Author: Peggy Berg, The Highland Group

This report on the status of the extended-stay lodging industry in the United States was prepared by The Highland Group as a service to the industry. We are grateful to the extended-stay hotel chains and owners that contributed information to this report and trust that the results will be useful. While accurate to the best of our knowledge, we do not warrant the accuracy of any information presented, nor do we warrant that any projections will be achieved. This information should not be relied upon to make any investment or management decision without further research and analysis.

• Extended-stay hotel room supply in the United States increased 54 percent in 1997 over 1996. Our figures indicate that 38,000 new extended-stay rooms opened during the first ten months of 1997.

• Based on development plans of existing extended stay lodging companies, 80,000 extended-stay rooms are projected to be added each year for the next five years.

• Atlanta is a benchmark city for extended-stay hotels because of the depth and diversity of extended stay supply in the city. As of the end of 1997, extended-stay room supply topped 11,000 in Atlanta. This represents 16 percent of the total Atlanta hotel inventory.

• There will be more economy-price than upscale extended-stay rooms before the end of 1998. This is a significant reversal from prior years and indicates a change in the way extended stay lodging is used by American travelers.

• Projected extended-stay hotel supply will be more than half a million rooms through 2002. At this level, extended stay hotel rooms will represent some 12 percent of total lodging inventory.

• Extended-stay demand grew at an annual rate of 54 percent in 1997, absorbing new rooms as they opened.

The database used in forming the estimations and projections in this report included the extended-stay brands in the table following. There are other independent extended-stay hotels that were not included, but the sample represents the great majority of extended-stay rooms in the US.

 Brands are grouped by the weekly room rate range in which their hotels conform. However, individual hotels of a given brand may have weekly rates outside the ranges in certain markets and we have adjusted for these variations.

Extended-stay room supply increased 54 percent during the first 10 months of 1997 compared to year-end 1996. Supply gains in 1997 followed a 32 percent increase in 1996 over 1995. Extended-stay hotel rooms currently represent about 3 percent of total US hotel room supply. The graph following shows the increase in extended-stay hotels rooms by rate tier since 1990.

Extended-stay hotel supply approached 107,000 rooms through October 1997 as shown below:

The fastest supply percentage increase occurred in the mid-price and budget segments because they are the smallest groups. The greatest number of rooms was added in the economy segment and more economy extended-stay rooms are under construction than rooms in other segments:

Projected room additions through 2002 in the economy segment are also the strongest, and this segment is projected to have the greatest number of rooms before the end of 1998, as follows:

Assuming supply growth projections are fully realized through 2002, extended-stay rooms will be distributed according to the table following.

This represents a significant change from the current distribution and marks a change in the way Americans use extended-stay lodging. Use of extended-stay lodging will have expanded from the corporate expense-account market to encompass most demographic segments. Corporations are taking advantage of the availability of these facilities for training, relocation and temporary assignments at all levels.

According to Smith Travel Research, total US hotel room supply increased at an average annual rate of 1.5 percent from 1990 through October 1997. Assuming total room supply increases at the same rate through 2000 and extended-stay hotels growth projections are fully realized, extended-stay hotel rooms will account for about 12 percent of total US hotel room supply through 2002.

Average extended-stay hotel occupancy was 79.6 percent through October 1997, which was the same as year-end 1996 occupancy despite a 54 percent increase in supply. This represents remarkable expansion of demand in response to new product. The table following shows historic extended-stay hotel demand growth.

Extended-stay room demand grew at an annualized rate of 54 percent in 1997 compared to 1996. This equates to a gain of almost 11 million room nights in 1997 following an increase of nearly 5 million room nights in 1996 compared to 1995. New extended-stay rooms are being absorbed rapidly on a national level. The table following shows average extended-stay hotel occupancy according to rate tier.

Occupancy is highest in the budget segment, which is consistent with the inverse relationship between average length of stay and price. (Average length of stay increases as price decreases and a long average stay tends to promote higher occupancy.) Ultimately, we project that occupancy in economy and mid-price segment will be higher than in the upscale category. Lower occupancy in these segments compared to the upscale tier reflects a relatively high number of new rooms currently under absorption in mid-price and economy segments.

The table following shows average rate for extended-stay hotels according to rate tier.

The overall average rate for extended-stay hotels declined to $67 in 1997 from $71 in 1996. Average rates rose in the upscale segment but the overall average rate declined because of the large increase in lower-priced extended-stay hotels.

