Hotel Online Special Report
Arizona Lodging Insights
First Quarter 1998
Warnick & Company
State of Arizona Lodging Market Performance First Quarter 1998
Metropolitan Tucson Lodging Market Performance First Quarter 1998
Metropolitan Phoenix Lodging Market Performance First Quarter 1998
Metropolitan Phoenix Extended - Stay Hotel Development: 1988-1998 
Metropolitan Phoenix New Hotel Development (No. of Rooms) 1994-1999
Exended-Stay Hotels Proliferate

Excess profits breed ruinous competition.”  Whoever coined this old saying could well have been talking about the extended-stay lodging market where more than 25 brands now seek to cash in on the incredible success of Residence Inns. 

With supply growth of over 60% from the end of 1996 through the end of 1997, extended-stay hotels are currently experiencing the fastest rate of expansion in the industry.   According to Bear Sterns & Company’s 1998 U.S. Lodging Almanac, there were 848 extended-stay properties (nearly 97,000 rooms) open throughout the United States at the end of January 1998.  Given current development trends, this figure is projected to reach roughly 300,000 rooms by the end of 2000, a more than 200% increase over current levels. 

Should we be concerned by this growth in supply?  In a December 1996 lodging stock report, analysts at Smith Barney "prove" with a few assumptions (20% of lodging demand is 6+ nights; 60% of that will be served by dedicated product) that the market will absorb all of these new extended-stay rooms and run 80% in the bargain.  Proof again that if you torture the data long enough, it will confess to anything. 

Historically, extended-stay hotels have been designed physically and operationally to cater to demand requiring accommodations for a longer period of time, typically 5 days or more.  Operationally, extended-stay hotels enjoy certain efficiencies: primarily labor (front desk and housekeeping), A&G and Marketing.  As such, the margin of profitability can be much higher. 

Driven by a perception of a deep, unsatisfied demand pool, operating efficiencies, and a proven track record of high profitability (the most profitable lodging segment over the past ten years), it is no surprise that the development of extended-stay hotels has reached a frenzied pace across the United States. 

In no other area of the country is the depth of this market more likely to be tested than in metropolitan Phoenix.  Of the approximate 3,200 hotel rooms added to the Phoenix market in 1997, 43 percent were in the extended-stay segment.  Although mostly new construction, there have been some apartment conversions.  Properties vary considerably in terms of quality, amenities, type/size of rooms and pricing.  The evolution of extended-stay hotel development in metropolitan Phoenix over the past ten years is illustrated in the following table.  Based on projected 1998 openings, ten-year growth in extended-stay rooms will be an astonishing 3,069%. 

So much new development in a niche market within such a short amount of time begs several questions: 

First and foremost, are the latent and unsatisfied demand pools really deep enough to fill all these new rooms?
What will be the impact on the rest of the industry if they lose 12% of their business to extended-stay (based on Smith Barney’s 20% x 60% calculation)?  And how will transient hotels respond to such a loss?
Will extended-stay hotels be forced to compete in the transient market to fill rooms … and what impact will that have on their traditional profitability advantage?
Will the proliferation of brands cause consumer confusion and will marketing expenditures rise as new brands struggle to be heard above the din?
What roles will pricing, services and amenities play in a consumer’s decision to defect to dedicated extended-stay product? 
The answers to these questions are as yet unknown.  We will hazard a few guesses. 

Much like other limited-service hotels, extended-stay properties are not capable of inducing significant levels of new demand (although displaced short-term apartment rentals may add some amount of demand not currently counted as hotel demand).  On the contrary, their survival is reliant upon their ability to penetrate the existing demand base, as well as the market’s ability to grow. 

While it is clear that extended-stay facilities have become increasingly popular and desirable for the corporate training and relocation segments, as well as certain other travelers, we believe the sheer number of extended-stay hotels being developed in Phoenix will outpace demand in this segment.  When it does, the definition of "extended-stay" is going to mean "one night." 

Stay tuned as we watch to see whether the laws of supply and demand have finally been repealed. 

Metropolitan Phoenix Extended - Stay Hotel Devlopment: 1988-1998
Year / Property
No. of 
Total Rooms
Percent Increase
Residence Inn Norhtwest Phoenix 128 128 -
Residence Inn Scottsdale 122
Residence Inn Tempe 126
248 376 194%
Homestead Village Central Scottsdale 120 496 32%
Homestead Village Norhwest Phoenix 136
Homestead Village Northwest Phoenix 141
Homestead Village Central Phoenix 124
Homestead Village Tempe 120
521 1,017 105%
Sierra Suites Northwest Phoenix 89
Homegate Suites Northwest Phoenix 134
Candlewood Suites Norhwest Phoenix 98
Residence Inn (expansion) Northwest Phoenix 40
Homegate Suites Phoenix Airport 139
Homegate Suties Southeast Phoenix 131
Sierra Suites Central Phoenix 113
Homestead Villagte Mesa 122
Extended Stay America Mesa 101
Hawthorn Suites Central Scottsdale 108
homewood Suites North Scottsdale 114
Sierra Suites North Scottsdale 107
Estended Stay America North Scottsdale 120
1,416 2433 139%
Residence Inn Mesa 117
Residence Inn Peoria 90
Extended Stay America Norhtwest Phoenix 104
Homewood Suties Northwest Phoenix 125
TownPlace Suites Northwest Phoenix 90
Hawthorn Suites Northwest Phoenix 153
Homegate Suites Central Phoenix 129
Extended Stay America Phoenix Airport 101
Summerfield Suites Central Scottsdale 160
Hawthorn Suites Chandler 140
Homewood Suites Chandler 83
Candlewood Suites Tempe 119
Mainstay Suites Tempe 94
TownPlace Suites Tempe 118
1,623 4,056 67%
Percent change between 1988-1998: 3,069%
Source: Warnick & Company

