Long-Term Lodging Benefits From Cost-Cutting Cos.
<B>Long-Term Lodging Benefits From Cost-Cutting Cos.</B>
By Bruce Serlen
As the softening national economy continues to negatively impact hotel occupancy rates, travel managers increasingly are directing travelers to less expensive, less amenity-laden lodging alternatives, positively impacting the extended stay sector.
Typically, extended stay properties offer travelers staying five nights or longer accommodations that are high in residential touches, but low on such pricey amenities as room service or gourmet restaurants.
The classic extended stay model calls for the nightly rate to decrease the longer the stay. In terms of length of stay, travelers have been known to call an extended stay property home for a year or longer, even though the five-night minimum is the commonly accepted industry definition. Now, travel managers are directing more transient travelers to these properties, because, even at a nightly rate, they tend to be a cost-effective option to full-service properties.
In the midst of 2001's disappointing performance to date--hotel occupancies across all lodging sectors in 21 of the top 25 U.S. markets declined in April, compared with April 2000, according to Smith Travel Research--there was promising news for extended stay operators. In April, for example, the drop in occupancy in the midscale without food and beverage sector nationwide over the prior year significantly was lower (2.3 percent) than the decline reported in the upper upscale category (8.3 percent). At about $500 per week for even an upscale extended stay room, these properties are comparable to the midprice segment in rates.
As a result of the substantially lower drops in demand, the softening economy should have only a "minor impact" on the overall health of the extended stay market in 2001, according to Mark Skinner, a partner in The Highland Group, an Atlanta-based consulting firm that specializes in this lodging industry segment.
"The U.S. supply of extended stay hotels is projected to increase by 9 percent in 2001," Skinner said. "Extended stay hotels surpassed 5 percent of total U.S. hotel room supply in 2000--up from 3 percent in 1997--and strong performance continues. In fact, the segment's share of total room supply has risen an astonishing 360 percent since 1995."
According to Skinner, extended stay hotels now are part of the lodging supply in most major and many smaller markets, though many areas of the country remain under-served and present opportunities for further development.
Based on historical increases in the rate of demand growth, however, the increase in supply isn't a concern because overall occupancy is expected to increase in 2001 as well. "As we predicted, dire forecasts of overbuilding have not occurred and average occupancy increased to more than 77 percent in 2000," Skinner said. This compares with 74.9 percent in 1999 and 74.4 percent in 1998.
The statistics for 2000 depict a sector rapidly absorbing new rooms. "Our statistics indicate that new extended stay construction will continue at a faster pace than the hotel industry overall," Skinner said. Sharing this fundamental optimism, extended stay operators said they were devoting their energies in 2001 to fine-tuning the product, seeking to cater more closely to the needs of the business traveler on long-term assignment. In terms of development, they said they generally were moving forward with the aggressive plans created before the current economic uncertainty began.
"The economy may be slowing down, but extended stay hotels succeed best when they deliver a high-quality product at a low price," said Mike Wilson, vice president of marketing for ExtendedStay America, which opened its 400th property in March. "If a company has many people on the road for long periods, extended stay chains simply become a better deal."
Even though supply is growing, Wilson confirmed demand is growing faster. "It's as much as a two-to-one ratio. The supply just isn't catching up with the demand," he said. "Because some extended stay chains are relatively new, travel buyers, in many cases, are still getting used to the concept."
Accordingly, trial usage is up. "You get much more trial during times like these," said David Redfern, vice president of sales and marketing for Candlewood Suites. "So, when the economy stumbles a bit, it's an opportunity for extended stay properties to attract new users."
Inevitably, along with the uncertain economy comes greater cost-consciousness. "The economy had been so strong, travel dollars may not have been monitored as closely as they will be in the next few years," said Jack McHugh, vice president of sales and marketing for Prime Hospitality, which owns the Wellesley Inns & Suites brand. "The opportunities that travel managers have now with extended stay is to be able to better control their dollars, while offering a product of comparable quality."
Extended stay chains also benefit as their accounts' travel needs change. "In down economic times, many corporations reorganize as they try to operate more efficiently," said Thom Hall, vice president of emerging brands at Choice Hotels International, which includes the MainStay Suites extended stay brand. "The number of relocations can rise as can the amount of training programs, both of which lead to extended stay business."
Because travelers' stays tend to be longer, extended stay properties are designed to be roomier and more residential than purely transient business hotels. At the same time, there's less staffing. At MainStay Suites, for example, there's always a staff person on duty, but the front office closes at 11 p.m. "Yet, travelers don't tend to mind," Hall said. "Because many are with us longer, they say it gives them more of a sense of ownership, of being more in control."
For extended stay brands that are part of larger hotel companies that have multiple brands at multiple price points, the trend toward trading down can be problematic. When a client scales back on its use of the full-service brand in favor of directing more room nights to the extended stay option in the portfolio, the hotel company inevitably loses revenue. But at least it retains market share in that destination. The all-important relationship between client and hotel company, meanwhile, remains in place, with the hope that "trading up" will occur when the economy strengthens.
"Demand for our extended stay brands has continued to grow, despite the softening economy," said Tim Sheldon, senior vice president for extended stay lodging at Marriott International. "People are still doing business. The number of people on long-term assignment seems to be on the rise with many on contracts that can last from six to nine months." Marriott's brands in this category are Residence Inn and the more moderately priced TownePlace Suites.
