Just as the Extended Stay market segment began its growth spurt, with demand outpacing supply by three to one and the need for properties in certain markets at a critical level, capital supplies have all but disappeared. The corporate players are left with targeted sites selected, but undeveloped, deposits forfeited and massive growth plans on hold. 

And so, the playing field has become a lot more level for the independent or small franchiser.  According to Cristina Ampil, Senior Lodging Analyst for PricewaterhouseCoopers (PWC) in New York, “Wall Street’s public market for hotel development dried up because they sensed over-building, sensed lower RevPAR growth (in the overall industry), consequently, stocks are not providing the  money.” 

Ampil went on to discuss other contributing factors: the repeal of the Paired Share REIT exemption, categorization of  hotel real estate as growth stocks rather than earnings’ stocks, the recent uncertainties of the global financial markets evidenced by massive instability of the Brazilian currency, etc.  This refrain is echoed over and over by participants in this lucrative market segment. 

Jay Witzel, President of Extended Stay America Management says that capital is “flowing away, due to the fear of overbuilding.“  Extended Stay, possessing a conservative balance sheet, won’t go to equity with their stock depressed, in deference to their corporate commitment to a 50%/50% stock/ debt ratio. 

These decisions by the corporate extended stay players are clearly driven by different realities than those exhibited by the market itself.  The extended stay segment presents an underserved market class where according to PWC, 1997 year-end demand for 300,000 rooms was inadequately met with 100,000 rooms of product. 

Peggy Berg, of the Highland Group reports that the demonstrated annual demand, which grew by 32% in 1996 and 54% in 1997, is projected to continue.  One predictor is the projected growth in the demographic profile group which defines the extended stay client: professional specialists between 35 and 49 years old, earning in excess of $50,000 per year.  Even with supply growing exponentially as well during those time periods, occupancy for this product has remained at 80% over the past six years, in most cases eight to ten points above national averages for similarly priced hotels.  Operating profit margins for the extended stay market average approximately 15 points above industry average and nearly eight points above all-suite properties.  Yet, they comprise less than five per cent of rooms inventory in most markets.  Residence Inns, among the upper tier of the extended stay market, enjoys the highest RevPAR in the industry, and NOI/per rooms which exceeds that of the Four Seasons’ chain. 

The growth of demand, and the economics of the extended stay product, coupled with the cutback of capital to the major participants offers a textbook opportunity for the independent franchise. 

In short, the corporate side of development cut back, Extended Stay America’s 160 hotel per year growth has been halved; other companies such as MainStay, Home Gate, AmeriSuite are relying more on franchisees to meet the needs of this emerging market.  Candlewood Suites’ short-term development strategy will be “more broad-based than our prior preference for company-operated construction,” according to Jim Roos, its President. 

Many companies are taking advantage of this confluence of factors and bringing themselves up to speed on the product, and bringing the product to the market. Mark Daley, of Generation Companies, LLC reports that Generation has five operating Suburban Lodges of America, with three under development, and a commitment for seven Candlewoods over the next two and one-half years.  Although Daley believes that the financial market does not yet understand this product, (“cap rates should be derived by finding middle ground between the apartment industry and the hotel industry”), because of their firm’s relationships with local lenders, they are able to finance these products.  Further, “we are not competing against five brands’ corporate development efforts in every marketplace”, as was the case over the past two to three years. 

Daley believes, as do many other market participants, that this market is just beginning to be understood even by many in the industry.  “The product is different; it’s local – local businesses, local hospitals.  It’s marketed differently than a typical transient-stay property.  You must look to the product, not the reservation system.”  Daley states in fact, that the transient stay segment of the market “doesnt’ know how scared it should be”.  He feels that a “backwash” will take place; that is, extended stay guests will return to those properties even for transient use. 

Many of the same thoughts are echoed by Tajjammal Murad, President of Tranz Hotels, operators of seven properties.  Because the market segment is not only different, but new, old strategies don’t always apply.  According to Murad, “it’s difficult to analyze where sites should be built; even Smith Travel Research is not yet tracking extended stay as an independent market segment.”  Murad’s personal rule of thumb for site analysis is that 15% of the demand in a given market is going to extended stay.  Local businesses, to which Murad attributes 90% of an extended stay property’s success, are the demand generators in his marketplace, Carrier, Bristol Meyers, New Process Gear, among them.  But according to Murad, even five miles away from the rooms’ generators, you pull the market.  His experience has shown that 30% of the long-term stay demand draws from training and relocation.  With the improved financial picture of this market, i.e., “enhanced ROI and net operating profits in the 70% - 80% range, compared with those of standard hotels in the 30% to 35% range”, Murad has seen that non-traditional sources of funding are also available.  Phillip Morris, headquartered near the property is financing one of Tranz’ two projects under development, this one in Richmond, Virginia. 

Linda Jones, of Lands Inn, Inc., a licensee for Choice Hotels is awaiting the outcome of initial reporting of their first extended stay product in Charleston, South Carolina.  Among the expectations, higher profitability, which Jones reports will be monitored closely by local lending sources, who are “very interested in seeing how we meet the expectations with this new product type.”  Lands Inns anticipates substantial resort / leisure room draws for this MainStay, as compared to the local business orientation of many extended stay markets.  Two factors:  a reported six-month wait for new housing in some parts of the Charleston market, and Charleston’s long-standing destination status as a historic waterfront landmark of the Old South.  Nonetheless, prior to its March 1 opening, pre-selling yielded a single company taking 20% of the property’s 71 rooms. 

Summit Management Corp, is currently building a MainStay, scheduled for a summer opening, in the Buckhead section of Atlanta.  Greg Averbuch, Summit’s President, reports many of the same factors brought them to this arena at this time.  “It’s a more positive environment; fewer people are going after the same site; further, apartment occupancy in Buckhead is very high; rents are increasing, and corporate apartments can be put back into inventory.”  Summit is carrying the improved profitability of extended stay one step further.  The Main Stay will be “piggybacked”, that is sharing a site with a Sleep Inn, providing 225 total guest rooms, for transient and extended stay guests, and enjoying the economies of scale afforded by combined training, housekeeping, maintenance, etc. 

With 4th Quarter 1998 earnings approaching their projections, some hotel company stock prices starting to rise again, and industry wide ADR reportedly on the rise in 1999, the institutional outlook may change.  Corporate players may return to their earlier announced growth plans  - maybe, maybe not.  Regardless, the outlook for the extended stay segment looks good for anyone who enters it with the right product in the right place.  Perhaps it’s now the time to act. 

Stephen P. Taylor, CHA, is president of TaylorGroup. His 25 years of hospitality experience provide an invaluable background for clients and readers alike.