Despite the shaky economy of the past few years, the extended-stay segment has managed to perform well. According to data from the Highland Group, extended-stay revenue per available room (RevPAR) increased 7 percent and rose to a nominal high of $58.80 in 2012, and rooms under construction doubled over the previous year. The outlook continues to look promising for the segment, with supply growth expected to be around 3 percent in 2013, making the extended-stay model a viable business opportunity for hotel investors.
“Extended stay has been a very good segment,” says Tom Seddon, chief marketing officer for Extended Stay America. “I think that the business has been resilient during downturns. Profit margins tend to be higher than good, old-fashioned hotels.”
As an owner and operator of more than 700 extended-stay hotels, Extended Stay America (ESA) understands the benefits and challenges of capturing long-term guests. The company recently instituted major changes, beginning with the appointment of former Starbucks CEO Jim Donald as the company’s chief executive officer. With Donald at the helm, the company consolidated its multiple brands under the ESA umbrella to achieve better recognition in the marketplace. To keep up with customer demands, the company also spent $420 million to improve its properties through renovations. Seddon says the changes are meant to increase the company’s visibility and attract more customers to its hotels.
“I think it’s very easy for people in the extended-stay segment to think that the rest of the world understands what we do,” Seddon says. “But a lot of people still don’t know it very well. There’s a big opportunity to keep educating customers.”
Seddon explains that hotel owners looking to enter the extended-stay arena should pay close attention to the differences in operations between an extended-stay property and a traditional hotel. For instance, extended-stay hotels often require a smaller staff. Many of these hotels do not keep the front desk open 24 hours and also don’t require daily housekeeping services. This creates operational efficiencies but doesn’t provide a safety blanket of having extra hands on deck in times of need. Seddon also says a lot of business that comes through an extended-stay hotel is driven by sales instead of centralized systems, and managers need to hit the ground running to drum up business and increase bookings.
“You have to be comfortable with realizing that the model is quite sales driven,” he says. “A lot of extended-stay business is specified very locally. You need to be ready, willing, and able to run your hotel that way.”
Extended-stay hotels are present in all of the largest markets in the United States, but recently there has been more interest from developers looking to incorporate the segment into center-city locations. The extended-stay segment is also booming in areas outside of oil and natural gas drilling sites. Properties with extended-stay rooms are filling the needs of workers who are flocking to states like North Dakota, Texas, and Pennsylvania to work at the drilling sites and who need long-term lodging. Those markets are attractive areas for extended-stay development, but Seddon warns hotel investors to do their due diligence before jumping into the mix.
“If you’re going to buy and hold something, you’ve got to be confident in the next 10 years not the next two years,” he says. “Hotel investors should think harder about supply growth and look at both sides. If too many people all pile in, even if demand is strong, too much supply is going to make everyone unhappy.”