Travelers staying five nights or longer accounted for 37% of the hotel room nights sold in the U.S. in 2004. Yet, only about 5% to 6% of all hotel rooms in the U.S. are considered extended-stay.

So, it's no surprise why the extended-stay hotel segment is on the brink of major growth, say hotel experts. “There is still such a big supply and demand imbalance,” says Laura Bates, Marriott's senior vice president of brand management for extended-stay.

Upscale extended-stay hotels such as Residence Inn by Marriott, Homewood Suites by Hilton, and InterContinental Hotels Group's Staybridge Suites are among the top brands attracting the attention of developers. Investors, meanwhile, are also gravitating toward mid-priced brands like TownePlace Suites by Marriott, Mainstay Suites by Choice Hotels, and IHG's Candlewood Suites.

Some developers also are giving serious consideration to building economy extended-stay hotels, such as Choice Hotels' newly acquired Suburban Extended Stay Hotels.

With 67 properties, Suburban typically charges guests about $240 per week. Nearly all travelers stay in the no-frills studio apartment-like hotels for a week or more, says Ralph Thiergart, senior director of brand strategy at Choice Hotels.

With lower operational costs than full-service and even limited-service properties, owners can often recoup costs faster and reap the rewards of higher profits, say experts. A Homewood Suites hotel, which has about 115 rooms, typically costs about $90,000 per key, or room, to build. A full-service Hilton, on the other hand, costs anywhere from $125,000 to $200,000 per key to build, depending on the location, according to Hilton.

Yet, the average daily rate at upscale extended-stay hotels such as Homewood and Residence Inn are comparable to many full-service hotels — another reason why these hotels are so appealing to developers. Rates at Residence Inns are about $105 nightly, says Bates of Marriott.

The average daily rate at Homewood Suites by Hilton year-to-date is $102 a night. Considering that occupancy at all Homewood Suites open for at least a year reached 78%, the hotels generated more than $79 in revenue per available room (RevPar), says Jim Holthouser, senior vice president of Homewood Suites by Hilton.

The extended-stay business also is attractive to developers because margins are typically higher than those at other types of properties, says Bates. Extended-stay hotels service longer-term guests instead of transient travelers. While they offer larger suites with kitchen facilities, they don't offer costly amenities, such as room service, restaurants, operations and daily housekeeping.

Homewood Suites does offer daily housekeeping services, but linens and towels are only changed twice a week, leading to lower operating costs. The hotels also don't need to staff the front desk with three or four workers. Typically, one will do, further cutting down on operational costs, says Holthouser.

Who's the target customer?

Upscale extended-stay properties cater to corporate travelers on long-term assignments, sales professionals, and families looking for more spacious accommodations for the same daily rate they would pay for a much smaller room at a full-service hotel.

Midscale and economy properties, which often charge guests a weekly rate instead of a daily rate, typically attract construction workers and persons living in temporary housing or who are in the midst of relocating.

Across the board, demand for extended-stay hotels increased by 4.9% in 2004, the fastest rate of growth since 2002, and a faster growth rate than the 4.6% increase for the overall hotel industry, according to Smith Travel Research of Hendersonville, Tenn., and The Highland Group, an Atlanta-based hotel investment consultant.

“Consumers are realizing that they get more value for their dollar at an extended-stay hotel,” says Aaron Gumpenberger, an associate at HVS International, a hospitality consultant. Consequently, hotel companies are putting more marketing muscle into this segment, following the lead of Residence Inn, already a household name.

Playing field grows crowded

Several new brands have entered the market over the last decade, including Staybridge Suites, Mainstay Suites, Candlewood Suites, and Extended Stay America. Now owned by The Blackstone Group, Extended Stay America's four brands — Extended Stay America, Crossland Studios, Homestead Hotels, and StudioPlus — encompass more than 650 hotels, none of which are franchised.

The growth of Extended Stay America, coupled with brand recognition garnered by Residence Inn, the leading extended-stay brand with 482 properties, has helped augment consumer awareness. The growth of the sector also is helping to generate even more interest from developers, adds Mark Skinner, a partner at The Highland Group.

Equity Inns, a REIT based in Memphis-Tenn., owns 20 Residence Inns and 10 Homewood Suites. Howard Silver, CEO of Equity Inns, says the segment has great potential. In fact, many long-term guests would stay at extended-stay properties, Silver believes, if more existed in the markets in which they travel. Equity's Residence Inns and Homewood Suites are reporting growth in both the corporate and family markets. “These hotels provide a great value for the dollar,” says Silver.

