| By Heather Saunders and Monica Filkova / Arthur Andersen / May 2000
FRANKFURT - May 8, 2000 - The demand for extended-stay lodging has existed since travelers with a little money in their pocket have had both the time and the inclination to spend time away from homes and businesses. The extended-stay concept dates back to 19th century England when visitors arrived at rooming houses in horse-drawn carriages, and travel was a more leisurely affair than it is today. Today, the extended-stay lodging sector offers diverse products that vary widely throughout the world to serve the needs of modern leisure and business travelers. And while product offerings differ on the two sides of the Atlantic, there is some consensus on the definition of extended stay. This hotel sector in a variety of forms is made up of commercially run lodging properties with suites or apartments comprising one or more rooms. As the hospitality industry enters the 21st century, extended stay represents a significant opportunity for hotel companies, developers and investors. Interest in extended stay has been spurred by high net income margins and occupancy rates that typically surpass hotel industry averages. Indeed, extended-stay lodging can be seen as a “win-win” situation for the hotel owner and investors. Higher occupancy rates, lower construction costs and shorter periods of stabilization paint an attractive picture for hoteliers in Europe and the United States. In London, for example, occupancy levels for extended-stay properties are actually better than the already strong levels posted by conventional hotels. In the United States, extended stay was reinvented as a commercial enterprise when Marriott opened its first Residence Inn in 1974. Now, the economics of the extended-stay sector have made it a magnet for real estate investment trusts (REITs) and other investment groups in hospitality. This article draws a profile of the extended-stay lodging sector as it has evolved in the United States and Europe, with the focus on its current state of development and economic opportunity in the future. What is extended stay? Extended-stay properties operate under several banners, but generally fall into one of three categories:
The lexicon of extended stay in its many variations can be attributed in part to its history of development. In the United States, extended-stay lodging has been adopted by the hotel industry as an extension of hotel lodging. Hotel companies such as Marriott have begun to penetrate the corporate housing sector with extended-stay properties for business use. As extended stay was reinvented as an extension of the hotel industry, it has continued to be identified as a complementary commercial enterprise annexed to U.S. hotel development. In contrast, the sector in Europe has grown as a separate business concept, particularly in Great Britain and France. And in Germany, the segment emerged as a product diversification among real estate developers in the early 1990s when hotels and housing were not too attractive to investors, but the combination of the two seemed to hold a potential for good returns. Varying definitions of extended-stay lodging in Europe and the United States are also reflected in the type and volume of performance data available. In the United States, data has been developed on this segment of the hospitality industry. In Europe, however, the prevalence of serviced apartments with widely varying sites, locations and contract terms, as well as the limited supply of apartment hotels and the small markets in some cities, make it hard to obtain performance statistics and even harder to compare cities or countries from market to market. Location, location, location The development patterns of extended stay are also distinctly different in U.S. and European markets. European serviced apartments have traditionally been located in city centers with strong, all-season tourist and business demand. Catering mostly to leisure travelers, apartment hotels were initially unbranded. The easy availability of transportation was of primary concern. Establishing extended-stay lodging in major cities meant that many properties were converted, rather than purpose-built, offering fewer and smaller units than comparable properties in the United States. The major European aparthotel brands, Orion and Citadines, began to expand domestically in France in the late 1980s, and internationally in the early 1990s when they opened properties in Belgium, Spain, Portugal and the United Kingdom. In many cases, the bulk of supply is in the capital cities. In the United States, however, preferred extended-stay product locations are often suburban areas, usually close to suburban office parks, hospitals or senior residence communities. Southern locations fare better, mainly due to the high volume of relocation, both by companies and their employees, and by senior citizens. Although used by leisure guests, most extended-stay accommodation is located so as to be convenient to business travelers. Moreover, it has taken U.S. operators much longer to build up the domestic market and move to international locations than their European counterparts. The difference in location types between the United States and Europe relates to the varying patterns of settlement and the level of dependence on cars. The general preference for urban locations in Europe has important implications for the economics of the projects, since land prices will typically be much higher in central areas and available plots tend to be smaller. In general, the downtown locations have meant conversions and nontraditional solutions to space and configuration problems, rather than new construction. The greatly varying development patterns and economics in the United States and Europe will, undoubtedly, continue to translate into varying risks and rewards for developers of extended stay properties. U.S.: Most highly developed The U.S. extended-stay market, the world’s most developed, is primarily comprised of three extended-stay products: (1) all-suite hotels; (2) limited-service hotels, and (3) serviced apartments, the corporate housing market. The all-suite hotel is relatively common in metropolitan areas and refers
to full-service hotels with two-room units, usually with a bedroom and
living room. These hotels have limited public areas and services. The apartment
hotel, as its name implies, is equipped with a kitchen or kitchenette and
may have one or two rooms. These hotels are often in the budget or economy
class. They are typically described under the limited-service concept because
they usually have fewer staff on site with food and beverage limited to
a breakfast room, and they do not report food and beverage revenue.
