Quick recovery expected for extended-stay hotels
Quick recovery expected for extended-stay hotels
13 MAY 2010 7:59 AM

The Highland Group forecasts demand for extended-stay hotels to increase 7.3 percent in 2010 and 3.9 percent in 2011 if overall demand in 2010 reaches expected levels.

The hotel industry’s performance during the first quarter of 2010 was stronger than expected, and early indications suggest the pace of recovery could be significantly faster than was anticipated as recently as the end of 2009. Generally, extended-stay hotel trends mirror trends in the overall hotel industry. Extended-stay hotel performance exceeded expectations and also bettered overall industry performance improvement during the first quarter 2010.

Mark Skinner

Extended-stay demand was up 16.5 percent during the first quarter of 2009. In 2010, extended-stay hotels accommodated a record number of roomnights during any first-quarter period. The 10.4-percent increase in occupancy was the greatest gain in more than a decade, and the quarterly change in revenue per available room was positive for the first time since the middle of 2008.

STR’s recently revised forecast for the United States hotel industry for 2010 and 2011 projects stronger performance than its forecast issued in the fourth quarter of last year. We believe that extended-stay hotels will recover more quickly than we had anticipated six months ago, and we offer our forecast for the extended-stay segment through the same years. 
Click image to enlarge.
Note: (1) Projected year end
Sources: STR, The Highland Group

During the downturn that began during 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. Changes in the rates of extended-stay supply and demand growth are expected to be more acute during this recovery, and average occupancy is projected to rise more quickly than it did following the last recession in 2004 and 2005.

During this and the previous downturn, extended-stay hotels offered deeper discounts than traditional hotels, and rates did not increase faster than overall hotel rates until more than two years after the recovery began. Extended-stay hotel rates then rose relatively quickly for about the next four years.

Click image to enlarge.
Note: (1) Projected year end
Sources: STR, The Highland Group

Extended-stay average rates declined 10.2 percent during 2009 compared to an 8.8-percent fall for the overall hotel industry. STR reported overall hotel average rates were down 4.3 percent in the first quarter of 2010, but the monthly decline in March was only 2 percent.  Extended-stay hotel discounting also reacted positively to growth in demand. Midway through the first quarter it appeared extended-stay hotel average rates would post a first-quarter decline between 11 percent and 14 percent. However, smaller discounting later in the quarter reduced the total first-quarter drop in average rate to 8.6 percent. This means rate discounting had declined to between 4 percent and 5 percent later in the first quarter.

At year-end 2009, there were 11,456 extended-stay hotel rooms reported as under construction. Only 1,068 of these rooms opened during the first quarter of 2010 compared to more than 4,400 in the first quarter of 2009. Bad weather during 2010 is likely to have delayed some openings. The number of rooms opening during 2010 will increase, but not all of these rooms will open, and we expect extended-stay hotel supply growth to be 3 percent in 2010 and 1.5 percent in 2011.

If the correlation between overall hotel and extended-stay demand growth is similar to when we emerged from the previous downturn and STR’s forecast of 4.1 percent overall demand growth in 2010 and a 2.9-percent rise in 2011 are realized, then extended-stay hotel demand should rise 7.3 percent in 2010 and 3.9 percent in 2011. Extended-stay demand is projected to start rising faster than supply in 2010. With a modest 2.8-percent decrease forecast for average rates, extended-stay hotel RevPAR is projected to increase 1.3 percent in 2010.

The table following summarizes our forecast.

Extended-Stay Hotel Forecast
  2009(1) 2010(2) 2010(3) 2011(3)
Room Supply 6.7% 5.5% 3.0% 1.5%
Demand 0.4% 16.5% 7.3% 3.9%
Average Rate -10.2% -8.6% -2.8% 2.2%
Occupancy -5.8% 10.4% 4.2% 3.9%
RevPAR -15.4% 0.9% 1.3% 4.5%
Notes: (1) Actual year end
          (2) First quarter 2010 compared to first quarter 2009
          (3) Projected year end
Source: The Highland Group

Mark Skinner is a principal with Atlanta-based Highland Group. He can be reached at mskinner@highland-group.net.

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