Extended-stay hotels’ relatively large share of business travelers and of revenues from the top 25 U.S. markets should cushion the anticipated slowdown in the rate of RevPAR increases.
Extended-stay hotels and the overall hotel industry follow very similar cycles. Consequently, if STR’s forecast of significantly lower revenue-per-available-room growth in the hotel industry during 2012 compared to 2011 is realized, extended-stay hotels likely are to follow a similar trend.
However, extended-stay hotels’ relatively large share of business travelers and of revenues from the top 25 U.S. markets should cushion the anticipated slowdown in the rate of RevPAR increases.
In light of STR’s sharp downward revision in forecasted overall hotel RevPAR during 2012—3.9% compared to the 7% forecast in August—we have revised our projections for the extended-stay segment.
In an article following STR’s revised forecast, the Hendersonville, Tennessee-based research company indicated that in 2012 there would be little or no increase in leisure travel because its fundamental drivers, including house values, disposable income and lower unemployment, are projected to show little, if any, improvement next year. Corporate transient and group demand are forecast to increase in 2012, but with leisure travelers accounting for, by some measures, 50% of total hotel roomnights, STR forecasts overall hotel demand will increase by only 1.1% in 2012 compared to 4.7% in 2011. Leisure travelers are estimated to account for only 28% of roomnights in extended-stay hotels. Therefore, if STR’s segmented demand forecast is realized, extended-stay hotels should see faster annual demand growth than the hotel industry in 2012, as they have done almost every year during the past decade.
STR’s most recent forecast predicts overall hotel average rate will increase 3.7% during 2012 compared to 2011. This was a downward revision from their 4.9% forecast delivered during August 2011.
As tends to happen during expansionary periods, extended-stay hotel ADR started increasing faster than overall hotel ADR in the second quarter of 2011; this trend is projected to continue during 2012.
Extended-stay hotels are a price buy, and slower overall hotel ADR growth will have an impact on the segment. Here the distribution of extended-stay hotels should offer some protection because extended-stay hotels derive a relatively large share of their revenues from the top 25 markets. For the first three quarters of 2011, STR reported that ADR growth in the top 25 markets was 4.6% compared to 3.6% overall.
The top 25 markets are forecast to continue to lead on ADR growth, and, as a result, the increase in extended-stay ADR should accelerate.
Largely due to stronger rates of supply growth suppressing occupancy gains, extended-stay RevPAR increases lagged the overall hotel industry for close to two years during the previous recovery in hotel markets. Driven by strong growth in demand and occupancy, this recovery saw extended-stay hotel RevPAR growth in the lead initially.
However, extended-stay hotels accommodated a lot of discounted extended-stay contracts during the recession, and displacing these guests impeded ADR gains and consequently RevPAR growth during 2011.
Emerging from the last downturn, extended-stay hotels took about 19 quarters to return nominal RevPAR to the peak set in 2000. In 2012 extended-stay nominal RevPAR should return to the peaks achieved in 2007. That would be about the same time it took during the previous recovery.
The table following summarizes recent history and our forecast for 2011 and 2012.
Mark Skinner is a principal with Atlanta-based Highland Group. He can be reached at email@example.com.
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