At TownePlace Suites, new guest room prototypes are scheduled to be introduced in the third quarter of this year that still will be more residential in look and comfort than the existing room product. "We're really pushing the envelope to get the hotel experience to be as close as possible to a home experience," Sheldon said.
Rather than abandoning the old design approach, Sheldon described the new look as an enhancement. In fact, the updated look will be incorporated in properties coming on line, while it will be phased into existing properties gradually. Key sticking points designing extended stay guest rooms right now affect entertainment and technology. "How you deliver technology to the room, in particular, is a challenge. High-speed Internet access notwithstanding, how do you deliver technology in a way the guest is most comfortable with?" he said.
A more established brand than TownePlace Suites, Residence Inn has a number of properties in the system that are 11 to 12 years old. Many of these are being targeted for a renovation that will focus on the brand's signature gatehouse: the self-contained lobby-breakfast room public space. Exercise and laundry areas also are included. "We've added more pockets to improve functionality, so guests can be more productive while they're with us," Sheldon said.
As with the two extended stay Marriott brands, executives from Homewood Suites by Hilton said they've benefited from the affiliation with a multi-brand parent, despite the state of the economy. "The Hilton sub-branding has done a lot to build confidence and trust in the brand," said Jim Holthauser, senior vice president for Homewood Suites.
Travel managers with national account status at a multi-brand company can negotiate for their extended stay needs as part of the same negotiation for their regular transient room nights. In addition to the convenience, buyers can use the extra nights that the extended stay component adds to their program, especially in key cities, to increase their overall negotiating leverage.
In these days of cost consciousness, extended stay operators also argue that, in addition to rates, travelers staying at their properties incur fewer extra expenses than they do at other types of lodging. In fact, extended stay operators this year have broadened what they see as the competition to include transient midprice hotels as they seek to separate themselves from the pack in the travel buyer's mind. "The policy here is no surprises, meaning there are no extra charges, even for things like laundry and high-speed Internet access," Candlewood's Redfern said.
Likewise, free continental breakfast has become a standard at many midprice transient hotels including extended stay. But considering their rate structure and long-term residential nature, extended stay properties place more emphasis on their breakfasts than do other lodging categories. "Hot items on the breakfast buffet are a given here and not an option as at other brands," Homewood Suites' Holthauser said. Complimentary, 24-hour-a-day coffee is another brand standard at Homewood Suites.
At Residence Inn, breakfast buffet items are custom-tailored to the local area, so grits, for example, are on the menu at locations in the South.
With demand strong and potential owners often successful in obtaining the necessary financing because of these projects' relatively modest development costs, extended stay chains said they were moving forward aggressively with new projects for the remainder of the year and into 2002.
While the rate of U.S. supply growth has slowed in recent months, projects that already have been given the green light have tended to be smaller. Construction financing for large developments, by contrast, can be difficult to come by in today's environment. "In many instances, developers can do the smaller projects out of their own cash," said Daniel Lesser, senior director of the hospitality industry group at Cushman & Wakefield Inc., a real estate services firm. Extended stay projects would qualify in this category. "Our goal remained to become a national, rather than regional, brand," said Steve Hymans, Hawthorn Suites vice president of brand marketing. "This has meant getting into markets that increased brand awareness and built operating power." Hawthorn Suites opened its 100th property early in 2001 and expects an additional 40 to come on line before year-end.
ExtendedStay America celebrated a growth milestone of its own this year, when it opened its 400th property, a 101-room ExtendedStay America Efficiency Studios in San Jose, Calif. "While we want to be a national brand and have that distribution, we're also infilling, adding supply in markets where we already have a presence, but feel there are additional opportunities," Wilson said.
Multiple properties in a particular market bring valuable visibility, not only for the brand, but for the extended stay category. "The name recognition can only be an asset," said Redfern of Candlewood, which, for example, now has three properties in Orange County, Calif., and a fourth under construction at the county airport.
Like other midprice lodging sectors, extended stay brands, which once were almost exclusively found in suburban or highway locations, continued to make their presence known in more downtown areas in 2001. Though as ExtendedStay America's Wilson pointed out, city locations generally still tend to have higher barriers to entry than suburban sites. Consequently, these projects tend to take longer to get through permitting and construction.
In light of each of these sites' special characteristics, downtown extended stay properties tend to be one of a kind. As an example, Wilson cited a new ExtendedStay America property in Bellevue, Wash. At seven stories, the property is considerably more vertical than its suburban counterpart. "Considering that they're one of a kind, they don't tend to be replicable anywhere else," he said.
Candlewood Suites has had a similar experience with its new property in Jersey City, N.J., across the Hudson River from Manhattan, which opened in late April. "What we think of as the Candlewood culture has been working here, but it has taken more of an education for our guests than it would at a typical Candlewood Suites in the suburbs," said Denise Troche, director of sales for the eight-story property. "Many of our guests weren't familiar with the extended stay concept. The closest referent they had was corporate housing, because we resemble a high-rise apartment house. But once they get a sense of the mix of residential atmosphere and extended stay services, they adjust right away."
The average length of stay at the property has been 15 days, with one guest committed to staying five months. More than 28 percent of guests in these first few months of operation already have returned. "A number of our guests are on long-term assignment at financial services firms in the Wall Street area who go home on weekends," Troche said. "We're working with them to see if their budgets won't allow for them to stay here on a monthly, rather than weekly, basis. That way, they can choose their room and leave their belongings there when they go home Friday night. It's so much more convenient for them. By working with them this way, we can come up with a cost-effective solution.