Hilton’s Jacobs on Project H3, state of extended-stay

NEW YORK CITY – The heat is on in the extended-stay space with many of the industry giants announcing new products to meet what is generally perceived as growing demand. Even as supply has reportedly grown some 40% over the past seven years, extended-stay still only accounts for 10% of supply in the U.S. Even better for the newcomers is that over the same time period, demand has increased 43%.

The challenge for the likes of Marriott, Hilton, Wyndham and others jumping deeper into extended-stay is they will be competing for many of the same potential franchisees /owners who are challenged finding debt, supplies and even labor – no matter the development costs. They will also be competing for the same pieces of land and eventually the same guests – some of whom have long-term stay needs and others who will be transient or even leisure in nature. Having the proper mix is going to be key to financial success of the property and perhaps the biggest challenge.

The latest entrant into the extended-stay fray is Hilton, which announced its lower midscale Project H3 brand as it navigates the final stages of the trademark process, ready to address the expanding $300 billion workforce travel market with an apartment-style accommodation and hoping to attract 20-plus night stays and deliver an ADR between $95 and $105. Cost per key is projected at $120,000, excluding land. While no completed deals have been announced, the Hilton team said, “The interest from the owner community has been enthusiastic, and we are well underway in the next stage of development as we begin approvals.”

Each property will feature The Hive, a public area filled with natural light that includes a retail market, laundry room and fitness center. There will also be an outdoor gathering area, which includes a fire pit, grills and seating. Guest rooms include a kitchen with a full-sized refrigerator, dishwasher, microwave, and two-burner stovetop, along with storage options for the long-stay traveler.

Hotel Investment Today caught up with Hilton Chief Financial Officer, President, Global Development Kevin Jacobs at the recent NYU Investment Conference to learn more about the concept and address how some of the broader industry dynamics current in play could impact the launch.

Hotel Investment Today (HIT): A key to success in this space is getting enough longer-term stay guests to control costs, etc. How does Hilton plan to address this challenge with the new brand?

Kevin Jacobs (KJ): We’re trying to tap into this workforce travel market – construction, infrastructure investment, traveling doctors and nurses, etc. We think it’s a really deep market. There’s a reason why a bunch of us are getting into this business.

It is a product that is bought, sold and consumed differently. It is more of a short-term apartment than an extended-stay hotel. That is a different market and a different customer. But I think it’s a customer base that we learned how to access during COVID, when some of them were the only ones out there. We’ve developed relationships with this workforce, the travel intermediaries and directly with workforce travel consumers. And we think that we are very capable of selling it. Then, if you plug it into our systems, our loyalty program… And we do think it will be mostly new customers. We wouldn’t be doing this if we didn’t think we could do it well and at scale.

HIT: How much do you think loyalty will drive demand for this product?

KJ: It’s part of the attraction for the customer. This customer will need this product and we are targeting 20-plus-night stays. And some will want to stay for longer, want a room that is probably two-thirds like an apartment. If they can also get loyalty points and be part of the family, then we think that’s just an answer. So, it’s not the core reason they’re coming. But it certainly will drive demand.

HIT: There is also the “transitional” guest market. How are you addressing that opportunity?

KJ: Let’s say you’re relocating and want a place to stay for one, three, six, 12 months. You can live in this product for really any period of time… Our commercial people will have relationships with relocation companies. We already have people that are transitioning to a new home that stay in Homewoods and our Home2 brands.

HIT: What is the expectation for getting from deal signed to shovel in the ground?

KJ: It’s a fair question. Capital is more constrained at the moment, but our U.S. construction starts in the first quarter of 2023 we’re up over 50% and globally up 20%. If you have the right product, the right sponsorship, it probably requires a little bit more equity. The project that could have gotten 65% or 70% loan to cost maybe it’s now 50% or 55%. But our best developers that have relationships can get loans. It’s not that regional banks aren’t lending. Yes, they’re putting more capital constraints on themselves. The regulators are putting more capital constraints on them. The loan is a little bit more expensive, and banks are being more selective, but the right projects can get financed. And frankly, having the right brand and the right commercial engine behind the project makes it more financeable.

HIT: What is the makeup of interested developers?

KJ: We’ve had a group of five to seven of our best developers that have been ‘under the tent’ with us helping to incubate this product. So, they’re sort of in there, and there are more institutional owners than you would think. There are people aggregating capital that want to do this at scale. Now, it’s a lot of existing owners because we launched it very recently [within hours of this interview]. They’re lining up out the door for both Spark by Hilton and Project H3.

HIT: What is the anticipated development pace?

KJ: We don't have any signed yet because we just launched it, but we have literally hundreds of working deals. We anticipate this will be well over 1,000 hotels, ultimately. This brand will scale very quickly.

HIT: What’s the biggest challenge for Project H3?

KJ: We need to be mindful of the fact that this is a different product that is going to be bought, sold and consumed differently. It is more of a short-term apartment than an extended-stay hotel. So, that means commercially you’re selling it differently. You’re operating it differently. These will be very high margin businesses – like 60-plus percent GOP margins. But those GOP margins only hold if you do have an average length of stay that is approaching 20 nights because then you’re turning the rooms over less often, using housekeeping less often. That’s what gets you to fewer FTEs – in the single digits – to run the hotels. That requires you to keep your discipline commercially and really treat it as a short-term apartment versus an extended-stay hotel.

HIT: What are your expectations for transient business?

KJ: Ultimately, that will be location dependent. But yes, the beauty of this for owners is when that a unit is not rented on a monthly basis, then you have the Hilton engine that can fill it with transient, which drives returns for the owners. But again, if you do too much of that, then the margins, the operating costs start to suffer.

HIT: What options are available for developers?

KJ: There are some options in terms of the mix of beds… These will be mostly center loaded in terms of lobby in the middle. There is an option, depending on what your what your site looks like, to have it end loaded. The room size and key count (121 to 124) can vary a little bit, depending on the market, but it’s going to be largely prototypically built.

HIT: What incentives are you offering?

KJ: It’ll be just like all of our other brands. In certain cases, there’ll be some light fee ramps, and maybe a little bit of key money along the way. But nothing out of the ordinary, frankly.

HIT: Extended-stay is getting crowded. What’s your take?

KJ: It’s a noisy space for a reason, right? There’s a lot of deep customer demand for this product. There’s a lot of owner demand for the product… We think now is the right time to get into the space.

HIT: What will be the brand’s footprint?

KJ: We’re starting in the U.S. and will launch in Canada very soon. Eventually, this brand will be global, just like Home2 is becoming global…  The rest of the world is recognizing that extended-stay hotels are a very nice alternative to apartments in a lot of cases.