Thereâ€™s Room at the Inn for Site-Selection Experts in This Fast-Growing Market.
Good hotels used to promise guests everything but the kitchen sink. Nowadays, they’re throwing that in as well.
Fully equipped kitchens are just one of the many extras being built into a rapidly growing segment of the hospitality industry: extended-stay hotels. These lodgings target guests planning a longer-than-usual hotel stay—anywhere from four days to four months—and offer amenities ranging from CD players to dual phone lines to full-size refrigerator/freezers. Some of the units resemble studio apartments, with one large room and a galley kitchen; others offer multiple bedrooms and baths, kitchen and dining areas, and extensive in-room business equipment.
It’s a market, hotel developers say, that’s waiting to be served. According to D.K. Shifflet & Associates, a travel industry research group, hotel guests who stay five nights or longer accounted for 265 million rooms in 1995, compared with 215 million rooms in 1993 and 1994.
And it’s a market that continues to grow, offering opportunities, primarily in site selection, for commercial real estate professionals who understand what chains, real estate investment trusts (REITs), and other extended-stay developers are seeking.
One facet of the market is easily recognizable: Workers who are relocating or in town for long-term projects or training, who prefer to stay in a more home-like environment where they can cook a dinner and spread out their spreadsheets. But while the upper-priced tier of extended-stay hotels has established itself by catering to these businesspeople, competition is heating up in the middle- and lower-priced segments of the market as well. These newer chains aim to attract guests traveling for business who also like a homey atmosphere, but who are watching expenses. However, they also appeal to families who are visiting resort areas or individuals who simply are making a transition between homes or relationships.
An Old Idea, a New Form
While extended-stay as a hospitality product segment is new, the concept is not. "It’s been done in bits and pieces for decades," says Robin Webb, CCIM, who’s worked on a number of extended-stay projects. "But it has not been done as an overall product line with product segmentation and with much subsegmentation—breaking it into the same general rate tiers that you have in the [general] hotel industry."
Webb, who is vice president, commercial director of Prudential Florida Realty in Winter Park, Florida, says extended-stay is "a whole industry born of an old concept. Think back to the apartment hotels from the turn of the century. They often provided hotel services but were set up like apartments. So it’s a new concept that has been around for generations."
Webb points to Cecil Day, founder of Days Inns, as an extended-stay innovator; Day, he says, started the Days Lodges in the 1970s, which offered full one-bedroom apartments built alongside Days Inns. Residence Inn, the first extended-stay to capture a substantial market share—and the industry leader today—was founded by Jack DeBoer in 1975 and acquired by Marriott in 1987.
Despite the attention it’s getting, extended-stay still is a very small segment of the hotel industry. The United States had 57,401 extended-stay rooms at the end of June 1997—only about 1.7 percent of the roughly 3.4 million total U.S. hotel rooms, according to Chuck Ross, vice president of Smith Travel Research in Hendersonville, Tennessee.
But Smith’s numbers do show healthy growth. At the end of 1992, the higher-priced tier included 238 properties with 29,493 rooms. By the end of 1996, the segment had increased to 308 properties with 36,523 rooms, climbing to 333 properties with 39,373 rooms by June 1997. Growth in the lower-priced tier is even more pronounced; in 1992, there were only 60 properties with 7,400 rooms. By the end of 1996, the number had grown to 150 properties with 15,558 rooms, and in the first six months of 1997, 23 more properties with 2,470 rooms had been built.
One measure of extended stays’ attractiveness to investors can be seen in portfolio data from Innkeepers USA Trust, a REIT that owns 47 upscale extended-stay hotels, primarily Residence Inns and Summerfield Suites. During 1996, Innkeepers jumped from 18 hotels (2,071 rooms) to 32 hotels (3,912 rooms), increased its revenue per available room from $61.45 to $67.87, and raised its occupancy levels from 79.7 percent to 82.5 percent.
Price versus Features
Extended-stay hotels are categorized as limited-service facilities, but the service that guests do get depends on what they pay. The upper-priced tier, dominated by Marriott’s Residence Inns, includes other chains such as Hawthorn Suites, Homewood Suites, Summerfield Suites, and Woodfin Suites. Individual rooms may contain apartment-like features such as separate living and sleeping areas, kitchens, and even fireplaces. But the properties also offer many traditional hotel services such as swimming pools, free continental breakfasts, and meeting rooms—as well as amenities geared specifically toward extended-stay travelers, such as free grocery shopping services and weekly social hours. Rates run anywhere from $70 to $105 a night, depending on the length of the stay. While most guests are likely to stay for at least a week, the hotels welcome guests who are staying only a night or two.
