The extended stay segment has become a focal point for investors and developers, earning the nickname “the darling of the industry.”
Isaac Lake, senior director brand leader at Liv Smart, Hilton Corporate, highlighted the diverse investor mix attracted to this segment. “You’ve got hospitality people, multifamily unit people, and even newcomers to the space, all drawn by the returns and the ease of the operating models,” he said.
Ron Burgett, SVP development at Choice Hotels, emphasised the financial appeal of the operating model: “The relentless pursuit of a GOP over 50 percent is what we look at. Some of our brands are over 58 percent GOP, which is what developers want to hear. Labour costs are running at 15 percent of total revenue, compared to hotel labour costs of 25 to 30 percent. In this environment, when labour is hard to find, that’s critical.”
Avoiding amenity creep
Michael Anders, principal, EY, said that successful operators and developers avoided amenity creep and followed the extended stay operating model to achieve the best NOI.
Jim Mrha, CFO and COO of WaterWalk by Wyndham, noted the high proportion of new build properties still going up despite the tough economic conditions: “Even with high interest rates and high construction costs, 40 percent of new extended stay developments are new builds. Lenders and institutional investors are figuring that you can still get money in this segment.”
Wyndham’s 25th brand, WaterWalk Extended Stay by Wyndham, is a hybrid model, combining extended stay (60 percent) and multifamily units (40 percent), with the ability to flex units up and down.
“We can adjust the room mix based on demand,” Mrha explained. “The lenders like it from a stability standpoint, in terms of stability of cashflow. Typically, you’re running at 92 to 95 percent occupancy on the ‘live’ side. And the thesis is that on exit, we’ll be trading a hybrid cap rate between stay and live.”
Scope for expansion
Brand leaders highlighted the scope for expansion within the US and elsewhere. Lake at Hilton said: “We're definitely looking at obviously EMEA and APAC. There's incredible growth opportunities for extended stay in both of those regions. And China in particular is a strategic area that we're looking at for development of our extended stay products. So we see the demand is really global and we feel like international expansion is definitely in our future.”
Burgett at Choice Hotels said: “This is probably a good time to share with everybody that the demand is twice the supply in the US right now that we have. So there's a lot of runway for growth for all of us and we're seeing it. I mean we're having record years of openings right now, even in this environment. We're very happy with what we see. So I think US is really our main goal, coast to coast, we're developing four quadrants of the country and down the middle, so we see that happening for the next 10 years or so. And then again, we'll look international. We're just not there yet.”
Mrha at Wyndham echoed this sentiment, noting the market’s growth forecasts. “The US extended stay market is projected to grow from $18 billion today to $25 billion by 2027, a 6% CAGR,” he stated.
Mark Williams, managing director of franchise at Extended Stay America, also saw ample opportunity: “We’ve got over 700 properties in the US and there’s still a lot of white space for us to hit.”
Longer stays still key
Coming out of Covid, expectations were that the longer-stay component of demand would reduce, but this has not happened. Williams highlighted: “In 2019, across our entire company, 26 percent of our revenue was derived from 30-plus night stays. During 2020 it went up to 51 percent. It almost doubled. And you’d think coming out of Covid in 2021 that long stays would have gone down but instead they went up to 53 percent, and in 2022 they were at 56 percent. This is a reason why everybody and their brother are now coming out with prototypes.”
Extended stay accommodation is used by people who must travel for work such as construction workers, healthcare professionals; relocating employees; entertainment industry crews; government and military personnel.
The US Infrastructure Bill, representing $1 trillion in federal spending, is set to further boost demand for extended stay accommodation over the next eight years, as a modernisation programme of highways, roads, bridges, and public transport rolls out across the US.
“The reshoring of American jobs and the $1 trillion Infrastructure Bill are driving occupancy rates near 80% or higher in some brands. This is changing the industry in extended stay,” Burgett noted.
All quotes taken from the “Extended Stay – Thriving in a Dynamic Market” panel at IHIF Americas 2024