At the recent Hunter Hotel Investment Conference in Atlanta, many of the hotel industry’s statisticians agreed that recent increases in hotel demand are the beginnings of a real recovery in demand and not merely a reaction to discounts in hotel rates. We agree and the performance of extended-stay hotels seems to validate this opinion. So why are extended-stay hotels discounting room rates at double-digit levels and what information is available to make more informed decisions about setting future rates? This article offers some insights into the reasons and a possible solution.
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Mark Skinner |
Supply Extended-stay room supply increased much faster than overall hotel room supply over the past five years and the number of extended-stay rooms in 2009 was 14 percent higher than in the peak year of 2007. A surplus of new rooms opening around mid-year 2009 was a catalyst to accelerate rate discounting and this has persisted into 2010, despite a slowing of supply growth and strong increases in demand.
Rate structure
Generally, extended-stay hotels build a base of discounted long-term business and sell the remaining rooms at higher rates for shorter stays. The right mix of discounted long-term guests optimizes revenue, but too much long-term business, or long-term contracts that are discounted too deeply for too long, can displace higher-paying guests as demand recovers. This was one reason that extended-stay average rates grew more slowly than overall hotel average rates during the last recovery. Recent indications are that this is happening again.
Forecasting
Historical data and trends are useful in setting future rates, but forecasted statistics are more important when setting extended-stay rates that in many cases will run for several months.
Recent history showed that extended-stay hotel demand grew 8 percent in the fourth quarter of 2009 compared to the same period in 2008. Average rates were discounted 13 percent, but reviewing the relationship between rates and demand in previous quarters indicated that the fourth quarter’s increase in demand was not entirely attributable to discounting. Forecasted data enhances that theory.
An analysis of year-to-date performance of extended-stay hotels and other data resulted in the first quarter 2010 forecast shown in the table.
| Room supply | up 4% - 6% |
| Demand up | 16% - 20% |
| Average rate down | 11% - 14% |
| Occupancy up | 9% - 12% |
| RevPAR down | 3% - 5% |
Note: (1) Compared to 1st Qtr 2009
Source: The Highland Group
Our estimate of a 16-percent to 20-percent increase in extended-stay demand in the first quarter of 2010 is a growth rate that we have not seen for a decade or more. It would also be the greatest number of extended-stay hotel roomnights occupied in any first quarter by a margin of at least 10 percent. Given that overall U.S. hotel demand is also rising, there is little doubt that a significant portion of the growth in extended-stay demand is not merely a reaction to rate discounts.
Extended-stay room supply is forecast to be 4 percent to 6 percent higher in the first quarter of 2010 than it was a year ago. Forecast demand is rising much faster than supply and a look a little further into 2010 shows that supply growth will decline significantly. Restricted hotel financing mean that few hotels not under construction at mid-2009 will open during the foreseeable future. There were about 18,000 extended-stay hotel rooms under construction at that time and 10,000 of them were open by the end of the year. Not all of the remaining 8,000 will open and very few new properties will break ground in 2010 and 2011. With 315,000 extended-stay hotel rooms currently open, clearly supply growth rates of 4 percent to 6 percent are not sustainable and record low rates of increase are likely.
While it might be premature to declare that the recovery is established, extended-stay hotels should take heed of emerging trends and forecasts before setting room rates or risk prolonging the cycle of declining revenue per available room unnecessarily.
Mark Skinner is a principal with Atlanta-based Highland Group. He can be reached at mskinner@highland-group.net.
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