The lower-priced groups—Extended StayAmerica (which includes Extended StayAmerica Efficiency Studios as well as Crossland Economy Studios and StudioPlus Hotels), Homestead Village, Lexington Hotel Suites, Suburban Lodge, and Villager Lodge—more closely resemble small apartments with simpler rooms, less-frequent housekeeping service, and fewer extras. The hotels market themselves more as extended-stay lodging—in some cases, charging by the week rather than the night—and rates can dip as low as $25 a night in some areas.
Hotels in the mid-priced niche, such as Candlewood Hotels (started in 1995 by DeBoer in a joint venture with Doubletree Hotel Corporation); Homegate Studios and Suites, MainStay Suites, operated by Choice Hotels; and Marriott’s TownePlace Suites, hover in the $40- to $60-per-night range, and their features fall between the upper and lower ends—swimming pools and exercise rooms show up in some cases; twice-weekly maid service in others.
Occupancy rates at extended-stays tend to be higher than standard hotels. Gregory Hartmann, managing director of the Boulder office of the hotel consulting firm HVS International, says that industry-wide, extended-stays enjoy an occupancy rate of only about 5 percentage points higher—85 percent versus 80 percent for a standard hotel. But that average is lowered somewhat by statistics from the inclusion of more leisure-oriented markets, he says, where extended-stays face the same seasonal concerns as standard hotels.
Where extended-stays really excel, Hartmann says, is in more commercial markets; there, extended-stays keep their 85-percent rate, while other hotels drop to 70 percent. This is due in large part to the same problem that standard hotels face everywhere—weekends. A standard hotel in a commercial area generally isn’t filled on weekends. But extended-stay guests have longer-term commitments—and it’s not always necessary for them to check out of their rooms, even if they go home for weekends and return the next week. As a result, extended-stays simply are booked for longer periods of time. Hartmann adds that because they face fewer vacancies on weekends, they also don’t have to drop weekend rates to attract guests.
And, adds Patrick Ford, CCIM, president of National Hotel Realty Advisors in Portsmouth, New Hampshire, extended stays often welcome one- or two-night guests, which widens their customer pool. Travelers—business travelers in particular—may find that for just a little more money, they can end up with much more spacious facilities than a traditional hotel room offers, Ford says.
Because extended-stay properties are constructed differently from conventional hotels, development costs differ as well. "Keep in mind the square footage you’re building is substantially larger than a traditional hotel room," Webb says. At the same time, extended-stays tend to eliminate many of the public areas associated with standard hotels—extras such as restaurants, lounges, spacious lobbies, meeting rooms, on-site dry cleaners, and parking garages. Therefore, Webb says, "to compare construction costs, it’s more relevant to compare an extended-stay hotel to a one-bedroom apartment than to a traditional hotel."
Overall, Hartmann says, extended-stays cost about $10,000 more per room than standard hotels. One factor driving up costs, he says, is the inclusion of kitchens in the units. But, he says, because the units are larger, each hotel simply will have fewer units per parcel—and that can increase the per-room figure as well.
However, the difference in building time, he adds, is minimal—"maybe two weeks." Where developers might face delays, though, is before building starts—in the approval process. If municipalities aren’t familiar with extended-stays, he says, they may take longer to approve the projects because of fears about the hotels turning into transient apartments. This is a problem that may ease, Hartmann says, as more extended-stays are built and municipalities can better study their track records. And currently, he adds, in markets where planning commissions are more familiar with extended-stays, they may be more willing to speed up the approval process because they see the hotels as filling a new niche—particularly if the hotels cater to more upscale guests.
Costs also vary according to the brand. According to Tim Sheldon, brand vice president for Marriott’s TownePlace Suites and Residence Inns, a TownePlace Suites development generally costs $45,000 to $47,000 per room without land; a Residence Inn development costs $62,000 to $68,000 per room. Part of that cost, Sheldon says, stems from the increased size of Residence Inn facilities; guest rooms tend to be 20 percent larger, and the hotels also may include meeting rooms. Land costs, he adds, also can be higher for Residence Inns because they tend to be located in more-visible areas.
