HENDERSONVILLE, Tennessee—As the majority of hotel operators await the reawakening of the business traveler from its banking crisis-induced slumber, one area of the lodging industry seemingly sheltered from the storm is the extended-stay segment. As of April 2009, STR tracks 2,600 hotels with 302,000 rooms in this segment. Interestingly, the segment has seen only mild performance deterioration. This year, demand declined year-to-date through April only 1.9 percent, compared with the total U.S. extended-stay decline of 8.1 percent. Revenue declined only 8.5 percent, compared with -15.6 percent for the total U.S.
It is interesting to note that the total U.S. hotel occupancy and the extended-stay segment occupancy decline through April are almost the same, -11 percent for the U.S. and -10.2 percent for the segment. However, the changes were caused by different fundamentals as the strong supply growth overshadowed the moderate demand decline for extended hotels and in the U.S. the muted supply growth amplified the rapid demand deterioration. The results, in either case, were almost the same; revenue per available room declined 18.2 percent for the U.S. and fell 16.3 percent for the segment.
Looking back to the end of 2008, the overall lodging industry felt the impact of the financial meltdown and the recession as demand declined 1.9 percent and rates increased 2.5 percent. The extended-stay segment seemingly was unaffected by the growing cutbacks in corporate travel as annual demand increased 3.4 percent. Despite these strong demand numbers, even through the fourth quarter, extended-stay operators also felt they could not stem the tide of growing rate cuts. Year-end average daily rate was only 2.1 percent higher than a year before, dragged down by negative ADR changes in the last quarter. Total rooms revenue was 5.6 percent higher than in 2007. The segment generated almost $6 billion in revenue, or around 5.6 percent of the total industry revenue of $107 billion.
The only fly in the ointment for the segment is the rapidly growing supply number. Through April some 25,000 rooms (roughly 3 million roomnights) were added compared with last year. This increase in new rooms equated to a supply increase of 9.3 percent, almost triple the 3.2 percent supply growth of the industry as a whole. Clearly, the ADR increases of 6.3 percent in 2005, 10.3 percent in 2006 and 5.7 percent in 2007 attracted a lot of developer attention. It seems certain that competitors in the segment will need to learn to live with a lot more new rooms in their marketplace and need to adjust their strategies accordingly.
It stands to reason that the target market of the segment is not as fickle as the individual business traveler and hence the segment is somewhat more insulated from the immediate impact of the cutback in corporate travel. Companies hiring consultants or engineers on long-term contracts might ride out their contracts and therefore the extended-stay segment might see fundamentals deteriorate a little bit later. It will be interesting to note if the recovery of the segment also lags the broader industry.