Serviced apartments—intended for the corporate housing market—are generally
considered separate from the extended-stay lodging sector. Properties in
this category vary widely in size, even in the same location. They have
fully equipped kitchens and service is limited to daytime reception and
weekly or biweekly cleaning. Typically there are no public areas such as
lounges and breakfast rooms.
Growth has been especially rapid during the last two or three years in areas with high population growth, technology industries and rapid rates of immigration. As a result, extended-stay lodging comprises up to 13% of total rooms supply in some southern cities and 9% in metropolitan centers, in contrast to only 3% of total lodging supply on a national basis. The economics of success. Analysts expect the supply of extended-stay products to continue to grow by some 40,000 to 50,000 units per year until 2003. The interest in the sector is spurred by high net income margins and occupancy rates that typically surpass hotel industry averages. In 1998, extended-stay upper- and lower-tier properties achieved 78% and 67% occupancy, respectively. This stands in sharp contrast to the industry as a whole, which averaged 64% occupancy. Major players that once dominated the extended-stay market are being joined by REITs and franchise companies, which have been lured by the attraction of the bottom line. Higher occupancy rates, lower construction costs and shorter periods of stabilization have caught the eye of these new entrants. Construction costs are lower because no money is spent on common area design and construction, plus the initial land costs are lower. The stabilization period tends to be shorter than hotels of comparable quality because of lower operational costs, reduced payroll, and the elimination of low-profit centers such as restaurants. Net operating income (NOI) margins of 50% are not uncommon. More players: The corporate housing market High mobility in the U.S. business sector has created a strong corporate housing market. Oakwood Corporate Housing, founded in 1969, is the world’s largest serviced apartment agent and operator with more than 20,000 units in the United States, Thailand, the Philippines, China, and Britain. Large U.S. agents include CRS Corporate Housing, Preferred Living, Apartment Connection, and Corporate Housing Connection. On the Internet, two major search directories for U.S cities are now provided by Rent Net and Showcase Suites. Some U.S.-based agents market properties worldwide. The largest are BridgeStreet Accommodations (4,000 units in the United States, Canada, Britain, France), Barclay International Group (Europe, the United States, Mexico, Israel) and Global Home Network (London, Paris, Prague). The extended-stay concept dates back to 19th century England The extended-stay concept dates back to 19th century England and a more leisurely approach to travel than today. Now, this diverse sector primarily caters to the corporate executive needing a suite or apartment with one or more rooms. Great Britain’s market thriving In the United Kingdom, serviced apartments are the most common extended-stay
product, but aparthotels are increasing in number. Initially the units
were designed for the corporate executive or the affluent traveler, but
a growing number of midlevel properties have become available during the
past few years.
