Insiders’ guide to new-build extended-stay success

NATIONAL REPORT ‒ Over 40% of the investors planning to expand their hotel portfolios in the next 12 months are targeting the extended-stay sector, according to various investment surveys.

They’ll be able to tap ample opportunities from hotel-giant-backed new brands to fresh development options in emerging markets devoid of long-stay flags. But they’ll also face substantial competition.

Lodging Econometrics’ (LE’s) Q2 2024 U.S. Hotel Construction Pipeline Trend Report revealed that extended-stay brands currently account for 36% of total projects under construction, 33% of projects scheduled to break ground within a year and 34% of projects in the early planning stages.

So, how would the experts responsible for some of the sector’s leading brands and hotels craft a success strategy to play in this complex, competitive market? Hotel Investment Today by Northstar brought together thought leaders from the brand and investor communities for an exclusive roundtable aimed at helping owners and developers answer that question.

Asked to create a savvy investment plan for extended-stay new-builds were panelists: John Koshivos, vice president/managing director, Southeast U.S. development, Hilton; Isaac Lake, brand leader, LivSmart Studios by Hilton; Ryan Maher, vice president, investments, Noble Investment Group; David Montrose, executive vice president and head of InnVentures, a division of Highgate; Talene Staab, brand leader, Home2 Suites by Hilton and Suzanne Saunders, senior vice president, design and construction, Hospitality Ventures Management Group (HVMG). Mary Scoviak, custom and design content director, Hotel Investment Today by Northstar, moderated the discussion. LivSmart Studios by Hilton sponsored the virtual event recorded on Sept. 18, 2024.

Here are their best-practice guidelines for maximizing your new-build extended-stay’s ROI.

1. Understand the fundamentals: Shoulder occupancy is “everything.” According to these experts, the divergence in the transient vs. extended-stay hotel investment strategy runs the gamut from site selection and demand-generator assessments to revenue management and staffing models.

For Lake, owners need this scope of in-depth sector knowledge to develop the “hyper-discipline” to outperform in the crowded extended-stay segment. That starts with fundamentals such as occupancy.

“To be successful in this space, you really have to have 60% to 65% true extended-stay business in the hotel,” said Lake. “So, the first question I would ask myself as an owner looking to get into the space is: ‘Am I committed to running that type of business?’”

Montrose echoed the critical role extended stay-occupancy, not overall occupancy, plays in determining success. From a gross-operating-profit perspective, InnVentures’ extended-stay hotels’ goal is an occupancy rate of 55% to 65% long-stay business.

“When we can get an extended-stay product in that sweet spot, leaving enough transient availability to capture the transient ADRs, we find that the return on investment is extremely strong. Typically, we're seeing GOPs right around 60% to 63% when we can achieve those extended-stay targets,” said Montrose.

Maher went one step further. “[Shoulder] occupancy is kind of everything for extended-stay hotels,” he said. “Operating them requires a different headset from transient hotels where you're trying to maximize rate.”

Overly high percentages of transient business also undercut the labor-light advantage of extended-stay, where longer stays reduce workload for both front desk and housekeeping staffs.

“Extended-stay is designed for guests who don't need a lot of attention,” said Maher. “We see material impacts on our modeling when our length of stay trends more toward that transient zero to six nights than when we're getting a higher mix of the 15-plus-night or 30-plus-night guests.”

Selling to the extended-stay target market also involves a strategic rethinking, noted Staab.

“Extended-stay owners can't just put a sign up on the on the building or along a highway to drive bookings. Some travelers driving along the Interstate may not know the difference between a transient versus extended-stay hotel. They may not be aware that extended-stay means 30, 60 or 90 days. So you have to hire salespeople who know where and how to cultivate target-market business.”

2. Leverage the appeal of prime sites that aren’t at Main and Main. Extended-stay also changes the ground rules for site selection ‒ aided by technology, business relocation and demographic trends. And, that's redefined what "prime" means for extended-stay real estate searches.

“You don't have to be at Main and Main,” said Koshivos. “With the technology consumers have, whether it be with their iPhones, their Androids or any personal device, they know how to find where you are located…and that helps the overall development model from a costing standpoint.”

He acknowledged that opportunities can present anywhere, but observed that the current trends favor development that’s following population shifts to the so-called migration states benefitting from corporate and plant relocation and areas throughout the south from the Carolinas to Texas. Montrose also likes secondary markets across the nation. “You need to know where your customers are going and meet them there,” he said.

Noble Investment Group focuses on markets that have demand generators tightly tailored to the segment’s specific guest markets, said Maher. “It could be cancer hospitals. It could be military installations. It could be high-inbound-migration markets. It’s not about the airport markets or the tourism markets of the past. We want folks that are going to be coming in and staying for longer periods of time near infrastructure projects that are happening.”

3. Embrace the segment’s research-driven prototypes to control costs, satisfy guests. New extended-stay development puts a different spin on the upsides of product standardization. As Lake pointed out, product development for brand launches such as LivSmart Studios by Hilton requires a thorough review of research.

