US extended-stay hotels thrive in face of supply growth
Despite significant new supply, extended-stay hotel demand remains high, beating expectations of investors and analysts.
Robust demand growth in the U.S. extended-stay hotel sector continues to stave off any ill effects of new supply, despite the hefty current pipeline. Aside from current demand declines in specific, economically depressed markets, it appears the hospitality industry is still nowhere near the growth ceiling for extended-stay products, sources said.
Extended-stay hotels continue to outperform expectations, enjoying enough demand to remain ahead even as new supply weighs down occupancy numbers in some markets, sources said.
“Demand has been growing between 5% and 7% a quarter for basically two years,” said Mark Skinner, partner with The Highland Group, a hotel investment advisory firm. “Although we’re having strong increases in supply, demand is close to catching up. Occupancies this year were projected to show a slight decline, but based on the first quarter, they’re not—although there is a record number of rooms under construction: more than 40,000.”
Data from STR, parent company of Hotel News Now, shows U.S. extended-stay supply was up 6.2% year-to-date as of April 2017, compared with the same period in 2016, while demand in the sector was up 6.3%.
Skinner noted that supply growth has been concentrated in some markets. “Out of the 100 largest markets around the country, probably 35% or 40% reported no extended-stay rooms under construction at the end of 2016,” he said.
“Some of the under-served markets, especially for economy extended-stay product, have very high barriers to entry,” he said. “If you can get (it) open, you’ll do very well, but you won’t be opening it in the 1.5 years of you conceiving to do it. The entire process is slow, and so developers are prone to go to areas with lower barriers to entry.”
Extended-Stay new builds and conversions
When they do build, most developers are selecting upscale extended-stay brands for their new construction projects. Sources said popular upscale and midscale brands like Residence Inn, Staybridge Suites, TownePlace Suites and Home2 Suites are common flags among projects in the active pipeline, for several reasons.
“The majority of extended-stay rooms in the U.S. total pipeline are in upscale and upper midscale—two-thirds of all rooms are in those segments,” said Jan Freitag, SVP of lodging insights for STR. “That’s where the action is for a lot of the developers. The reason for that is they’re fairly easily built, banks will give construction loans on those hotels, and the price point is very healthy. That’s what I would project going forward: That we’ll see more of this coming together along the upscale and upper midscale price point between supply and demand.”
Currently, many of the properties in the extended-stay economy pipeline are conversions—either converted from standard hotels, or from aging upper-tier extended-stay hotels to a lower-priced tier to avoid renovations that are necessary to meet the latest brand standards. Demand for this type of development also is strong.
“There may be a midpriced hotel that has a good position, with a lot of contract business in the area—whether it’s construction, training, etc.—and that hotel is retrofitted with the kitchen facilities and the necessary amenities to make it extended-stay, and they’ve been very successful,” said Douglas Collins, president of Atlanta-based hotel brokerage firm DC Hospitality. “It’s a very hot product. There’s a lot more money out there chasing that product than there are sellers.”