Extended-stay hotels have become increasingly popular as it was the most resilient hotel type during the pandemic. As a result, more branded hotel companies have announced new brands and expansions into this product type.
At the end of October, the Northwest Hotel Investment Forum (NHIF) hosted its semiannual meeting with a panel of extended-stay experts.
Under questions from moderator Irvin Sandman of Sandman Savrann, a hospitality-focused law firm, all panelists agreed that the operating model, guest type and profitability differ from traditional hotels.
Ian McClure, CEO of Gulf Coast Hotel Development, LLC, said extended-stay hotels offer a “durable and reliable income stream” and noted they require “very different management” and have “very different (guest) segments.”
McClure’s extended-stay portfolio is dominated by economy and lower midscale properties. He said that the average length of stay is 45 to 60 nights, and occupancy ranges from 90-95%, “if done well.” He also said that the gross operating profit margin is 60% to 62% due to only having seven full-time employees per property and room cleanings only twice a week.
Rick Colling, global leader for Hilton extended-stay brand Homewood Suites, said the performance metrics shift depending on the class of the extended-stay hotel.
Hilton offers three extended-stay brands that cover different class types: Homewood Suites, Home2Suites and Project H3 — a new, lower midscale, extended-stay brand yet to be officially named.
Colling said that the average length of stay for a Homewood Suites is 3.2 nights, and 44% of available suites are booked by guests staying five consecutive nights or longer. Average daily rates are higher than that of the economy-class extended-stay hotels.
Some guests stay much longer than the average, he said, noting he was about to travel to Maryland to recognize two guests who were celebrating their 20-year mark staying at a Columbia Homewood Suites.
Colling mentioned the new Project H3 brand is geared towards longer-term stays to service the $300 billion workforce travel market. Hilton Project H3 developers broke ground on the new extended-stay brand in Indiana near a $2.5-billion, under-construction Samsung EV battery plant. Construction workers will need a place to stay during construction. The plant is scheduled to begin production in 2025.
This example shows the importance of location in extended-stay hotels. The Project H3 in Indiana will operate very differently than the Home2Suites outside of Disneyland, which generally attracts families who stay for three to seven nights.
Mike Nielson, CEO of development firm West77 Partners and brand LivAway Suites, said the economy extended-stay hotel located next to Boeing attracts subcontractors who might be on a two-month work contract for Boeing.
In general, guests at extended-stay hotels could be part of a traveling workforce that includes nurses, military, digital nomads or project-building teams. Guests also could be there due to weather disasters, divorces, or be insurance adjusters. Extended-stay hotels also can provide a viable option to a traditional apartment lease, as hotels do not require credit checks or charge for utilities, come fully furnished, and some housekeeping services are included.
Occupancy levels and profit margins are favorable, but operating extended-stay hotels is very different from other hotel types and requires special skills.
Nielson said “it’s not traditional hospitality, and you will get eaten alive as an owner/developer if you think it is.”
Nielson has a background in the multifamily sector, and said that expertise has been a critical element of success in the extended-stay segment.
“Barebones apartments cost $180,000 to $220,000 a door to build. Economy extended-stay construction is $105,000 to $125,000 per key all in,” he said.
He warned there are jurisdictional issues in some destinations, such as limits on the length of stays, bans on cooktops or restrictions on the size of the fridge.
The panelist said booking longer-term stays is the key to profitability and success.
McClure said a property near College Station, Texas, could book a three-night-minimum stay for $600 a night for big Texas A&M football games. However, discipline is required, because more revenue is gained by being loyal to the long-term guest who pays $70 per night and stays seven months.
Skinner said he doesn’t believe that there is “a risk for oversupply,” even with all the newly announced extended-stay developments and brands.
“The last time supply growth was this low was following the 2008-09 recession, and supply increases stayed well below the long-term trend for four years,” he said. “We are two years into the current era of low supply growth, and the federal funds rate is 10 times higher than it was the last time this occurred.
“Excluding the late 1990s, the highest annual gain in extended-stay supply was in 2009 when rooms increased 9%. If that level of supply increase was to occur now, rooms under construction would have to double from the current level and all would need to open within one year. Accordingly, the near-term risk of extended-stay hotel oversupply nationally is very low.”
Still, Colling cautioned: “Don’t jump in because you think you should. Jump in because you have the discipline to do it correctly.”
NHIF is an invitation-only, semi-annual forum for principals and executives of hotel owners, brands, management companies, developers, investors and lenders. Founded in 2011 by Sandman Savrann PLLC, NHIF’s purposes are to provide a select-group setting for high-level industry discussions and to help spur hotel acquisitions, development, investment partnerships and growth. It has the support of the industry’s major hotel brands, who serve as NHIF’s brand sponsors.