Why JLL expects more extended-stay, select-service investment

According to a new report from JLL, investment volume in select-service and extended-stay hotels in the U.S. in 2022 increased 5.5 percent year over year, with liquidity approaching $20.5 billion. They accounted for 51.1 percent of total U.S. hotel investment volume in 2022, an increase of 210 basis points from 2021 and the highest portion in U.S. history. 

With nearly $7 billion in securitized select-service hotel debt slated to mature over the next 16 months and rising interest rates not expected to subside, JLL expects that well-capitalized buyers will be able to acquire quality select-service and extended-stay assets in 2023. 

Zach Demuth, JLL’s global head of hotels research, said that hotels—particularly those in the select-service sector—generate a higher yield than any other real estate sector and can continue generating revenue despite inflation. “Hotels have the unique ability to change their rates daily, which other sectors don't,” he said. 

The report highlighted four key takeaways about the two segments:

1. Record-breaking investment shows no signs of slowing, driven by a growing demand base and higher profitability

The record level of investment volume in the combined select-service and extended-stay sector was underpinned by a quicker recovery in revenue per available room relative to the overall U.S. lodging industry. Through November, RevPAR for the sector was up 9.5 percent to 2019, 1.9 percentage points better than the U.S. overall. Investment volume for the sector reached a record-breaking $20.4 million during the year. 

“Select-service liquidity has increased each of the last two years,” Demuth said, noting that the record-breaking investment volume is not surprising given performance metrics. 

2. Top liquid markets show strong appeal for select-service and extended-stay hotel investment fed by evolving traveler trends

While a full 70 percent of select-service and extended-stay investment volume traditionally has been concentrated in urban and suburban markets, these markets accounted for only 57.8 percent of total volume in 2022. Regional and small-town markets made up the difference. 

“We see a lot more select-service growth in resort and remote destinations than ever before,” Demuth said. “Historically, it's been very heavily driven by city and urban markets.” He theorized that travelers are increasingly focused on experiencing more of a destination rather than remaining at a resort. “The hotel is kind of just a conduit to that.” 

Demuth also sees potential in secondary and tertiary markets that historically have not gotten much attention but became popular for that very reason during the pandemic. With travel rebounding and work-from-anywhere growing in popularity, Demuth said people can consider select-service or extended-stay hotels as a “home away from home” in a growing range of markets. 

Still, some urban hubs did see an uptick in investment, with a “boom in liquidity” reported for Los Angeles, Phoenix and California’s Orange County. These markets, the report noted, historically have had little select-service and extended-stay investment activity, and can be a good option for investors looking to diversify their portfolios and mitigate risk. The report also suggested that owners could buy select-service and extended-stay assets at a relative discount in cities like New York City and Washington, D.C., that are still recovering from the downturn. “Since select-service hotels traditionally have smaller footprints, they are frequently less expensive to build in these markets,” Demuth said. 

3. Select-service and extended-stay hotels represent a defensive and attractive sector with yields surpassing all other property sectors and lower levels of volatility

Since 2007, select-service and extended-stay hotels have achieved an average yield of 8.4 percent, 180 basis points higher than the industrial, retail and office sectors. The combined sector also has been resilient during other downturns, with lesser RevPAR declines and “generally” quicker recoveries relative to the overall U.S. hotel industry. 

This can be credited both to lower costs to build—thanks to smaller footprints and fewer fixtures, furniture and equipment required to meet brand standards than for upscale and luxury hotels—and to surging average daily rates. “Across the industry, we’ve seen average rates in many markets skyrocket,” Demuth said. “I do think, in many instances, select-service hotels will still see some rate growth. I think demand hasn't peaked for many of those markets and many of those types of hotels—obviously, indicated by the continued development.” 

4. Strong extended-stay hotel performance attracts increased levels of investment and expansions

As of November, extended-stay hotels are the only U.S. hotel subsector that has exceeded 2019 demand levels in addition to reaching a full RevPAR recovery. This has spurred investment in the sector, with Blackstone Real Estate Partners and Starwood Capital Group acquiring Extended Stay America in 2021 for $6 billion. According to JLL, there has been more investment volume into extended-stay hotels over the past two years (2021-22) than in the previous six years (2015-20) combined.

The segment now represents 9.6 percent of total U.S. hotel supply—an increase of 3.1 percentage points relative to 2012—and 24 percent of the total U.S. pipeline with 38,000 guestrooms under construction. 

Going forward, Demuth expects to see an uptick in premium extended-stay hotels to capture the “premium alternative accommodation” market. “We haven't seen a huge amount of growth there,” he said, “but I think that that's a segment to really keep an eye on.”