GLOBAL REPORT—International chains and local operators are adding dozens of new extended-stay hotels across Europe as investors begin to better understand a market which is still largely underserved compared to the United States, sources said.
Big chains like Marriott International and AccorHotels are among those leading the charge, with the United Kingdom and Germany evolving as the prime target destinations for most brands.
- Read “US extended-stay hotels thrive in face of supply growth” from Monday, 26 June.
“In my 12 years of involvement in extended-stay, I’ve seen it go from underdeveloped to lots of interest these days from banks and private equity funds,” said Carine Bonnejean, head of consultancy for hotels at the Christie & Co. London office.
“Now, these investors are starting to grasp the concept and seek us out as there is more and more interest, and we have gotten lots of calls even over the past month,” she added.
More commonly known to Europeans as “aparthotels,” development of the sector has suffered for a variety of reasons, according to Andrew Harrington, founder and partner at London-based boutique investment bank AHV Associates.
“We are very behind in Europe in comparison with the United States, where the concept started decades ago largely because of greater labor mobility. In Europe, this is restricted because you have something like 28 different countries, plus there are language issues.
“In the United States, you have a cookie-cutter model that works in New York or Texas or Colorado, and the zoning laws and planning laws can be very similar, while in Europe these laws differ a lot between Rome and London and Madrid. And at the same time, you have different financing norms,” he said.
“A lot of banks and real estate investors had just started looking at regular hotels, so getting them to consider extended-stay hotels has been a challenge. But now we’re on our way!”
Big chains move in
One of the multinational chains leading the extended-stay surge in Europe is Marriott’s Residence Inn, which currently has one property each in Edinburgh, Munich and Sarajevo, with four new hotels opening this year.
“One of the reasons development is harder in Europe is because you don’t have the suburban sprawl like in the United States, so there is more density and new builds are rare,” said Diane Mayer, VP and global brand manager for Residence Inn.
“Therefore, converting existing properties is more common, with the result that units are smaller than in America,” she added.
The brand’s units in Europe measure between 28 and 30 square meters compared to around 42 square meters in the United States.
“But that’s not a real problem with our guests as Europeans are more used to living in smaller space,” she said.
At the three Residence Inn properties that are up and running in Europe, business travelers account for about 70% of guests, with an average stay of two weeks. Occupancy rates average 73%.
With two properties scheduled to open in London over the coming months and one each in Amsterdam and Aberdeen, Scotland, the U.K. is definitely in the brand’s sights, along with Germany.
“We are very U.K. and Germany focused right now. We have hotels in Frankfurt, Hamburg, Bonn in the pipeline, plus a second in Munich,” Meyer said. “Then Warsaw and southern France.”
A local operator
At an industry conference in New York City in April, AHV's* Harrington presented a comprehensive pipeline of extended-stay hotels in Europe. One of the most active players was Dublin-based Staycity, which started in 2004 with founder and CEO Tom Walsh renting out one apartment in the Irish capital.
Since then, Staycity has expanded to nine properties in Ireland, the U.K. and France, and has ambitious plans for growth over the next several years.
“We have a second and third scheduled for Dublin and then another in Amsterdam with a local partner,” Walsh said. “We’re also planning to launch our premium brand in London, and we’ve signed for two more in Berlin and Edinburgh.
“We want to grow further in the U.K. and Germany, then Paris. Prague and Budapest seem to be well-performing markets, and we’re looking at opportunities in Warsaw and Krakow which could be attractive.”
Staycity currently has 2,000 units and another 3,000 in the pipeline. Walsh predicts it will boast 15,000 units by 2022 with the unfulfilled market demand and investor interest on the rise.
“Since 2004, the biggest change I have seen is that we used to knock on the doors of pension funds, for example, and they would say aparthotels were an interesting business model but they wouldn’t open their checkbooks,” he said.
“But now we have institutional investors knocking on our door because they’re learning what the sector is all about and the Staycity brand is much better known.”
AccorHotels is another European chain with a host of openings planned in the extended-stay space over the next two years. The company’s extended-stay brands are Adagio City, located in urban areas, and Adagio Access, which is largely suburban and offers more basic services and smaller units.
“We have 71 properties in France and several in Germany, Austria and Switzerland,” said Anja Mueller, director of European operations for the Adagio City Aparthotel Group.
“The United Kingdom and Germany are the markets we are targeting for the future so they can catch up with France, and we have nothing in London so that is a top priority.”
When speaking with potential financial partners, Mueller said she still has to explain why it is good to invest in the sector.
“We like to emphasize that they are cheaper to run because there is less housekeeping staff and no restaurants,” she said.
“Also, the normal policy is for rooms to be cleaned every day, but at Adagio the rooms are cleaned once a week unless the guest asks for a more frequent cleaning schedule for which they pay extra.”
Driving demand and the Airbnb factor
According to consultants, several factors are fueling the rising demand for aparthotels, including changes in what guests are looking for and cost-cutting by corporate clients.
“Business travelers make up most of the clientele, and large companies are looking to save money while at the same time providing a nice environment for their employees,” Harrington said. “And at the same time, the leisure market is becoming more important in this sector.”
Russell Kett, chairman of hotel consultancy HVS’s London office, added that both business and leisure travelers see aparthotels as “providing more bang for their bucks.”
Industry dynamics are also changing, sources said, with the rise of peer-to-peer accommodations providers like Airbnb that are now targeting business travelers. Some see them as a threat, while others see them as an introduction to the extended-stay concept.
“Airbnb is telling us that a large percentage of the traveling public doesn’t want to stay in box hotels and wants something different, like accommodations where they can cook their own meals,” Kett said.
Mueller said she considers Airbnb and others as competition, especially for leisure travelers.
Bonnejean said “Airbnb is going after the corporate market, but these types of outfits have also made people more aware of renting accommodation as an alternative to regular hotels.”
Brexit
With chains moving heavily into the U.K., especially London, that country’s break with the European Union might also affect aparthotels as the big financial services firms and corporations with headquarters in the British capital pull up stakes for Dublin, Amsterdam or Paris.
“It’s a real possibility that Brexit could have an effect on the market in London,” said Mark Skinner, who follows the European industry as a partner at U.S.-based Highland Group Hotel Investment Advisors.
“We’ve seen the negative effect on extended-stay hotels in the United States when a big company moves elsewhere. But on the other hand, a lot of those big financial firms could stay on.”
Others are equally sanguine on the subject.
“Brexit is not a terrible concern to us,” said Mayer of Residence Inn. “And it certainly doesn’t diminish my desire to have as much product as possible in London as I just can’t imagine demand in the United Kingdom diminishing.”
“It’s giving us food for thought, but we’re still big on London so I can say there is no real worries at the moment,” Staycity’s Walsh said.
Bonnejean, however, argued it is still too soon to know if there will be any impact.
“We don’t know yet what Brexit is all about,” she said. “Lots of people go to London on leisure trips, and while some of those banks and others will relocate, I think London will remain a world financial center.”
Correction, 29 June 2017: An earlier version of this story incorrectly referred to AHV.