New Supply Continues to Plague the Metro Phoenix Area 

Occupancy performance during the first quarter of 1998 continued its downward trend.  The culprit: new supply.  A 4.4 percent increase in demand during the first quarter was eclipsed by a 10.2 percent increase in supply, resulting in a 5.3 percent decrease in occupancy (to 78.8 percent) when compared to the same period in 1997.  In fact, supply increases outpaced demand in every geographic submarket in the metropolitan area. 

Metropolitan Phoenix 
New Hotel Development (No. of Rooms) 
Limited Service
Full Service
1993 Inventroy 12,571 12,144 8,912 33,627
1994 250 - - 250
1995 1,000 - 70 1,070
1996 1,825 - 390 2,215
1997 3,000 - 120 3,120
1998 5,500 - 23 5,523
1999 2,100 613 185 2,898
Potential Inventory 26,246 12.757 9,700 48,703
109% incr 5.1% decr 8.8% incr 44.8% incr

ADR grew, although at a more moderate level than in recent years.  Through the first quarter of 1998, marketwide ADR reached $126.99, a 2.3 percent increase over the same period in 1997. 

The decline in occupancy, combined with modest ADR growth, resulted in a 2.3 percent decline in RevPAR for the quarter, to $100.07.  It is significant to note that this decline marks the end of a 6-year growth trend in quarterly RevPAR on a marketwide basis. 

Thus far in 1998, the economy and mid-priced sectors continue to experience the greatest increases in new supply, 17.2 percent and 19.6 percent respectively.  While outpaced by new supply, demand growth for these sectors has also been significant, (11.7 percent and 14.8 percent respectively).  The sheer number of new hotels within the economy and mid-priced sectors continues to cause demand displacement from other price/product sectors.  The budget and luxury sectors experienced an actual decline in demand for the quarter (–.7 and –2.6 percent respectively), while the upscale sector achieved only a modest 1.4 percent increase during the period. 

In the resort sector, a 3.7 percent decrease in demand and a slight increase in supply caused a 4.3 percent decline in occupancy for the quarter, to 79.4 percent.   Conversely, average rates in the resort market continued their upward momentum reaching $236.63 year-to-date, a 5.2 percent increase. 

The Tempe and Mesa/Chandler submarkets experienced the greatest increases in both supply and demand for the quarter.  The Phoenix Airport submarket experienced another decline in demand; this trend is likely the result of cannibalization from surrounding markets. 

On the heels of so much new limited-service supply, the decline in occupancy and moderation of ADR growth in the first quarter are only a sign of things to come.  Unlike resorts, limited-service hotels have little or no ability to induce new demand and will not attract the group and weekend/mini-vacation demand, which have buoyed summer occupancies for resorts in recent years.  Thus, our expectation is that summer occupancy in 1998 will be substantially lower than prior year levels except for the resort sector, which should only be down slightly. 

Because of the spillover impact, the surge of limited-service supply will require even full-service hotels to revisit their marketing strategy and sharpen operating practices - especially during slow season months.  Limited service will have to pay close attention to property condition, and meeting/exceeding customer service expectations; they will also need to become more proactive in sales.  However, options for such properties are more limited than for resorts and larger full-service hotels. 

"New Supply Status Report" 

Our best advice is hope you picked a good location, the right flag…and that you have deep pockets.  For distressed real estate buyers, we offer this advice: don't be so obvious when you're licking your chops. 

Interested in the status of new hotel development in the metropolitan Phoenix and Tucson markets?  In an effort to help keep the market rational, Warnick & Company is introducing its “New Supply Status Report”.   The New Supply Status Report will provide information on announced resort and full-service projects, including the name of the developer and proposed operator of the project; proposed size and facilities; zoning status; development status; and estimated opening date.  Our records are updated on a monthly basis.  Cost is $1,000 per report.  Please call 946-1888 for further information. 

Rich Warnick
 Warnick & Co.
[email protected]
Also See:
The Buttes, a Luxury Conference Resort in Tempe, Arizona, Acquired for $63.6 Million / Sept 1997 
Varsity Clubs of America resort hotel in Tucson, Ariz. opens / July 1998 
Selected Hotel Transactions - 1997 Southwest Lodging Report 

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