Choice Hotels offers four tips for tapping into the industry’s hottest segment.
ROCKVILLE, Maryland – There’s no doubt about it: Extended stay is the hospitality industry’s hottest segment. Its top and bottom-line performance is strong. Guest demand exceeds supply and is growing, which is driving more development interest in the segment than ever before.
Extended-stay room revenue grew to $4.37 billion in the first quarter of 2023, an increase of more than $2 billion from the same period in 2016, according to a report by The Highland Group. And the United States had 51.5 million extended-stay room nights available in the that quarter, up 43% from 2016.
Historically, the economy extended-stay category has achieved occupancy levels 15% higher than the overall industry and in 2020, during the COVID-19 pandemic, that premium doubled to 30% above the U.S. average.
Matt McElhare, Choice Hotels International
To succeed in extended stay, you need the right systems in place. They should be supported by partners experienced in extended stay, across the full life cycle of your project, from market and site selection through stabilized operations. Proven brands that bring extended-stay expertise and provide tailored extended-stay programs, support and technology will be crucial to ensuring you’re capturing the right business mix to unlock the operational efficiencies that make the segment such an attractive investment opportunity.
Here are four tips for developing an extended-stay hotel the right way:
Economy and core midscale present the best “white space” market opportunity, with strong tailwinds for demand.
• The supply / demand imbalance in extended stay is significant, with more extended stay guests staying in traditional hotels than extended-stay hotels due to insufficient supply at the lower price points. Many submarkets across the U.S. lack a single economy extended-stay hotel open or in the pipeline, while roughly 76% of core midscale extended-stay hotels are 10 years old or more, representing a large development opportunity.
• Economy and lower midscale demand will also benefit from the rapidly growing blue collar workforce travel market, which is being driven by the reshoring of American manufacturing and the rebuilding of American infrastructure. One study estimates that the Infrastructure Investment and Jobs Act will generate between 50 million and 100 million room nights over 10 years. Those construction workers and logistics company employees are price sensitive and are already staying in economy and core midscale extended-stay hotels. There will be many more traveling – and filling extended-stay hotels – in the years ahead.
Consider both new construction and conversion opportunities.
• New construction platforms are in place in all categories within extended stay; however, construction costs, combined with availability of financing, are creating impediments to ground up development for certain developers in the near term.
• In this environment, conversion strategies can offer another way to add or grow exposure to the extended stay segment. Conversions typically have lower up-front capital requirements and faster speed to market than new construction projects, allowing you to capitalize on the segment’s high-performance potential more quickly. And certain brands, such as Choice Hotels International's Suburban Studios, offer new modular kitchen design packages that enable a fast and efficient transformation of traditional hotels to extended stay. That represents a significant opportunity, whether your strategy is to acquire and convert or reposition an existing asset in your portfolio.
Create dedicated extended-stay systems for development and operations.
• There are a multitude of nuanced differences between successfully developing and operating an extended-stay hotel and a traditional hotel. If you’re an experienced traditional hotel developer, it’s essential to think about your extended-stay portfolio separate from the rest of your portfolio, with new systems, supported by partners with expertise in the segment.
Many submarkets across the U.S. lack a single economy extended-stay hotel open or in the pipeline.
Matt McElhare
• In the development phase, partnering with an experienced extended-stay architect and a local civil engineer is critical to accelerating entitlement, ground break and opening. In the operational phase, a third-party management company that has experience in economy and midscale extended stay will bring the necessary expertise in local sales, length of stay rate-tier strategies, and extended-stay property operations to deliver consistent, high performance and profitability.
Focus on ESOcc and average length of stay.
• Extended-stay developers have more brand options than ever before. It’s critical to utilize different evaluation criteria when selecting a brand partner to ensure you have access to tools, resources and programs tailored to extended stay.
• Brand partners that have an existing track record of success in extended stay with experts in place in critical areas such as site and market selection, revenue management, marketing, sales, training and operations will help you achieve higher returns.
• Instead of solely evaluating brand contribution against traditional top-line metrics such as occupancy, rate and RevPAR, look closely at average length of stay and extended-stay occupancy (ESOcc) — both are more indicative of whether a brand is delivering the right type of guests for extended stay that will help flow through to the bottom line.
If you’re considering getting into extended stay, there’s never been a better time. Just make sure you partner with experienced extended-stay experts every step of the way – from development to pre-opening to grand opening and every day after.
Matt McElhare is senior director, extended stay brands, Choice Hotels International.
The views and opinions expressed in this column do not necessarily reflect the opinions of Hotel Investment Today or Northstar Travel Group and its affiliated companies.