is avoiding hotel taxes, since more than 30 days constitutes leasing, and the other is getting the best rate in the tiered structure."

As buyers realize these and other potential cost savings, the demand for extended stay properties continues to outpace current supply. With occupancies hovering between 80 and 85 percent, the major players have plenty of reason to stretch their reach.

Residence Inn, the pioneering brand in the upscale extended stay marketplace, has 260 properties in operation with at least 120 more in the development pipeline. "Although we are already in most primary markets, we are continuing our aggressive strategy in downtown urban centers," said Tim Sheldon, vice president for TownePlace and Residence Inn brands. "Now we are looking into secondary markets to expand our overall distribution."

Hawthorn Suites also is pushing out from downtown areas and into suburbia with Hawthorn Suites Ltd., its toned-down, more limited service spin off. Homewood Suites, meanwhile, expects to add 25 new sites annually.

It is not only relocation, training and special projects that fill the growing number of extended stay rooms. An increasing number of transient business travelers are looking to the products as an alternative to traditional hotels. Some brands report transients as one-third of their guests. Robert Mandelbaum, director of research with New York-based PKF International Consulting, pointed out that any hotel room, of any type, is often difficult to find in many markets. "There is an unavailability of rooms in several cities and people are grabbing whatever they can," he said.

However, availability is not necessarily the main cause of extended stay popularity for shorter stays. The rooms, more spacious and full of comforts than their traditional counterparts, are often comparable in price, and years newer.

Conti expects the positive growth to continue because "enhanced amenity packages at all price points effectively compete with existing hotels."

John Leven, Hawthorn vice president for franchise sales, said, "People find a greater value in the extended stay product, even for two or three nights, if they don't need a restaurant or meeting space."

Hoteliers and industry insiders, however, agree that increased education is needed to inform buyers of the extended stay product. Although the Extended Stay America name has brought some awareness to the segment, there is still confusion as to what the concept means. "Quite simply, extended stay brands need to reach out to businesses and explain their facilities," Mandelbaum said.

Residence Inn is one chain pushing direct sales to buyers via educational initiatives. "As a result of the misunderstanding and lack of knowledge as to what extended stay is and what it offers, we are now running educational programs for travel agents and inviting potential buyers to see the product for themselves," said Geary Campbell, director of national public relations for Marriott Lodging.

Some companies, however, already recognize extended stay as a blossoming segment and have set up specialized units within their corporate travel departments. Plano, Tex.-based EDS, for example, operates an extended stay desk that handles corporate travel for those needing more than just a night or two on the road. EDS corporate travel manager Jack Witherspoon said the desk places travelers in a growing number of available properties according to personal and professional needs. "The extended stay locations are popping up all over the place and our database of vendors and choices available to our travelers is expanding daily," he said.

The growing popularity of extended stay is leading to corporate negotiations as companies are starting to choose preferred vendors and chains recognize preferred buyers. Although the market's namesake, Extended Stay America, does not negotiate volume rates, most of the upper-end brands embrace corporate contracts. However, almost all those agreements are forged on a market by market basis and use "backyard marketing" to focus their direct regional sales. "Most brands do not carry all that much weight in consumer recognition and have to concentrate on individual properties," Conti said.

However, as the chains multiply their properties and become more visible on a national scale, it is anticipated they will begin offering national deals. "You will see extended stay brands negotiating corporate accounts on a national basis relative to market and segment rates," Conti said.

Yet, many hoteliers maintain they will stick with localized deals only. David Redfern, director of sales and marketing for the midscale Candlewood Suites, said, "We make a contract with one company for one or two properties and give a preferred rate on those local sales."

Residence Inn and TownePlace Suites also have yet to go national in corporate deals. "Our idea is to price in a way designed to meet the needs of a traveler in a particular market," Sheldon said. Volume rates for both brands are determined on a hotel by hotel basis.

The same is true of both Homewood and Hawthorn. Leven does not see Hawthorn moving towards national pricing anytime soon because "the cost of doing business varies so much that even the most preferred accounts receive rates determined by the individual markets."

The three upper-end players, however, all offer discounts to their most valuable buyers. John Holthouser, Homewood Suites senior director of brand marketing, said that if an account "proves it can generate a good deal of business, we will extend as much as a 10 percent discount off that market's rate."

Witherspoon said EDS can benefit from its own corporate apartment program when striking a deal with an extended stay brand. With apartment locations near its Plano headquarters and in Detroit, the corporation has leverage against hotels in those markets (<I>BTN</I>, Jan. 27, 1997). "If we offer the same type of product at a lower rate, then their property will not be as attractive as our own," he said.

"Although demand is high," Mandelbaum said, "there are not as many extended stay demand generators as there are for traditional hotels. As a result, this is one market segment where the buyer has clout."

Furthermore, new brands are giving buyers options. EDS, for example, is in the process of negotiating a contract for year-round rooms at some extended stay properties. "Although Marriott is dominant in the arena, new companies are starting to generate distribution and Residence Inn is no longer the only game in town," Witherspoon said.

With occupancies far above all other hotel segments and major players following aggressive growth plans, new extended stay properties will continue to appear in the hotel landscape. However, it appears likely that further consolidation will occur as the larger brands leverage experience and resources from their parent companies and garner national recognition.

"There is a lot of product going up, but the demand side isn't quite defined," Conti said. "We may see a short overbuilding period followed by a weeding out process."

Still, the popularity of the product will continue to grow from both the buyer and traveler perspectives. "We are starting to pay much more attention to where our transferees are staying," Brunner said. "As extended stay develops along similar lines to the rest of the hotel industry, we will see a better negotiating situation for both the corporation and the larger chains.