The extended-stay hotel segment is hot—it’s still hot. It’s been that way for some time now and even through the pandemic. According to The Highland Group, U.S. extended-stay hotels set new performance records for demand, average daily rate and revenue per available room in the third quarter of 2022.
The sector’s strong performance is evidence of why so many lodging companies are scurrying to develop new extended-stay offerings for developers to build. Extended-stay hotels generate strong cash flow due to a lower cost structure and sustain demand during tumultuous times and rosy ones, as well. Amid this promising environment, Hotel Management gathered some of the top names in extended-stay to discuss the segment. Little did we know at the time, but the roundtable was part hotel discussion and part breaking news. During the conversation, Ron Burgett, SVP of extended-stay development for Choice Hotels International, announced that the franchisor had signed an agreement with real estate investment firm ServiceStar Capital Management to develop 21 new Everhome Suites hotels, with properties planned in Colorado, Arizona, Utah, Nevada and Florida over the next few years.
After making the announcement Burgett turned to Mark DeRose, cofounder and principal of ServiceStar Capital Management, and asked his opinion on where extended-stay hotels perform the best. DeRose called these longer-term holds and ticked off population growth, wage growth, job growth, gross domestic product and housing starts as variables to examine before deciding where to build an extended-stay-type property. “You study and look at these indices and then you get to the metrics: what’s the RevPAR and where’s RevPAR challenging? And you can start to separate the green lights, yellow lights and the red lights,” DeRose said.
The extended-stay segment demonstrated a resilience during the pandemic that surprised even the most ardent optimists. It’s why many refer to extended-stay as recession proof. According to data from HotStats, year-to-date extended-stay gross operating profit per available room in the U.S. is up 32 percent versus the same period a year previous. Now, as the hotel industry rebounds and resets, investors and developers, like ServiceStar, are looking at the sector, eager to make large, legacy investments, with the expectation of hearty future returns.
“The space is going to be more crowded now and for good reason,” DeRose said. “Every investment deck has a page that lists risks—all the terrible things that can happen. Well, we just went through the terrible things and this product showed resiliency, durability—it’s like a dream come true. You’re going to get a lot of capital that’s attracted to it.”
Dan Weber, CEO of Lodging Advisory Group and former CEO of Value Place Hotels, is also seeing the extended-stay segment fill up with capital inflows, especially on the deal side. “There are more players looking for the bigger deal,” he said, adding that the more congested it’s become, the harder it is to make sense of deals. “Prior to the pandemic, you could really underwrite something. Maybe you had to get a little aggressive on your cap rate, but you were underwriting real income. You understood what you had. Now, it’s just all made up. People want you to pay up, so the acquisitions have become difficult.”
Choice’s Everhome Suites is touted as all-brand-new construction. “We’re 25 percent up year over year for new construction,” Burgett said. “When you have a product that has profit margins over 50 percent, it makes sense to continue to build.”
It just might take them a bit longer to get to the finish line. Timelines for development used to be shorter, but variables such as new competition, development of other asset classes and higher interest rates have conspired to slow the process down some. “It used to take X number of weeks to get a site plan survey done and those have increased significantly,” said Will Ballard, regional VP, real estate, extended-stay brands at Choice Hotels International. “There are other competitors looking in the hospitality space with the likes of multifamily and self-storage. It becomes challenging from a bandwidth perspective to be efficient on timelines.”
DeRose pointed out that the labor shortage in construction and planning also compounded timelines. He’s still optimistic. “There is still a timeline to build self-storage, to build multifamily, to build a mixed-use project, to build an office. You’re talking about timelines that are far greater than what we do. And I think it’s one of the reasons that it attracts capital. You can see the beginning and the end on one piece of paper and that’s very appealing.”
In the economy and midscale extended-stay segments, location matters. For this type of product, brands and developers look afield, but there are some markets that pencil out better. Typically, that is outside core, urban locations, like the ones that ServiceStar will be developing in. “Those are markets that you can generally rely on that are construction-friendly,” said Weber. “Urban can be very challenging; it’s hard enough to make an economy new-construction property work. Your construction costs might vary a little bit, but your land is going to be your primary differentiator. It comes down to ADR and occupancy to make your numbers work. That’s so important because these are not your $5-million Value Places anymore. It’s your $13 million WoodSpring or maybe more for an Everhome. So, it’s critical that you have to get rate.”
Extended-stay business is built for solid returns. As Simon Mendy, divisional president, Aimbridge Select Service, Aimbridge Hospitality, the world’s largest third-party management company, pointed out, investors and owners turn to them to produce revenue out of every crevice of a property and to beat back costs. “The margins are what makes this investment so attractive,” he said. “It is not the sexiest of products, but in terms of going to the bank, I’ll take it every day.”
It’s also a space that has historically been undermanaged, as DeRose alluded to. But what started as a pure franchise, owner/operator business has become more professionalized. Consider Aimbridge, which recently revamped its organization into separate operating divisions, one of which is select service, focused on efficiencies for short and extended stays. Aimbridge’s scale allows it to piece and string customers throughout its U.S. network. Aimbridge employs a tool called Boomerang, wherein when a customer checks out, the hotel will ask where they are heading to and can deliver that lead to another Aimbridge-managed property. “There’s the element of market presence,” Mendy further explained. “The individual operator isn’t able to touch the customer in Arizona and in New York, because they only exist in one market. We can. In that sense, we are able to transfer that customer from one of our assets to another.”
Unlike other segments, especially boutique and lifestyle, extended-stay is very much focused on continuity of product. This means for the guest experience and for the development prototype. “You want consistency,” Weber said. “You don’t want a brand to change major things on you. That is comforting when you’re putting out [big sums of] money.”
“You have to keep it simple,” said Burgett, something his colleague echoed. “The standardized experience is something that’s attractive to the guests,” Ballard said. “And going back to consistency and discipline, we try to be very methodical about the markets that we select. We look for diverse demand generators, we look for growth for migration, for business-friendly savings, for overall good market fundamentals, so that we can keep running this standardized type of program over and over
Extended-stay is also a segment that doesn’t need long to ramp up. “It gets to coverage on your debt very quickly,” DeRose said.
It’s for all these reasons that brands and developers have poured into the space. To be sure, the cat is out of the bag on extended-stay hotels. “We want to keep this space, but there’s a lot of people knocking on the door,” Burgett said. He then paraphrased Jack DeBoer, who pioneered the extended-stay market with brands like Residence Inn and Candlewood Suites. “You have to slide under the radar; don’t tell everybody. Unfortunately, we can’t do that anymore.”