Market segmentation in the United Kingdom is not based on price, as is often the case in the United States, but rather more on the size and services required by the predominant group of guests. For instance, there are properties that cater specifically to guests from the Middle East who spend the summer in London with their families and prefer finely appointed apartments with multiple bedrooms. The economics of success. Extended-stay occupancy levels in the United Kingdom are typically between 80% and 90%. As in the United States, those levels are somewhat higher than the already strong occupancy levels of hotels in London. Serviced apartments have prospered because of stable tourist and business demand for the product. The high quality of furnishings and spaciousness of the apartments have resulted in high rental rates. Hotels have also recognized the increasing market interest in serviced apartments and several have converted rooms into apartments for extended-stay use. Additionally, operational and marketing synergies make the construction of serviced apartments adjacent to a hotel good strategy. Marketing. U.K.-based agents, such as Foxtons typically have international operations. The locations covered vary in scope from just a few properties in European capitals (Holiday Serviced Apartments) to offerings around the globe through partner affiliations (The Apartment Service). Some agents, however, are still concentrating on the domestic market and have only limited international offers (Regency Apartments). A profile of France and Spain In France and Spain, aparthotels and serviced apartments are still overwhelmingly developed as holiday lodging. The trend is for agents to represent units in multiple locations. The French brands, Orion and Citadines—both represented by B&V Associates, a U.S.-based agent — dominate the market with more than 7,000 units in over 110 city and resort locations. B&V are responsible for marketing 17 properties in Paris, four properties in London, two properties in Brussels, one in Barcelona and one in Lisbon. The largest Spanish operator, Iberostar Hotels & Aparthotels, has almost 3,000 apartments in its nine aparthotels in Palma de Mallorca and one on the Canary Islands. Other large holiday apartment operators include Domaines du Soleil with 30 units, Maeva Latitude with 88 units, which also has a vacation ownership program, and Pierre & Vacanes, with 53 units in resorts and cities. Extended stay comes to Germany Germany is a new market, and primarily features apartment hotels and “boarding houses” designed for the business traveler (i.e., the two-plus- to four-plus-star categories). Originally, boarding houses began to spring up during the recession of 1992-1993 when other real estate sectors were weak. Their construction has sometimes been an attempt to get around planning restrictions, since it is possible to develop a boarding house on land zoned for residential use. For example, boarding houses are being developed as a part of mixed-use developments where planning authorities have required a certain percentage of residential space. The resulting small size of these geographically dispersed markets together with the predominantly private ownership initially created a very fragmented industry that has been difficult to qualify or quantify. Supply. In the last three to five years, however, the appearance
of extended-stay lodging has changed in Germany with the opening of larger,
chain-affiliated properties. Berlin, Dusseldorf, Munich, Frankfurt
and Hamburg have the largest supply of quality extended-stay lodging. As
was the case in the United States, many of the first operators have been
subsidiaries of real estate development companies diversifying their portfolio
and privately owned companies. However, it is not uncommon for hotel companies
to test the market by offering apartments in hotels.
Recently, Dublin-based Midatlantic Hotels announced that it has signed an agreement with U.S.-based Candlewood Hotel Co. to develop six extended-stay hotels in Germany and Switzerland over the next six years. It will debut with a property in Berlin, and is considering sites in Hamburg and Stuttgart. Characteristically, apartment hotels in Germany have 100-150 units with a breakfast room and 24-hour reception. “Boarding houses” typically have larger apartments with larger kitchen units. However, they do not have dining facilities and reception is generally limited to daytime only. Both apartment hotels and boarding houses have secondary competition that particularly targets the price-sensitive market in the form of furnished apartments offered on short-term leases. Apartment agents usually have a wide choice of quality levels and locations available in large cities. The economics: Does it pay to stay? As with other European countries, published data on the extended-stay market in Germany does not exist. Information on individual properties is rare since few operators keep records on long-term guests. These factors make market evaluation difficult. In general, however, supply growth has outpaced growth in demand and demand is expected to stagnate in the future. Corporate clients, who generate 70% of overnight stays, have become more price-sensitive. Even the relocation of the federal government from Bonn to Berlin has not sparked the level of demand expected. New states are especially feeling the negative effects of low demand. For instance, poor performance has forced Solitaire to put its Leipzig and Erfurt properties up for sale. In Germany, unlike the United Kingdom and the United States, the extended-stay segment as a sole source of business is not enough to generate sufficient occupancy and rate levels. The inadequate performance of extended-stay lodging has encouraged operators such as Madison and Inn Side to shift their target to the short-term and transient segment, once again blurring the fine line between conventional