By Lisa Leavitt, Manager, Summer 1996

There has been significant discussion recently regarding the growth of the economy extended-stay market. In fact, it is difficult not to pick up industry literature or attend a hotel conference without reading about the under-served market and the significant entrance of major new players.

We agree that there is untapped potential in this segment of the market. We also agree with many of the warnings regarding the proliferation of new brands leading to the propensity to over-build. However, we also believe there are a number of ingredients that will make some extended-stay companies in the economy segment more successful than others.

The hotel companies that will win market share and enjoy sustainability in this industry will be those that find superior locations for their facilities. We define a superior location as sites with the following characteristics:

Significant visibility - In the economy extended-stay segment, centralized reservation systems mean very little, for most of the room nights are generated by drive-by business and word-of-mouth. Thus, excellent visibility from major thoroughfares with high traffic counts is an important success factor for this market segment. Another consideration is whether the local government ordinances will allow the large signage often necessary to facilitate visibility.

Few good alternative sites available - Because a significant amount of new competition is coming on line, and because word-of-mouth is important in this hotel segment those companies that enter a market early and obtain a superior site - leaving few alternatives for the competition - can earn a local reputation quickly, allowing them to create barriers for other entrants.

Key market demand generators in existence - Relevant demand generators are a key characteristic necessary for a successful economy extended-stay product. Industries with a considerable volume of employees that utilize extended-stay hotels include engineering, military design and contracting, foreign manufacturing, government, construction, and health services. Areas that attract per diem guests are also optimal.

Higher-end extended-stay hotels or high-end hotels in close proximity - At first, it may seem a bit unusual to recommend additional hotel supply as being optimal for the entrance of a new hotel property. The economy extended-stay market, however, caters to a different customer and has price points that are significantly lower: therefore, the high-end properties are not competitors. These upscale properties attract the attention of potential economy extended-stay guests. These guests, who cannot afford a higher-end property, will likely be referred to the economy extended-stay property.

We believe that there will be over building in the economy extended-stay segment in the future. However, there currently is a significant opportunity for well-positioned, carefully selected extended-stay sites. Only through a thorough understanding of the motivators behind a guest’s extended-stay and careful market due diligence can one conclude whether this product type will make sense in a particular locale.

The Real Estate Report is published by KPMG's National Real Estate, Hospitality, and Construction Practice. © 1996 by KPMG Peat Marwick LLP All rights reserved. For additional information email KPMG.

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