NEW YORK—Extended-stay hotels continue to be one of the top- performing segments in the lodging industry, particularly as it relates to traditional occupancy, ADR and RevPAR measures. As such, Hotel Business canvassed a number of owners and operators of extended-stay hotels, in addition to other properties, to get a feel for how the segment is faring from their perspective. Participating in the question and answer session was Ethan Kramer, president, Paramount Hotel Group; Mitul Patel, COO, Peachtree Hotel Group; Dennis Craven, chief financial officer, Chatham Lodging Trust; and John Pharr, president, Strand Development Company.
How has the extended-stay portion of your portfolio performed versus the rest of portfolio in recent months?
EK: Much better, but from our perspective, it may be market-specific, as the Pharmaceuticals have increased training demand.
MP: The extended-stay portion of our portfolio continues to outperform the rest of our portfolio from an occupancy standpoint, and is within their brand averages from a rate standpoint. We are seeing overall increases in both categories for 2013 thus far.
JP: Extended stay has tended to outperform many of our other hotels in 2013, and 2012 was very good year for extended-stay also.
The segment seems to have outperformed many other segments throughout the downturn and into the recovery. To what do you attribute its performance?
EK: Extended-stay has always outperformed transient hotels. The fact that extended-stay has outperformed other segments throughout the downturn and the recovery is simply a continuation of that trend.
MP: We attribute this to the amount of supply in this segment coupled with the demand base that it attracts. There are a limited amount of major, well-recognized brands in the upper-tier and lower-tier extended-stay category when compared to the vast and varied amount of general, midscale hotels to choose from.
JP: Our properties are mid-level and economy products. These properties have done well because they offer significant value over the traditional midscale hotels. Some of the economy versions actually have increased in “permanent” residents as the economy has deteriorated and more people have become renters. Some Social Security recipients find these properties within their budget.
DC: Bottom line is that this segment appeals to all customers and the segment provides owner/operators with flexibility to manage revenue based on the demands within the market and current economic conditions. Extended-stay occupancy is critical to the success of this segment, and owners can step up their extended-stay occupancy in downturns at lower rates and maintain revenue dollars. In upcycles, you trade out less extended-stay occupancy for higher-rated guests.
Have you gotten more traction on rates at your extended-stay properties versus other properties in the portfolio?
EK: On the whole, yes, but it depends on the market.
MP: Yes, especially when we shift our demand mix to attract either a higher-rated rack rate or extended-stay pieces of business.
JP: Rate increases have been similar to our other properties. Location and market drive the pricing.
DC: Generally, there’s the same type of traction across our brand types.
Are you looking to add more extended-stay properties to your portfolio? If so, why?
EK: Extended-stay properties provide a tremendous price value for multiple occupancy travelers; whether for families, training demand or group travelers. When extended-stay hotels achieve their targeted percentage of ESOC business, the operating margins are superior to that of transient properties.
MP: We have a focus towards acquiring extended-stay hotels as we prefer the occupancy patterns and the overall concept of extended-stay hotels. Our business is that of hospitality, and with extended- stay, we have the opportunity to know, connect and retain our guests. The benefits of having a more loyal clientele base equates to a steady revenue stream which allows us to operate efficiently.
DC: Yes, we have been long-time owners of extended-stay properties because we believe it provides the best risk adjusted returns over time for our shareholders through all phases of the lodging cycle.
What are some of your top-performing properties? Why?
EK: Residence Inn, due to brand awareness and quality product.
MP: Our top-performing hotels are aligned with major, well-known brand families and have consistent product offerings. They outperform their competitors because of their strong affiliation and rewards program that has a large following.
DC: We focus on premium-branded properties such as Residence Inn by Marriott and Homewood Suites by Hilton.
JP: Savannah Suites. It offers convenient urban locations combined with economy pricing, as well as a number of amenities.
Have new brand prototypes significantly reduced the per-key development cost?
EK: Brands generally don’t focus on reducing development costs. It is up to the franchisee to value engineer the brand specs to save costs.
MP: The new prototypes generally have caused an increase in the overall per-key development costs because of brand improvements and rising construction costs.
JP: We have looked at several development situations and I do not see a reduction in per-key development cost.
What are some of the ideal locations or markets for extended-stay properties in your opinion? What are some of the key criteria you look for?
EK: On a general basis, we prefer primary and secondary markets. Those markets need to possess the ability to attract 40%-45% of extended-stay travelers. Our Princeton Residence Inn is an ideal location. Proximate to a major university, loaded with corporate and training demand, active relocation market for families and situated next to a significant retail and restaurant center.
MP: Markets with strong government, medical and training/education are the most ideal. Generally, any market that has a depth of demand for longer-term stays usually fares well for these property types. Not all markets are created equal, so it’s important to drill into the specific market’s dynamics with regards to both occupancy and rate in order to determine the viability and positioning of this property type.
JP: Military bases, large corporate training facilities, areas with lots of new development for an extended period. Markets that are under-served by the extended-stay segment.
DC: This asset class appeals to customers in all locations and markets and that is the key to their success. Business travelers, long-term project professionals, leisure travelers, including single or family, all have reasons to stay in this segment.
What are the advantages of extended-stay properties from an operating standpoint?
EK: Primary operating advantage: When occupied by a requisite percentage of ESOC business, the rooms department operating costs are considerably less than a transient hotel. Upon stabilization, your marketing costs also are lower as you are accommodating a smaller number of overall travelers in a year, though your annual occupancy is often higher than a transient hotel.
MP: Typically, the longer- term stay guest requires less overall housekeeping time per room. These guests tend to use less of the hotel’s f&b as time goes by, and they get in the market to find other options. From a revenue standpoint, the advantage is that with a good extended stay base of business, the hotel can drive a higher nightly rack rate via the transient sector, therefore driving overall ADR. It is an extreme advantage in this business when a hotel can increase ADR and lower operating costs.
JP: Cost of operation can be significantly lower. You still must meet brand standards, however, housekeeping costs are always much less and total staffing requirements are reduced because you do not have a lot of turnover in guests. Many extended-stay properties do not offer the free breakfast or some of the other amenities that are required at traditional hotels.
DC: Operating benefits are rates that are very attractive and not far below upper-upscale hotel rates but with much higher occupancies. Combine this with lower operating costs because there is no f&b department and extended-stay guests produce high operating margins that flows through to the bottom line and to our shareholders.