Whatever the price tier, the economics of operating extended-stay properties are significantly different from those of traditional hotels, Ross says. Generally, he says, a conventional hotel employs large numbers of people because it provides extras such as daily housekeeping and food service. An extended-stay hotel, though, only has a front desk, and it doesn’t provide room service or daily maid service, so it can run with far fewer employees. The Extended StayAmerica properties are a case in point: The chain says a typical Crossland Economy Studios property with 120 to 140 guest rooms is staffed by three full-time and three to five part-time employees. Its top-of-the-line segment, StudioPlus Hotels, has five or six full-time employees at an 80- to 100-studio site.
Extended-stay hotels also can cut costs by using more flexible staffing. Sheldon says that TownePlace Suites uses a self-managed service team, where staff members fill in for each other. Although the hotels are staffed 24 hours a day, the cross-training reduces the number of front-desk personnel as well as housekeeping staff. The result: a 100-unit TownePlace Suites can run with a full-time staff of seven; a similar-size Residence Inn—because it offers more standard hotel amenities—generally needs 22 to 25.
Setting Sights on Sites
Site selection offers the greatest opportunity for brokers interested in working on extended-stay properties—"[There’s] more consulting or land-sale function for all levels of these properties, versus resale of existing properties," says Dewey Struble, CCIM, president of Trident Real Estate in Reno, Nevada. "Right now, there just aren’t very many of them—and now there’s money to build new."
Site-selection criteria illustrate extended-stays’ hybrid characteristics. "The physical needs [of the property] are very similar to an apartment complex," Webb says; "However, they have retail needs like a hotel." A site should have reasonably good visibility and access, he adds, "but it doesn’t have to be [a] premier-hotel site."
In fact, a nontraditional hotel site sometimes can be very effective, says Jeffrey Fisher, chief executive officer of Innkeepers USA Trust. Such locations "feed into what guests want," Fisher says. "If you were staying somewhere for three weeks, would you want to sit on the side of a highway?" Instead, he says, Innkeepers looks to acquire properties with "a more wooded, residential feel."
An extended-stay property, however, does need proximity to its market; if it’s targeting corporate clients, it should be close to businesses and office parks whose employees and clients are the most likely potential guests. Struble says economy-priced properties can be a little more flexible, locating in more-residential areas as well as areas where conventional motels might operate. Support services, like restaurants and grocery stores, also should be convenient.
Evaluating the Competition
Site selection also should include evaluation of the competition—and not just other hotels. "Corporate apartments really are the competition for the extended-stay hotel," Ross says. Oakwood Corporate Housing, for example, operates more than 17,000 extended-stay corporate apartments in the United States. The company offers customers a variety of personalized amenities, including packages for kids and for business travelers. The units are marketed as fully furnished apartments and are meant for stays of a month or longer.
But developers should keep an eye on the local rental market as well. "If a particular market has any strong extended-stay demand characteristics, then local apartment complexes can become flexible and start renting on a short-term basis—maybe monthly leases—and satisfy that demand. So you should also look at the local apartment market to evaluate potential competition," Ross says.
"Most markets where [extended-stays] are successful are communities that are experiencing high growth, have strong economic factors, [are] strong in migration, [are] healthy, vibrant, [and] can also support the addition of residential apartment units," he adds.
Brokers working on site selection need to clarify for themselves the various products’ distinctions, Webb says. "It’s important to understand the product that you are representing to sellers—particularly in sites where there are multiple pads for multiple products; you may have someone wanting to put in three hotels in an office park. It’s extremely important to understand what you’re bringing to the site—not only its physical requirements, but the caliber, quality, and image that it’s going to generate for that particular park or hotel center."
In fact, the slight differences between extended-stays and apartments as well as other similar kinds of lodging could be a drawback to extended-stays in their current stage. "The hospitality industry has blurred all the lines," Webb says. "There are too many brand segments in the market, and the consumer doesn’t understand them. It’s difficult enough for someone who deals with them every day to understand. We now have at least three and maybe four tiers in the extended-stay line alone—and probably seven or eight only slightly different tiers of quality in the hospitality industry overall in just the general hotel line. I think it’s very confusing for...consumer[s] even to the extent that when they pull up to the front door, they don’t know exactly what services that facility may be offering to its guests."
