Extended-Stay Consistently Outperforming Other Tiers

As the U.S. lodging industry continues to post healthy results, it is worth examining some niche products and their performance. Many extended-stay chains are now offering their guestsrooms with a full kitchen and, often, silverware and dishware that allow them to make the room truly a home away from home. Oftentimes, consultants or contractors on long-term assignments prefer this type of property because it is geared to a long-term guest’s specific needs. Beyond a full kitchen, other services, such as housekeeping and laundry, are modified to accommodate guests who do not want or need daily housekeeping services.

Because extended-stay chains operate at various price points, STR breaks the extended-stay universe into two distinct groups: upper and lower. In 2015, the upper extended-stay average daily rate (ADR) was $137.30. The lower extended-stay ADR for the same year was $63.50. Given these ADRs, it is probably fair to assume that upper-end extended-stay properties compete more with upscale and upper-upscale properties and that lower-end, extended-stay hotels compete more with midscale and economy properties.
Interestingly, the occupancy for both classes of extended-stay chains has been consistently outperforming other U.S. market tiers; in 2015 the upper chains achieved 71.2 percent occupancy and the lower chains achieved 74.1 percent. It is also worth noting that the lower-end chains have been reporting occupancy of over 70 percent since 2010, a time when many properties across the United States were still struggling with the aftermath of the Great Recession.

High occupancies and ADRs have not gone unnoticed by the developer community. Supply growth ending in February 2016 was 7.4 percent on an annualized level, which is roughly six-times higher than the national average. Obviously these new rooms need to be absorbed, but so far occupancies do not seem to indicate a supply problem. Looking to the recent past, there has been some turbulence in this area, however. During the Great Recession, when most developers stopped pursuing new deals, the annualized supply growth for upper-end, extended-stay chains in December of 2009 was 10.1 percent, and for lower extended-stay chains it was 8.6 percent. These numbers are noteworthy in their magnitude, but also in how quickly they fell in the following years. Developer financing dried up and the result was a supply percent change in 2012 of only 1.8 percent for upper and only 1 percent for lower extended-stay brands. It will be worth watching if the current rapid addition of new rooms will play out similarly in this part of the cycle.

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High occupancies and limited new supply have allowed operators of lower extended-stay properties to increase their room rates meaningfully over the last few years. ADR percent change has been over 6 percent in the last four years, which is higher than the national average. For higher-end hotels, ADR growth peaked in 2015 at 5 percent after the Great Recession. This is much lower than the 2006 ADR change of 9.1 percent.

Looking ahead, we would expect more pricing power in the lower end extended-stay chains as occupancies should remain high. But the new supply of upper end extended-stay properties could have negative implications for results in the near future.

About the Author
Jan Freitag is senior vice president of STR.

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