Success drivers to help with extended-stay profitability

NATIONAL REPORT – There is no shortage of performance metrics to justify why hotel investors plan to enter or expand in the extended-stay sector. For those who want long-term proof, data shows more than 25 years without annual demand declines (barring 2020). Investors more interested in the real-time picture can refer to a Q3 2024 study by The Highland Group that revealed record-setting demand, ADR and RevPAR for extended-stay hotels while the overall industry was shouldering its third consecutive quarter of shrinking occupancy.

Predictions of continued outperformance for the “near term” and a supply gap mean there are more opportunities ahead.

Hotel Investment Today by Northstar brought together a panel of experts to share their best-practice, hands-advice on the “how” of transforming this potential into profit.

Ron Burgett, senior vice president, extended-stay brands development, Choice Hotels International; Jacquie Rencurrell, director, Turnstone Group; Aaron Walker, president, Ark Hospitality and Ian McClure, CEO, Gulf Coast Hotel Management, drew on extensive first-hand experience to help extended-stay veterans and first-timers avoid the pitfalls and optimize the profit potential of this unique segment in their conversation for a roundtable sponsored by Choice Hotels International.

Mistakes owners can’t afford to make

Playing by the rules may not sound like a high-level business strategy, but in the extended-stay sector, it’s pivotal. Rule one: Execute on the business model exactly as intended.

“Pennies matter in this space,” said Walker, “If you lose sight of that and you start going after that Taylor Swift weekend business because it's a $400 or $500 rate, the numbers may be good for that weekend but you may have had to displace many long-term guests in the process. It ends up costing you much more in the long run. It’s critical to stay in the extended-stay model. Many outside investors who start dabbling in this space hear that message, but they don't really understand it.”

Playing the transient card also undercuts the lean staffing model that is central to achieving extended-stay hotels’ margins.

“If you book a lot of nightly guests, you're obviously going to need more staff to clean the rooms and turn the rooms, which completely changes the operating model,” said McClure. “So, you may own an extended-stay asset, but, in reality, you're operating a transient hotel that happens to have kitchens in it.”

Simple = scalable

Extended stay’s appeal for owners and developers also stems from its scalability, according to the panelists.

“That's what this is designed for…this is a very recurrable operating model,” said McClure. “It's just basically [replicating] that same box in these particular markets [with strong demand generators] and going from there.”

Turnstone’s Rencurrell added, “Scalability is easy. You understand your product because it’s so clear. You understand what type of sites and demand drivers you're looking for. When you go in for entitlements, it's a really simple story. Once you learn the process with that first one, the rest [are] plug and play.”

Development hot spots

In terms of markets, Burgett said the four corners of the U.S. remain priority targets. They're higher-barrier-to-entry markets that have performed “very well,” he noted.

The franchisor also is keen on the upper-Midwest and mid-South. “We're looking right down the middle,” he added. “New product is coming online from Wisconsin to Dallas, and we continue to see demand outpace supply.”

Walker called the top 25 to 40 MSAs “really critical” when eyeing potential extended-stay development sites, particularly those with older assets in the segment.

“Coming in with some of these newer, fresher hotels in this space has really been good for us,” he said, noting it’s been a company focus over the past year and a direction that will continue. He also sees opportunities in “border communities,” smaller markets-within-markets like those in Arizona, California and South Texas.

McClure recommended looking beyond geography. “It’s also the real estate inside those MSAs; we look for activity and density. You can be in Dallas, for instance…but if you don't have the right demand drivers for extended-stay in that particular area, you're not going to have a good asset.”

In addition to a large population, he suggested developers consider destinations with significant new construction, hospital systems and “any type” of military presence.

“With an extended-stay hotel, you don't have to be right downtown,” said Rencurrell. “We're looking at highways and ring roads around cities where there is new growth and where a lot of construction, manufacturing, distribution and similar business types are. We are trying to be where people are looking for housing.”

That search has Turnstone monitoring population growth activity in states like Idaho and Montana, which saw increases as a result of the pandemic and subsequent waves of “migration” of remote workers and West Coast residents looking for a more affordable quality of life.

“Obviously, they need more houses built. They need a lot of industries that would have people staying 30, 60, 90 days or more on those crews,” she observed. “States that are pro-business and are looking to have companies move in and expand there are also areas that we're looking at. But investors and developers have to make sure they’re really looking at long-term demand, not a short-term spike.”

Streamlined solutions to entitlement

The entitlement process can be rife with headwinds, from zoning issues to lengthy wait times for inspections, the panelists noted.

