Generally, extended-stay hotel trends mirror trends in the overall hotel industry. Growth in supply picks up when capital is available and/or revenue per available room is expected to increase. Contractions also tend to follow similar paths. In light of the recently released forecast, Smith Travel Research made for the U.S. hotel industry for 2009 through 2011, we offer our forecast for the extended-stay segment through the same years.
Note: (1) Projected year end
Sources: STR, The Highland Group
During the downturn that began in 2001, extended-stay hotel demand grew faster than overall hotel demand but not as quickly as extended-stay hotel supply until about the middle of 2003. Then followed a period of about two years when extended-stay hotel demand grew faster than supply. Extended-stay hotel demand grew 1.7 percent in the third quarter of 2009 but demand is still projected to decline by 1.5 percent for the entire year. While this is a much lower decline than the 5.9 percent STR is forecasting for all hotels, extended-stay supply growth in 2009 is projected to be 7 percent. As a result, the decline in occupancy is projected to be similar to that for all hotels.
Extended-stay hotels often are positioned as a better value than comparable traditional hotels—especially for longer-term guests. During the previous downturn extended-stay hotels offered deeper discounts than traditional hotels, and rates did not increase faster than overall hotel rates until mid-2004. Extended-stay hotel rates then rose relatively quickly for about the next four years.
Note: (1) Projected year end
Sources: STR, The Highland Group
Extended-stay average rates are projected to be 9 percent lower in 2009 than in 2008. STR forecasts that overall hotel average rates will decline 8.9 percent in 2009. While the projected annual declines are similar, extended-stay hotels have been offering deeper discounts recently and average rates were 11.5 percent lower in the third quarter of 2009 compared to the same period in 2008. We attribute this to discounting to promote absorption of rapid extended-stay supply growth, and this is expected to persist into 2010 at least. Accordingly, we project that extended-stay hotel average rates will decline 4.2 percent in 2010 compared to 2009. STR’s corresponding forecast for all hotels is a 3.4-percent decline.
At mid-year 2009, there were 17,971 extended-stay hotel rooms reported as under construction. Not all of these rooms will open eventually but we expect extended-stay hotel supply growth to be 3.2 percent in 2010. If the correlation between overall hotel and extended-stay supply growth is similar to when we emerged from the previous downturn and STR’s forecast of 0.8 percent overall room supply growth in 2011 is realized, then extended-stay hotel room supply should rise 2.8 percent in 2011. If the correlation between demand growth also is similar to what we experienced in 2003 and 2004, extended-stay hotel demand is projected to rise 2.9 percent in 2010 and 3.9 percent in 2011.
Extended-stay demand is projected to start rising faster than supply in 2011. With a modest 1.8-percent increase forecast for average rates, extended-stay hotel RevPAR is projected to increase 2.9 percent in 2011 after declining 4.5 percent in 2010.
Note: (1) Projected year end
Sources: STR Global, The Highland Group
Projections for extended-stay hotel RevPAR are predicated on the correlation between overall hotels and extended-stay hotels being essentially the same as when we emerged from the last downturn. A key part of that relationship was and still is the rate of increase in extended-stay hotel supply. There is not much that can be done about rooms that are actually under construction, of which an estimated 10,000 will open in 2010, but a reduction in the expected rate of extended-stay supply growth would magnify forecast gains in RevPAR in 2011.
The table following summarizes our forecast.
Mark Skinner, ISHC is a partner with The Highland Group, an Atlanta based hospitality consulting and research firm. The company offers consulting and research services on all types of hotels but is perhaps best known for its quarterly and annual reports on extended-stay lodging which have been quoted widely in the media for several years.
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