ATLANTA — Hotel brand executives are bullish on the present and future of the extended-stay segment, but have divergent opinions on the decision to invest in conversions or new construction while costs rise and supply-chain issues extend timelines for openings.
Noah Silverman, global development officer, U.S. and Canada, Marriott International, said at the “Brands Tipping the Scale” panel at the 2022 Hunter Hotel Investment Conference that he can understand the strategy behind new construction since those hotels will likely be ready to open when the recovery starts. But he warns that the situation has to be ideal.
“I’m absolutely a believer that you can go against the grain a bit, but it takes some good fortune and stars aligning to be able to make that happen in a way that delivers those returns at the end of the day,” Silverman said.
Conversions Versus New Construction
Due to a decline in labor and the supply chain drying up, brand executives have been faced with a decision when it comes to new projects: convert existing hotels or build new ones. The opinion among the panel was anything but unanimous.
Jim Tierney, senior vice president of real estate and development at Hyatt Hotels Corp., said the company primarily focuses on new construction and will continue to in the future. Despite factors such as market recovery, high construction costs and a tough lending environment, Tierney said he’s seen the pipeline pick back up a bit and hopes it will fully recover to pre-pandemic levels by 2024.
Wyndham Hotels & Resorts Executive Vice President and Chief Development Officer Chip Ohlsson said the company was initially planning on focusing on conversions during the pandemic, but its new-construction pipeline grew more than it ever had in 2021. A huge spike in leisure business caught the interest of hotel owners and spurred Wyndham’s pivot, he said.
The company launched its new economy extended-stay brand, currently titled “Project ECHO,” on March 22. Every hotel under this brand will be new-construction, with plans of opening the first one in 2023.
Although Wyndham has committed to new construction, Ohlsson acknowledged that there are some major difficulties in building from scratch today, with construction costs and delayed materials among the key factors. Ohlsson said he’s willing to pay more to get the product in place as quickly as possible.
“The importance of our brand is really paramount right now because construction starts are tough, procurement is tough. We’ve been working with a couple of different companies and we flat out said, ‘We don’t care [about] the costs right now. We care [if] you can deliver on that cost.’” Ohlsson said.
High construction costs and supply-chain issues have been enough to deter some companies, such as Marriott, from shifting its focus to new construction, Silverman said. Uncertain timetables and project costs have Marriott targeting its “robust” conversion pipeline right now.
“In every downturn, conversions become a premium choice, so all of us I think have been hovering around them like vultures for every conversion opportunity that we can find out there,” he said.
Extended-Stay Segment
The trendiest segment in the industry has undoubtedly been extended stay, and when asked if panelists believed in it moving forward, they were all in agreement: it’s here to stay.
Silverman said the benefits of the segment have been around for decades, but the upswing in digital nomads and remote working will only serve to enhance it. He said he feels fortunate that Marriott has the extended-stay brands it does.
“In some ways, this is not a new phenomenon. One of the worst kept secrets in the industry for a lot of years has been that if you have some money and an opportunity to develop a Residence Inn [one of three Marriott extended-stay brands] you should do it,” Silverman said.
Julienne Smith, IHG Hotels & Resorts' senior vice president of development, transactions and asset management, said she is optimistic about the segment because the average length of stay has increased not only in extended stay, but across all segments by over a day due to an uptick in leisure and bleisure demand. Smith said she believes in the trend because of the cost benefits, not the consumer’s length of stay.
“The most important thing about extended stay is not necessarily that it has a longer-term stay and it’s a relatively low cost to build in relation to other segments, but it’s the flow through. It’s the labor model, it’s not turning the room every day. That’s the biggest piece that developers and owners are waking up to,” Smith said.
Ohlsson said Wyndham had been looking into adding to its extended-stay portfolio over the past few years but really picked up its efforts after seeing the success of the segment during the pandemic.
Launching “Project ECHO” while the trend is surging will pay dividends for the company, and the reaction to the launch announcement has Wyndham excited, Ohlsson said.
“It’s probably the hottest space out in the market place right now, and so for us to be announcing at this time, it just all lined up,” he said.