The extended-stay segment of the hotel market continues to prove why it is a favorite among developers. While the segment posted its first RevPAR decline in six years in 2008, it still outperforms the rest of the industry in a number of key ways, according to a new report from The Highland Group, an Atlanta-based consulting firm that tracks the business.

Despite a slight downturn in the fourth quarter, extended-stay demand increased by 1.2% last year. And while occupancy softened (down 3.7 points over 2007 to 70%), the sector still led the overall hotel industry by nearly 10 occupancy points. The segment’s Achilles heel in ’08 was supply growth: up 6.7%, the fastest rate of growth in seven years, according to the report.

“What’s amazing is the performance of the upscale segment of the extended-stay market,” says Mark Skinner, a Highland partner and author of the report. “Last year, upscale supply grew by 9.5%, the most for any segment, yet demand still rose by nearly 6%. Upscale has been the extended-stay growth engine for the last eight to 10 years.”

The economy and mid-price segments of extended stay both posted decreases in demand, which Skinner attributes to declines in the construction industry, a key target market for both segments. He adds that while extended stay typically lags the start of a recession, the mid-priced and economy segments led the downturn this time, again a function of the steep slowdown in business from construction crews.

“During the last downturn, extended stay lagged by one to two quarters both going in and coming out of the recession,” says Skinner. “Perhaps this time, it will lead the upswing. Time will tell.”

Skinner believes last year’s strong supply growth will be the peak in development activity for at least a few years. However, the firm projects the number of extended-stay rooms will increase by 3.4% yearly for the next five years. If that’s the case, the supply of extended-stay units will grow from 295,707 in 2008 to 350,086 by 2013.

“There will be attrition in the development pipeline across the board,” says Skinner, “but development will continue because most projects can still get financed by local lenders, who are still providing money for the right kinds of development.”

The lure for most developers is the high gross operating profits (GOPs) generated by extended-stay hotels. Economy, mid-price and upscale extended-stay properties reported average GOPs of 53, 55 and 52 percent, respectively.

Given the economic and lending climate, Skinner doesn’t believe any new extended-stay products will be introduced to the marketplace in the next few years. (The latest product announcement came in January with the launch of Home2 Suites by Homewood, a new mid-priced Hilton extended-stay brand.) However, he sees a possible niche for new product between the upscale (with an average rate of $122) and the mid-price ($67 ADR) segments.

“Perhaps a product in the $90 ADR range would work,” he says. “Another opportunity exists for more development at the very top of the market in select cities for brands such as Element and Hyatt Summerfield Suites.”