We project that the strongest average rate increases will occur in the mid-price segment because of the projected increases in the proportion of hotels priced in the upper end of this category.

Atlanta and Dallas share many similarities. Both Metropolitan Statistical Areas (MSAs) are similar in terms of population and employment size, mix of industries and economic growth. Dallas and Atlanta are high growth MSAs and their hotel market mixes are predominantly commercial. We compared the status of extended-stay lodging in Atlanta and Dallas as highlighted in the following paragraphs.

Supply: Atlanta and Dallas

Atlanta has more extended-stay hotel rooms than any other MSA in the nation. At 11,005 extended-stay rooms, Atlanta has more than two and one half times as many extended-stay rooms as Dallas, as shown in the table following.

Extended-stay hotel rooms represent 16 percent of total hotel rooms in Atlanta compared to 9 percent in Dallas. Demand accommodated in extended-stay hotels in Atlanta accounts for 20 percent of total MSA hotel demand. The respective figure in Dallas is 10 percent. Extended-stay hotels have a greater share of demand than supply, which accounts for their higher occupancies.

One of the reasons for disproportionately high extended-stay supply and demand statistics in Atlanta compared to Dallas is Atlanta’s large supply of budget-priced extended-stay hotels, as shown in the table following.

Atlanta has more than 3,300 budget-priced extended-stay hotel rooms, many of which have very long average stays. They operate at high occupancy and many operate at rent levels that would not be economically feasible for a comparable property built today. Direct comparisons between extended-stay supply and demand statistics in Atlanta and Dallas should consider Atlanta’s budget-priced extended-stay hotel community. However, Atlanta still has almost twice as many upscale, mid-price and economy-priced extended-stay hotels as Dallas. The tables following show extended-stay hotel rooms under construction and planned for Atlanta and Dallas.

Source: The Highland Group

According to Smith Travel Research, average annual hotel room supply growth from 1987 through October 1997 was 1.7 percent in Dallas and 3.5 percent in Atlanta. Assuming respective total supply growth rates are maintained and extended-stay hotel growth projections are fully realized through 2002, extended-stay hotel rooms will represent 31 and 27 percent of total hotel room inventory in Dallas and Atlanta respectively.

More than 3,200 extended-stay hotel rooms are currently under construction in Dallas, of which 67 percent are in the economy segment. Atlanta has 1,290 extended-stay rooms under construction, of which 48 percent are in the economy segment. Future room additions planned in Dallas and Atlanta are similar but no upscale extended-stay hotel companies have announced plans for new hotels in Dallas. The economy segment has the greatest number of rooms planned for Atlanta and Dallas.

Demand: Atlanta and Dallas

Room night demand in extended-stay hotels in Dallas increased 648 percent from 1990 through October 1997. The comparable increase in Atlanta, which had a larger base of supply, was 83 percent. The table following shows annual change in extended-stay demand in Atlanta and Dallas.

Considerably stronger relative extended-stay demand growth in Dallas compared to Atlanta is attributable to the smaller number of extended-stay rooms in Dallas. Atlanta absorbed over 2,100 extended-stay rooms more than Dallas from 1990 through October 1997. Demand growth for extended-stay hotels has been stronger than overall hotel demand growth in both Dallas and Atlanta, particularly since 1995, as shown in the graph following.

Demand growth for extended-stay hotels is projected to exceed overall hotel demand growth in Atlanta and Dallas. However, discussions with operators of newer extended-stay hotels in Atlanta indicated a lengthening in absorption time for new product. Additionally, we noticed increased competition between extended-stay hotels, particularly in the mid-price and upscale segments. Competition between extended-stay hotels will intensify in Atlanta and Dallas and some over building will occur in certain sectors of both MSAs. However, the findings of this research indicate that Atlanta and Dallas overall are unlikely to become over-supplied extended-stay hotel markets in the near term.

Atlanta generates high amounts of extended-stay demand compared to many MSAs. This is reflected in Atlanta’s high ratio of extended-stay hotel rooms to total hotel rooms, which is the highest in the nation to the best of our knowledge. While many MSAs may not be able to support the same ratio of extended-stay hotel rooms to total hotel rooms as Atlanta, our research indicates that there is considerable room for extended-stay supply growth in many MSAs around the nation.