hotels and extended-stay lodging. Central and Eastern Europe The impetus for developing extended-stay lodging in Eastern European capitals has been generally demand-led. The influx of expatriates in the early to mid-1990s, coupled with the lack of suitable rental housing, prompted hotels and local entrepreneurs to invest in the creation of serviced apartments either as an extension of the rooms product in high-end hotels or in separate, secure living complexes, typically individually owned. Most hotels in the region are conventional, consisting primarily of rooms with a few higher-end suites. Suite hotels of the U.S. type do not yet exist, although independent aparthotels or mixed-use lodging, with rooms and apartments, are appearing in some cities. In large cities and resorts there are tourist agencies which can book travelers at privately serviced apartments. Western companies rarely consider this as an option for corporate housing. Many of the cities in the region were initially considered “hardship” posts, and parent companies often spent considerable amounts of time and money to ensure appropriate housing for their employees. In some cases, companies have invested in purchasing or constructing company housing to avoid the hassle of dealing with local agents and operators. However, it is important to note that as residential supply develops in these markets and as foreign companies localize their teams, long-term expatriates are no longer the main target group. In cities like Prague and Budapest, the consulting and IT sectors are growing rapidly, creating a new target customer. Consultants and managers on project-related assignments — spending two to three months in the country vs. the two to three years typical for expatriates—are generating sufficient mid-term demand to warrant investment in apartments vs. hotel rooms. Central and Eastern Europe appear to be in that stage of the evolutionary cycle when professionally run and chain-affiliated serviced apartments and aparthotels begin to appear. The pioneers. Marriott pioneered extended-stay lodging in Central and Eastern Europe with its international extended-stay brand, Marriott Executive Residence. It opened the Millennium Court in Budapest in 1997 and the property at Prague’s Longin Business Center in early 2000. Strategic Hotel Capital recently acquired the Inter-Continental Hotel in Prague and, as part of the deal, acquired the new Golden Prague Residence. Westmont Hospitality is also considering opening a Citadines in Prague. Apartment agents are entering these markets with offerings in Prague (Global Home Network) and Budapest (The Apartment Service). In general, Prague and Budapest are the preferred cities for development by international operators because of the steady tourist flow and economies that are running from stabilization to development. Warsaw, which still lacks high-quality, extended-stay properties, is likely to come next. Orbis, Poland’s largest chain, and Marriott have already announced their intention to look for a development opportunity. The economics: Is there money to be made? Typically, extended-stay lodging prospers in markets with a well-developed hotel market and tight supply of residential housing, especially in areas of high relocation. Eastern European cities such as Riga and Kiev may not have well-developed hotel markets, but they have limited supply of Western quality housing for international professionals, such as consultants and company managers. Rental allowances are more generous than in Central Europe, and expatriate turnover is higher because employee contract terms are short. But, while there is money to be made, problems must also be solved. What local operators lack is good marketing and reservation systems, and the security associated with well-known brands. Although an international brand will not necessarily generate much additional demand, it could capture a lot of the overnights spent in conventional hotels and local serviced apartments. Centrally located, midrange properties with a small number of units can enjoy occupancy levels similar to the United States and London. Operating margins could even be higher given the lower costs of operation and the relatively higher prices guests would be prepared to pay for an apartment featuring new utilities systems, modern kitchen equipment and security surveillance. Conclusion The very uneven state of development of the extended-stay sector in the different European countries implies potential for further development in at least some markets and opportunities for consolidation throughout the region. Our recent market research in Central and Eastern Europe, for example, suggests there may be significant latent demand in some cities that could be tapped into with professional marketing of good extended-stay products. Consolidation—either by agencies (as in the London market) or by operators
(as in France and the United States) -- has barely begun in Germany, or
in most of the Northern and Eastern European capitals. As strategic investors
have gained experience and confidence in the more highly developed extended-stay
markets of the United States and France, the stage appears to be set for
expansion into the rest of Europe.
Heather Saunders is a senior manager and the director of Hospitality & Leisure Consulting in Arthur Andersen’s Frankfurt office, where Monica Filkova is an experienced consultant. Also contributing were Sally Robinson, a manager in the London Hospitality & Leisure office, and Sharon C. Collins, knowledge manager for the Hospitality and Leisure Services practice in Los Angeles. If you have a comment or require more information about this article,
please send an e-mail to Arthur Andersen’s Hospitality site editor,
Steven F. Shundich
©Arthur Andersen
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| U.S. Capital Markets... Will They Recover This Year? / Arthur Andersen / 1999 |
