A few plausible reasons explain why many investors and brands are checking into the extended-stay hotel category. The bottom line is that they expect to leave with suitcases full of profits for a long time.
Extended-stay hotels are a hot topic lately.
- This year Blackstone and Starwood Capital bought 111 WoodSpring Suites hotels for $1.5 billion.
- Last year, the same two investment firms took over the mid-priced chain Extended Stay America in a $6 billion deal.
- During the pandemic, extended stays, particularly in the economy segment, proved more resilient than other hotel categories.
- Giant hotel groups like Marriott have been reaffirming their commitment to the category, which includes hotels whose rooms have fully equipped kitchens and typically have larger rooms and access to laundry machines.
You might suspect extended stay hotels are in a hype cycle that can’t last.
- After all, extended-stay hotels have been popular in the past couple of years for pandemic-related reasons, such as social distancing concerns and the demand for traveling nurses. But those factors are fading.
- Vacation rentals and short-term rentals seem to be swelling the supply of places where travelers can stay long-term. These alternative accommodations are increasingly run by professional management companies, including some branded “aparthotel” offerings from companies, such as Blueground and Placemakr.
Yet extended-stay hotels have favorable, long-term tailwinds, according to Mark Skinner, a partner at the Highland Group. Skinner has been advising on hotel investment for 28 years.
Demand is outpacing supply in most US markets, Skinner said. That’s the most critical factor.
- Skinner cited not-before-published survey data from the Highland Group, collected on US extended stay hotels for the three months ending on January 31.
- In the economy segment, demand was increasing by 11 percent, while supply was increasing by 4 percent. That’s an almost three-to-one demand-to-supply imbalance.
- In the mid-price segment of extended-stay hotels, demand was increasing by 17 percent, while supply was increasing by 3 percent. That’s a five-to-one demand-to-supply ratio.
- In the upscale segment of extended-stay hotels, demand was increasing 25 percent, while supply was increasing 4 percent.
- “Those numbers have compressed some since, but demand is still outstripping supply,” Skinner said. “All three segments are at record-high demand.”
- “Construction on a national level of extended stay hotels is at the lowest it’s been for nine years.”
- The study counted hotels whose rooms have fully equipped kitchens and which take reservations rather than requiring a lease.
A national housing crisis has been bolstering demand for extended-stay hotels, particularly in the economy segment, Skinner said.
- After the 2008 financial crisis, home construction failed to keep pace with demand in many US markets. This year’s rising construction costs and tighter underwriting terms for loans are undermining supply creation, too.
- Check out this quote from Bloomberg: “In 2019, a survey of budget extended-stay hotels in suburban Gwinnett County, northeast of Atlanta, found 45 percent of the room nights booked were for stays of 30 days or more. Such a long stay is often a sign of residency. By 2021, that number had jumped to 67 percent, according to the Highland Group.”
- Skinner said the phenomenon isn’t confined to the budget segment. “It’s creeping up the rate scale,” Skinner said. “It’s been a long time since I’ve seen so many 30-plus-consecutive-night stays in upscale extended-stay hotel brands — the likes of Residence Inn and Hyatt House.”
- The demand is an impetus for builders to construct both more hotels and residential inventory. “But this housing crisis won’t be solved overnight,” Skinner said.
More US government spending on infrastructure will also support long-term demand for extended-stay hotels.
- “Most of the federal infrastructure projects haven’t even started yet — and they’re everywhere,” Skinner said. “And it’s not just the economy segment that will benefit. The construction managers and senior personnel are also on long-term assignments, and they tend to stay at the more expensive extended-stay hotels.“
- Business travel and international travel will continue to rise in the next couple of years after their pandemic plunges.
A possible recession — if one materializes — won’t cool the extended stay boom by much, Skinner predicted.
- “If there’s a recession, the other demand drivers will stay mostly in place, and the highest impact would be on the upscale segment,” Skinner said.
- Bloomberg Economics only puts the chances of a US recession in the next year at one in three.
- Would an increase in capital restraints somehow affect weaker companies in this sector? “No, I don’t really see that,” Skinner said.
Skinner is worth listening to. He’s seen it all over nearly three decades of boom-and-bust cycles in hotel investment.
I always read tips and feedback. Contact me at [email protected] or via LinkedIn.