“Supply has grown consecutively for the last five quarters,” said Mark Skinner, principal at The Highland Group. “Supply growth in the second quarter alone was 5.5 percent, which is the fastest it’s been since mid-2010. However, during the previous supply bubble supply was growing at between 6 and 9 percent. In 2009, the slowest growth quarter was 8 percent, so it will be awhile before it gets to that level.”
Lodging Econometrics reports that 892 extended-stay hotels with 95,638 rooms are in the construction pipeline. If all those hotels open, the segment will see a 29-percent increase in supply. More than 76,000 rooms are either under construction now or will go under construction in the next 12 months. In 2015, 179 properties with 19,124 rooms are scheduled to open.
Performance continues to be strong
The strong development pipeline hasn’t negatively affected performance of the segment. In fact, by any measure—demand, revenues, occupancy, rates or revenue per available room—extended-stay hotels are outperforming most other segments of the United States hotel industry.
Demand grew 5.5 percent during the second quarter, the highest amount in five years, and revenues were up 14.4 percent, the biggest increase since 2006. Second-quarter occupancy for the segment was nearly 80 percent, led by the upscale tier with an 83-percent occupancy. Extended-stay occupancy for the first half of the year was 76.8 percent, compared to 65.2 percent for the overall U.S. hotel industry. Both average rate and RevPAR increased 8.4 percent in the quarter.
Skinner believes the increases in performance metrics will begin to flatten next year.
“In the latter half of 2016, we might see the upscale and midpriced tiers showing negative changes in RevPAR on a quarter-over-quarter basis,” he said. “When it comes to the economy sector, there will be a lag effect in which we will continue to see positive RevPAR growth beyond when it starts to contract in upscale and midprice, for several reasons. Mainly, the supply bubble has been much slower to inflate in the economy segment.”
Hilton Worldwide and Marriott International brands dominate the extended-stay development pipeline. The Home2 Suites by Hilton brand has the largest pipeline with 210 properties and 21,582 rooms under development. Nearly three-fourths of those properties won’t open until 2017 and later. Sister brand Homewood Suites by Hilton has 113 hotels with 13,069 rooms under development.
There are 155 Residence Inn by Marriott projects with 19,623 rooms in the pipeline. TownePlace Suites, Marriott’s midpriced extended-stay chain, has 136 properties and 13,621 rooms under development.
Much of the extended-stay development stream is back-loaded with most of the openings scheduled for 2017 or beyond. According to Lodging Econometrics data, about 200 properties with 21,000 rooms will open next year, representing a nearly 6-percent jump in supply. About 30,000 rooms, or 8 percent of current supply, should come online in 2017. The remainder of the pipeline, or about 35,000 rooms, will open in 2018 or beyond.
Skinner said despite the strong pipeline, there are plenty of development opportunities for extended-stay hotels.
“The high-barrier-to-entry markets are still by and large undersupplied with extended-stay product, especially economy product,” he said. “There are plenty of opportunities in those markets and in urban centers. They’re not the easiest places to develop, but there is lots of opportunity. Also, within the Sunbelt states, a lot of the extended-stay product across all price segments is old, so you have replacement opportunities.”