Extending its welcome : Segment's performance shows long-term growth

Hotel & Motel Management, April 3, 2000 by Jeff Higley

Atlanta--Even with a decelerating growth rate, the extended-stay segment of the lodging industry is reaching new frontiers.

A new study from The Highland Group revealed that extended-stay's occupancy rate climbed one-half of a percent to 74.9 percent, and several industry executives said they believe part of that can be attributed to the segment's growth in leisure areas.

"Extended-stay properties in resort areas are really becoming popular," said Jim Anhut, senior v.p. and brand manager at Staybridge Suites by Holiday Inn and chairman of the American Hotel & Motel Assn.'s extended-stay council. "It's a timeshare-style unit without the commitment. It's becoming a real value proposition for leisure travelers."

Anhut said a Staybridge Suites in Myrtle Beach, S.C., has maintained an occupancy rate in the 90-percent range since it opened.

Mike Cryan, president and chief operating officer of Windsor Capital Group, which owns four extended-stay products through its subsidiary Windsor Hospitality Group, said leisure consumers are learning what the extended-stay concept has to offer.

"The product is not as differentiated from other hotels as people were originally touting it to be," said Cryan, who formerly served as co-chairman and chief operating officer of Homestead Village. "There's a good formula for operators to make money, but the product is a hotel option that caters to people whose needs change slightly when they're on the road for an extended period of time."

"Leisure travelers are becoming more of the extended-stay business mix," said H. Mark Daley III, president of The Generation Cos., a Chapel Hill, N.C.-based hotel developer. "We haven't had any property that hasn't stabilized within three or four months of opening, and some of that has to do with leisure travelers. The folks that are staying for business are understanding more what they are getting, and they're getting used to it."

"As more people stay in extended-stay properties, they are expecting them to be everywhere they travel," said Matt Cooper, chief financial officer for SuiteOne, a Duluth, Ga.-based extended-stay brand owned by Southeastern Hospitality Holdings. "We have an incredible amount of demand."

The study from The Highland Group, an Atlanta-based consulting firm that specializes in extended-stay, supports Cooper's statement:

* More than 40,000 new extended-stay rooms opened in 1999--a 21-percent increase from 1998, which had a 46-percent increase in the number of rooms from 1997.

* Extended-stay hotels represent 4.8 percent of the hotel rooms in the United States--up from 3 percent in 1997.

* While occupancy climbed to 74.9 percent in the extended-stay sector, the overall U.S. lodging industry's occupancy was 63.3 percent.

* Extended-stay roomnights sold increased more than 9.3 million in 1999 to 51.7 million.

The slowdown of growth is healthy for the segment because demand growth is catching up with supply growth, sources said.

What has led to that is a shift in the way all hotels are being funded.

Private money

Dan Berman, brand president of Suburban Lodges of America, said the rapid growth in the extended-stay segment in the four years prior to 1999 was fueled by publicly traded companies that had plenty of access to capital and were developing corporate-owned properties.

"When capital became scarce, extended-stay got caught up in that," Berman said. "The growth we're experiencing now is primarily coming from franchise companies."

Twelve of the 15 Suburban Lodges properties under construction in the first quarter of 2000 were franchised properties.

"This is a window of opportunity for private developers because the public companies have slowed their development," Berman said. "The equity returns are strong enough that developers can raise capital."

"Historically, the rapid acceleration of supply was fueled by a relatively small handful of companies that were publicly funded," Anhut said. "That funding has gone to dot-com companies, which leaves extended-stay development open for smaller developers."

"The impact of Wall Street deciding that supply is growing too fast is starting to have some benefits," Cryan said. "Supply is being absorbed much faster now. As long as financing is difficult to get, growth and supply will remain steady."

Daley said that because extended-stay rooms are what the consumer wants, that's what his company is building. The company will have 11 extended-stay properties open by year's end.

"We're able to fund all of the projects we want to build," Daley said. "The lenders we work with understand extended-stay because we've worked with them from the beginning and educated them. That's the most important part of smaller developers being able to secure financing."

Anhut said developers are simply following in the footsteps of franchise companies, which have been adding diversified products to their portfolios for years.

"The majority of the individuals who have acquired franchises from us are multibrand developers looking to diversify their holdings," Anhut said. "Many developers are now looking to have a broader portfolio while they are concentrating on having a strong presence in a well-defined geographic area."