“You used to be able to receive entitlements in six to nine months. Now we're looking closer to 12, 15 or 18 months, depending on the municipalities,” said Rencurrell. “And if you are looking for a rezone, you definitely need a local land-use attorney who understands all of the politics and dynamics within that municipality.”

At the pace Gulf Coast Hotel Management develops, McClure said his company looks for speed and certainty within the entitlement process. “We'd rather not go into a market where we to have to rezone something because it's just an exorbitant amount of time,” he said. “That can be especially frustrating for first-time developers, who might wait for years.”

Rencurrell suggested developers step in to help guide the municipality through the entitlement process. “Some cities may not be familiar what they do and don't allow; they may not know exactly what your product is. There is a lot of hand-holding and education that goes along [with the process].”

Hiring a project manager(s) is another solution to sorting out obstacles when trying to get extended-stay properties in the ground, said Burgett.

How to get lender buy-in

The panelists stressed that forging strong relationships with local lenders is often key to getting extended-stay projects financed. However, for first-timers, these experts agreed it’s imperative to show the brand’s track record, as well as the borrower’s own credentials.

For new investors coming into this space, it is important to have experience on your side, either a professional management company or someone who can put their résumé [to the task], according to Walker.

Added McClure, “The biggest [selling point] to a lender is going to be: this works, it's recurrable, [sic] it's durable and 12 months out of the year it operates wonderfully if you operate it correctly. At the end of the day what a lender wants to know is: 'Am I going to get repaid?’ If it's extended stay, they're far more favorable to underwriting a project than if it's just a regular transient hotel.”

While lenders historically look at the top line, said Burgett, with extended stay the bottom line is “the most important thing you’re going to talk to a lender about.” Rencurrell agreed.

“What you're seeing in your margins and your bottom line is something that these banks get excited about and that they feel secure and safe lending on. And, extended-stay hotels have on average performed well even through recessions,” she said.

Although decreasing benchmark interest rates are encouraging for the financing outlook, Rencurrell stressed her company is not sitting on deals.

“We continue to entitle and develop because we understand that entitlements can take 12, 18 months and interest rates will be in a different place by then,” she said.

Walker said lower rates “take a little bit of pressure off our overall investment thesis. Lowering interest rates helps our IRR a tad and certainly helps our overall ability to raise capital for some of these projects. We probably have an additional four or five projects in the pipeline that we didn't have before the Fed eased off.”

The cost of money matters in terms of pipeline, but it’s just one factor. In the current environment, said Burgett, “You have to look at where you could put the product, at what’s the right place where you can push RevPAR now. These projects need to pencil at current market conditions because we don't see construction costs dropping a lot.”

Why this segment will stay hot

The panelists concurred over the next three to five years the segment will continue to generate investor interest. “It has been a stable investment,” said Rencurrell, noting there could be some slight oversaturation “in very specific markets” due to the influx of new brands into the space, which will likely smooth out over time.

“We're bullish,” said Walker. “We've got quite a bit in the pipeline already in the extended-stay space. We very much want to add to that and feel very strongly that we will find a lot more sites that fit our thesis.”

And, more deals are likely as product comes to market. “There are a lot of older boxes out there that are 20-, 25-year-old economy-extended-stay assets. They have been in the market forever and they're tired. These new WoodSpring and Everhome brands [two of Choice’s four extend-stay franchise offers, which also include MainStay Suites and Suburban Studios], they're fresh. You may get a little higher ADR, maybe a little better part of town, new-development-type areas. If it’s a strong market with a strong brand, put us there all day long,” said Walker.

McClure shared that optimism. “The next three to five years look fabulous for us,” said McClure. “We obviously wouldn't be building as many assets and acquiring and converting as much as we're doing right now if we didn’t see such a positive outlook.”

He acknowledged the new competition coming in but felt very little is in Gulf Coast’s space.

“They'll call themselves extended-stay and they think they're going to be extended-stay, but I know many of the developers that are doing it and they're really transient operators. So, unless they really change the ethos in their companies, they're going to end up being an extended-stay hotel that operates as a transient hotel. And that ROI is likely very different than the ROI that Aaron, Jacquie or I have for our assets. We think the future is really bright,” said McClure.

Investors who share that view have put 400 hotels into Choice’s extended-stay pipeline. Burgett said Choice’s extended-stay arm is opening a hotel approximately every 20 days, and. “It's going to get to be a faster clip in the next few years. With new construction, we have seen on average steady GOPs …. So, it’s a big runway for us and a big runway for our developers and our 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.