The lines particularly may be blurry when comparing extended-stays to suite hotels. "There is potential confusion in the marketplace as to what is really included in a suite property," Struble says. "You may get a studio, but you’ll have a kitchen—versus a lower-priced product that may have one or two bedrooms and no kitchen—but they’ll still call it a suite because it’s more than one room." Extended-stay can be a differentiating factor, he adds, but a suite hotel may need to add amenities to call itself such.
"I liken it to what happened eight or 10 years ago where we saw a great proliferation of segmentation in the hotel/hospitality business," Struble says. Then, he points out, the difference in products was based more on service and amenities in conventional hotels. "What we’re seeing now is a different kind of segmentation—it’s a different product rather than a different price point."
In the meantime, the chains aim to clear up consumer confusion with careful marketing. "The medium and upscale range are corporate products," says Webb. "They’re often marketed directly to corporations to garner the relationship. I don’t see an awful lot of traditional hotel advertising as you might for tourism." Marriott’s Sheldon, for instance, says that TownePlace Suites will build on Residence Inn’s experience of direct sales, emphasizing such sales even before the facilities open. He adds that TownePlace Suites’ general managers are expected to spend five to seven hours a week in sales.
Other chains position themselves simply by the amenities they offer. Extended StayAmerica hotels also are marketing themselves toward corporate travelers, so their rooms offer free voice mail and computer data ports, but the hotels lack pools and other features that might be more attractive to families.
Most of the players in the extended-stay market have ambitious plans for the next five years. As of September 1997, Candlewood, for example, had five company-owned hotels open, 24 under construction, and 34 sites under contract. It also had five franchised hotels open or under construction. (It expects that eventually its hotels will be roughly 50 percent company-owned and 50 percent franchised—with Wichita-based Candlewood managing about half of the franchised properties.) Extended StayAmerica—founded in 1995 by Blockbuster Entertainment’s H. Wayne Huizenga and George Johnson—operates 134 properties under its three brands and has another 90 under construction and options to purchase 120 more sites for development. The company aimed to have 181 properties open by the end of 1997 and more than 540 by the year 2000. Marriott launched TownePlace Suites in March 1997 and plans to open 35 of them by the end of 1998, with 130 projected by 2000.
Are developers being too optimistic? Hartmann thinks the market is good. "If you look at the numbers, travelers staying five days or more are about a third of the market—and extended-stay hotels are only about 4 percent of the market." If the economy stays strong, he says, true extended-stay hotels won’t be affected by the growth of new supply.
Struble is more cautious. "There is concern in some peoples’ minds, that in an area that has never really been previously defined, [if] we’ve reached saturation—or are we beyond saturation already? Nobody really knows," says Struble. What could be troubling, he adds, is "that the hospitality market has been on such a high the last couple of years, we don’t know the shakeout of that, which will eventually come. It’s a very cyclical business, and the hospitality market cycles tend to be shorter than other cycles in the real estate business. And whether the [extended-stay] part of it will help drive that or whether it’s immune from it—we don’t know, because most of this extensive new development of these properties has happened since the last down [market]. It’s all been occurring in an up market, so we’ve never seen a shakeout [of the] market."
The future also might bring brokers future opportunities aside from site selection, Ford says. "The real brokerage opportunities may come four or five years down the road," he says, when the properties have matured and are riper for resale, and a particular market is "developed out."
Consolidations also may affect extended-stay lines. StudioPlus Hotels is part of Extended StayAmerica as a result of its merger with the Fort Lauderdale-based company in April 1997; Promus Hotel Corporation, which owns Homewood Suites, merged with Doubletree Corporation in September 1997.
The hotels’ identities also will affect their success. "I think what you’ll see is more consistent branding much like what you have in the traditional hotel industry," says Webb, "where you have, for example, Marriott product lines that target different tiers of the market." Consumers, he adds, then will begin to identify with a limited number of names.
In any event, brokers interested in hopping on the extended-stay bandwagon now should know what they’re undertaking. "You either have to have expertise in the hospitality business or align yourself with someone who does," Struble advises. "It’s a different animal. Many things are the same, but they have different labels in the hospitality business—it’s a little different language."
And, he adds, "be comfortable working in a corporate environment. You’ll get involved in that either because it’s a company-owned product or because they’re almost all franchised. You have to be comfortable working with corporate real estate people."
Marriott’s Sheldon agrees. "It’s a growing market, and lots of people want to play in this arena," he says. "But you have to have a clear understanding of what it is."