Development pipeline expands

Hilton Hotels has benefited by the rebirth of Homewood Suites over the past six years, ever since the company decided to attach the Hilton name to the Homewood brand. Developers and travelers soon became aware that they could tap into Hilton's toll-free reservation system and guest loyalty program. “We can now offer a lot more value,” says Holthouser.

Homewood Suites by Hilton currently has 165 hotels in its portfolio, yet the brand is on track to double that count within the next 18 to 24 months. In fact, most of the major extended-stay hotels have large development pipelines.

All told, there were 8,711 extended-stay hotel rooms under construction at the end of last year, according to The Highland Group. Although that figure declined 6.6% from 9,329 rooms under construction at the end of 2003, numbers are expected to rise this year.

Residence Inn is leading the pack with new projects. It has 84 hotels and 10,576 rooms in its pipeline, followed by Homewood Suites by Hilton with 75 hotels and 8,339 rooms, according to Portsmouth, N.H.-based Lodging Econometrics.

Not to be outdone, Staybridge Suites has 55 hotels and 5,955 rooms in its pipeline, followed by Candlewood Suites with 54 hotels and 4,607 rooms, and TownePlace Suites with 26 hotels and 3,260 rooms, according to Lodging Econometrics.

“Residence Inn may be the biggest and best-known brand, but Homewood Suites and Staybridge Suites are also coming on strong as the sales teams are clicking them into play,” says Patrick Ford, president of Lodging Econometrics.

Other hotel companies also hope to grow their extended-stay chains through new development. Mainstay Suites, which was launched in 1996, only has 28 hotels open now, but it has 18 hotels under development with 4,401 rooms, according to Choice. Mainstay Suites Hotels cost about $50,000 per room to build, excluding land, says Thiergart. “We're building the brand back up,” he says.

Between Mainstay and its new Suburban Extended Stay Hotel chain, Choice has high hopes for the extended-stay segment and is receiving a lot of interest from the development community, adds Thiergart.

Is this sector recession proof?

Historically, hotel product segments that depend on transient business travel and meeting events are vulnerable during recessionary periods. But extended-stay properties cater to travelers who must remain in one place for an extended duration. For example, attorneys working on trials out of town, construction workers on large jobs, insurance adjusters and corporate trainers all typically stay at extended-stay hotels.

The real estate fundamentals reveal the resiliency of the extended-stay sector. Even as the economy slipped into recession in 2001, for example, the occupancy rate at extended-stay hotels registered a healthy 73.7%. That figure dipped slightly to 72.2% in 2002 and 71.7% in 2003. Last year, occupancy rose to 73.5%, much above the 61.3% overall average occupancy rate at U.S. hotels.

This year, the extended-stay sector has continued to prosper. For the first three quarters of 2005, occupancy hit 76.7%. The average daily rate rose from $64.07 in 2004 to $68.61 during the same period. (Those figures take into account an average daily rate ranging from $26 to $30 at economy hotels and a higher rate ranging from $98 to $105 at high-end hotels.)

RevPar has also ticked up. After falling significantly from $48.49 in 2001 to $44.51 in 2003, RevPar has been climbing. As of the third quarter of 2005, RevPar registered $52.61, according to The Highland Group and Smith Travel Research.

Good time to expand

One developer reaping the benefits of the extended-stay segment is Good Hospitality Services in Valparaiso, Ind. Good is currently constructing three Homewood Suites: two in Indianapolis and one in Bloomington, Ind. With 15 properties, Good currently owns only one extended-stay hotel, a Homewood Suites, which opened two years ago near the Indianapolis airport.

Although approximately 30% to 40% of the hotel's guests stay five to 14 days, the property also performs particularly well on the weekends. That's when families move in and take advantage of the spacious suites with kitchen facilities, says President Jeff Good.

The goal is full occupancy. “Our bread and butter is extended-stay business,” says Hilton's Holthouser, “but we also target families as our secondary market.”

Robyn Parets is a Boston-based writer.

EXTENDED-STAY HOTEL OPENINGS
Upper Tier* Middle Tier** Lower Tier*** Total Openings
Year Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
2006 Est. 73 8,219 50 4,607 4 392 127 13,128
2005 Est. 48 5,361 20 1,731 1 104 69 7,196
2004 30 3,089 21 2,252 16 1,658 67 6,999
* Includes: Hawthorn Suites, Homewood Suites by Hilton, Residence Inn and Summerfield Suites
** Includes: Candlewood Suites, Hawthorn Suites LTD., Mainstay Suites, Sierra Suites, Staybridge Suites and TownePlace Suites
*** Includes: Crossland Studio Suites, Extended Stay America and Surburban Extended Stay Hotels
Source: Lodging Econometrics