Strong demand pushes extended-stay development

HomewoodSuites_Akron_Fairlawncrop

Developers are rushing to build extended-stay hotels. According to The Highland Group, the rate of increase in supply of extended-stay properties in the United States has accelerated for six consecutive quarters. And the number of new extended-stay rooms opening annually has doubled in the past year.

Strong performance by properties in the segment is fueling the development frenzy. Year to date through September, extended-stay occupancy was 78 percent, the highest number in at least 15 years. This is despite the biggest increase in the number of new rooms in six years.

Demand continues to be strong, up 5.8 percent in the third quarter and 5.4 percent year to date through September. The upscale segment leads with an 8.6-percent rise in roomnights sold through September.

Despite the boom in new development, extended-stay operators have been able to push rates. Through September, average rates were up 7.9 percent for the segment, with the economy (up 8.2 percent) and midprice (up 8.3 percent) subsets leading the segment. Strong occupancies and high rates have resulted in significant gains in revenue per available room: up 7.6 percent in September and 8 percent through three quarters.

Pipeline fever

In the 12 months ending Sept. 30, 21,762 new extended-stay rooms opened, bringing the total supply to 387,168 rooms. The 12-month increase was more than double the number of rooms added during the previous 12 months.

The upscale segment leads in new extended-stay development. Through the third quarter of 2015, the number of rooms in the upscale tier of extended stay rose 7.7 percent. For the midprice tier, room supply was up 4.3 percent, while the number of economy extended-stay rooms increased 2.4 percent.

Most of the development in the extended-stay arena is branded properties. According to Lodging Econometrics, the 19 largest extended-stay brands have 926 properties and 98,411 rooms in their construction pipelines.

The branded pipeline represents 29 percent of existing branded extended-stay rooms in the U.S. Much of the branded pipeline is in the active phase, with 30,335 rooms under construction and construction scheduled to start within 12 months on another 47,953 rooms.

More than 350 branded extended-stay hotels will open this year and next. Nearly 300 properties will open in 2017 and 400 in 2018 and beyond.

Two brand companies—Hilton Hotels Corp. and Marriott International—dominate the branded extended-stay pipeline. The two companies, each with two extended-stay brands, account for 71 percent of branded rooms under development in the segment.

Home2 Suites by Hilton is the brand with the most hotels (224) and rooms (23,126) under development. The midpriced chain has shown rapid growth since its launch in 2011. In the first three quarters of the year, 23 Home2 Suites properties opened, including the brand’s 50th. In addition, the chain signed 117 new development deals.

A key opening

Urban centers are a prime target for developers of extended-stay hotels. Homewood Suites, Hilton’s other extended-stay brand, last year introduced a new prototype that provides more flexibility for building in metropolitan areas. Homewood and Home2 have 23 hotels in urban locations, with 15 more properties slated to open by the end of 2016.

A recent milestone urban center opening was a Residence Inn by Marriott in downtown Chicago. The 381-room property, the 700th hotel in the chain, is the largest Residence Inn in the system.

The developer, the Prime Group, created the hotel as an adaptive reuse of a 100-year-old historic office building. Cost of the project was $136 million. The hotel has 6,700 square feet of meeting space, and a full-service restaurant will open in the property next year.

Residence Inn is targeting other urban locations for expansion. The chain has two other properties in downtown Chicago, as well as ones in midtown Manhattan, downtown Los Angeles and downtown Philadelphia. About 40 percent of Residence Inn projects in the pipeline are in city-center locations.

The Homewood Suites by Hilton brand is one of the fastest-growing extended-stay chains. Pictured here is the Homewood Suites in the Fairlawn area of Akron, Ohio.

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