In its ramp-up to the new brand debut, Hilton vetted several years’ worth of data on guests who had stayed at extended-stay products pre-COVID. Additionally, it examined two years’ worth of data on guests who stayed 10-plus nights post-COVID. Those insights were then shared with a group of experienced extended-stay owners/operators who added their own observations regarding development.

“We captured what guests was telling us was important from a product perspective,” said Lake. That data showed extended-stay guests focus on kitchen space (over 94% plan to cook), the quality of the fitness facility and ease of item delivery (packages, food, etc.).

The latter toggles in with cost-efficiency around labor and staffing. Lake said creating a system that allowed for the seamless delivery guests want without having to involve an associate “helps keep the labor model efficient and the cost to operate low for owners,” he said.

For industry veteran Montrose, whose company specializes in the management of premium select-service and extended-stay hotels, developers and investors interested in extended-stay hotels need to put cost considerations in the spotlight when choosing a segment and a flag.

Some upper-upscale, extended-stay products “are leaving a lot of revenue opportunities on the table” based on their development costs, in his view. “You can only go so low from an average-rate perspective,” Montrose said. “However, with brands creating midscale to economy extended-stay products, the upfront development costs have come down significantly. The rates that you can set to maximize the profitability of the asset give you a much wider range when the product is less costly on the front end.”

Based on her role with previous extended-stay brand launches, Saunders advised owners to resist the temptation to over-invest in prototype add-ons, “The brand has already done extensive research to determine guest needs and preferences. Adhering to the prototype keeps the focus on what guests want ‒ and that’s what keeps upfront costs down.”

A collaborative team is crucial to keeping projects on budget and on target. “I would caution people who are going into this space to make sure they understand that the fact that these properties are smaller and cheaper than your traditional select-service, upper-midscale-type hotel, does not mean that they are easier to build,” said Maher. “Make sure you've got a team in place from the brand, from your general contractor and from your operator in advance and put the focus there before you start spending real dollars and putting money at risk.”

Like Saunders, Maher encourages owners to choose a brand that doesn’t necessitate additional discretionary spending to fit market demands. His goal is strictly plug-and-play products.

“From there we can go out and copy and paste [lessons learned with a standardized product] throughout the footprints in which we're developing. That allows us to streamline the process to be as efficient as possible and to really create scale in a quick way that's in accordance to our business plan and how we aim to grow this business for our company ,” said Maher.

Staab added a long-term note on costs. CapEx, renovation cycles and reinvestment may follow a different schedule. And budget planning should reflect that.

“With extended-stay, you have to think about the condition of your hotels, because you know guests are staying with you for a long time. And, they're not always having a better stay the longer they stay,” she said. “If you're not keeping up your hotel, that little ding in the wall may have gone unnoticed by guests for the first few days, But, by day 30, they’ve named it. They’re seeing everything that bothers them every day. So, you really need to be on top of your game, because even small maintenance issues can negatively impact the hotel experience. Don’t assume anything will be overlooked.”

4. Look for a brand that’s addressing investors’ pain points from financing to labor costs. Even with benchmark interest rates cuts, sourcing financing and getting terms that make the project pencil out are concerns for hotel investors. Before signing on with any brand, ask how they’re helping owners get the deals done and laying the foundation for a successful business long term, panelists advised.

“The development cycle is always something that's a moving target. Right now, we all know that construction costs have been elevated, interest rates are high. This is all part of the cycle, and we know that that model will change. Things will get back in line at some point in the near future. The Fed just cut 50 basis points. That doesn't really do anything for us. Fifty basis points is not going to move the needle,” said Koshivos. “But what it does do is it gives confidence back in the market that our cycle. Although it's been difficult right now for a year or two, from a new development standpoint, we'll just see a shift in the model. We'll go from doing more conversions to more new builds when things loosen up a little bit.”

He added, “If an owner is having difficulty getting a project financed, we exert an extraordinary amount of effort on our part where we just will be patient with them. We'll find out when they think they're going to be able to break ground. We'll do extensions on their construction start dates. We’ll update the plans to our Design and Construction Group. We may look at redoing some of their potential fee structures to get deals done. If the owner can’t get financing, we can delay the project.”

For Maher, the way the group leverages key money makes this more than a nice-to-have item. “It's not just how that works towards the deal economics, but it's a partnership with the brand. It's a partnership with a commitment to figure out ways to get this done,” he said. “There's a lot of cost here, and all of that kind of goes into to the total deal package. Figuring out how to get these things from a piece of dirt to a successful building is essential to ROI.”

The proven ability of owners to do just that is why the sector will continue its growth trajectory.

At the end of the day, observed Lake, “The good thing about the extended-stay segment is that these stay occasions continue to be strong. You still have people relocating for work. You still have travel nurses. You still have major infrastructure projects. All of these stay occasions continue to happen, regardless of what is happening in the market,” he said. “And that is why the extended-stay segment is so strong and so attractive to potential investors.”

Stefani C. O’Connor is a journalist based in New York City.

The views and opinions expressed in this content do not necessarily reflect the opinions of Hotel Investment Today by Northstar or Northstar Travel Group and its affiliated companies.