Extended-stay supply/demand imbalance creates development opportunities

SonestaES_Orlando

The extended-stay segment of the U.S. hotel industry is a developer’s dream. Extended-stay hotels regularly outperform the rest of the industry in occupancy and growth in average daily rate. And for many years, demand for extended-stay accommodations has outpaced additions to supply.

The first quarter of the 2015 was especially strong for the segment, reports The Highland Group. While supply increased 4.2 percent during the period, it was also the sixth consecutive quarter in which demand grew faster than supply.

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Based on a 4.8-percent boost in demand, extended-stay occupancy increased 0.6 percentage points to 73.7 percent, the highest first-quarter occupancy since 2001. Extended-stay occupancy was more than 12.5 percentage points higher than industry-wide occupancy.

Room revenues for the nearly 375,000 rooms in the segment were $2.2 billion, up 12.5 percent over the year-earlier period. By comparison, revenues for all hotels increased 9.1 percent in the first quarter.

Average rates jumped 7.3 percent in the quarter, compared to 4.7 percent for all hotels. Based on strong rate growth and steady occupancy, revenue per available room increased 7.9 percent, nearly equal to the 8 percent increase in RevPAR for all hotels.

Price-point differences

Extended-stay performance differs by rate category. Demand increased the most in the upscale segment (6.2 percent); it was slowest in the economy tier (1.5 percent). Increases in revenues were strong in all categories, led by the midpriced tier (12.9 percent). According to The Highland Group, total extended-stay hotel room revenues are increasing by more than $1 billion a year.

While occupancy growth was muted overall, the economy segment showed the biggest jump at 1.1 percent to 78.8 percent. The economy rate class also outperformed other tiers in rate growth, up 9.2 percent, and increase in RevPAR, up 10.3 percent.

 The pipeline

The supply pipeline for extended-stay hotels has been on the rise for the past two years, says The Highland Group. The rate tier with the most rooms, upscale extended stay, saw a 6.1-percent increase in supply in the first quarter to 150,345 rooms. Midpriced segment supply grew 4.5 percent, while the economy sector saw minimal growth.

The development pipeline should be robust during the coming years. An analysis of Lodging Econometrics data covering nine extended-stay brands within six hotel companies shows 780 hotels with 83,270 rooms in the pipeline. Those rooms alone represent a 22-percent increase in total supply of extended-stay rooms.

According to Lodging Econometric forecasts, 361 extended-stay hotels with 37,399 rooms in the nine chains should open this year and next.

Residence Inn by Marriott leads the construction pipeline with 149 hotels and 19,146 rooms under development. During this year and next, 74 Residence Inns with 9,311 rooms will open. Other extended-stay brands with more than 10,000 rooms under development include Home2 Suites by Hilton (17,504 rooms), TownePlace Suites by Marriott (12,994) and Homewood Suites by Hilton (12,474).

New players

While the brand landscape in the extended-stay segment has been stable in recent years, Sonesta International Hotels was a relatively new entry with the launch of the Sonesta ES Suites brand.

First announced in 2012, Sonesta last month launched a $250-million investment program to upgrade and redesign its brand portfolio, including the ES flag. In late July, the company added nine additional properties to the group, bring the total to 25 Sonesta ES properties.

Sonesta ES started with the conversion of 15 Staybridge Suites and two Residence Inns under management by Sonesta. With the new additions to the brand, Sonesta ES is now in 18 U.S. states.

Earlier in 2015, the former Value Place brand changed its name to WoodSpring Suites. Chain executives said the switch was driven by a combination of factors, including a disconnect between the budget orientation of the name and guests’ perception of the quality of the product. While still in the economy rate tier of extended-stay, WoodSpring officials believe the new name can help drive both rate and occupancy.

The company also announced a brand extension, WoodSpring Suites Signature, an upgraded property designed to appeal to less-price-sensitive guests. Executives said the higher rates generated by this product will enable the chain to penetrate urban markets and other locations with higher rate structures.

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