August 19, 2021

Extended-Stay Hoteliers Play to Strengths, Step Up Growth

By Bryan Wroten
Hotel News Now
June 3, 2021 | 8:49 AM

Extended-stay hotels performed relatively well in the U.S. during the pandemic, sometimes acting as a buoy for other hotel types that struggled more.

During the “Here To (Extended) Stay” panel at the 2021 Hunter Hotel Investment Conference, executives said the extended-stay hotels in their portfolios helped to manage the losses of the past year.

“We walked into this crisis already set up for the success of it,” said Nick Esterline, president and founder of Kansas-based hotel development, investment and management firm TGC Group. “We focused on our guest and made sure we went back to our roots a little bit.”

TGC Group manages twelve extended-stay hotels across several states and brands. The extended-stay model is built to work through tough times and it proved itself over the course of 2020, said Jim Darter, president and CEO of hospitality management firm Sandpiper Hospitality. Sandpiper manages more than 40 extended-stay hotels, most under the WoodSpring Suites and Extended Stay America brands.

“If you’re doing what you should be doing and putting more and more extended-stay occupancy in it, you have a step up on what happened in 2020,” he said.

The first instinct in a crisis like the COVID-19 pandemic is to cut expenses, but within weeks of the pandemic’s onset, Sandpiper’s management realized revenue would continue to be strong even with some losses, and focusing on yield management through sales could drive more demand to the hotel, Darter said. “For the most part, our focus was on taking advantage of the revenue that was there in the markets,” he said.

By June, Darter said the company was surpassing its 2019 performance levels, which was “a testament to our focus on the revenue side, yield management and doing the smart things with our staff.” Construction

U.S. extended-stay hotel room supply grew 3.9% in 2020, even as overall hotel supply decreased about 3.6%, said moderator Mark Skinner, partner at The Highland Group. Extended-stay room demand dropped 16%, but overall hotel demand was down twice that.

The number of extended-stay hotel rooms under construction in the U.S. was down by 4.5%, but still at about 45,000 rooms by the end of 2020. The high-water mark for extended-stay rooms in the construction phase was 2017 at 50,000.

“So we’re not really that far below it at the end of 2020,” Skinner said.

StayApt Suites President and CEO Gary DeLapp said his company is building 100 corporate hotels, with 10 expected to open in 2021 and 10 more in 2022. The company is working with private equity firm Lindsay Goldberg, which has committed $300 million for DeLapp to follow the same model he used when rolling out the WoodSpring Suites brand as its former president and CEO. The price of lumber has been a challenge and is holding back projects, he said, but despite rising construction costs, the company is ready to launch a new brand. “We made the decision that when you launch a new brand, you’ve got to put your money where your month is,” he said. “We’ve done that by putting our personal dollars into these products, and we made a decision to go forward with this in spite of the lumber prices being at an all-time high, because we’ve got to demonstrate that this product is good.”

Esterline said TGC Group is keeping its foot on the gas with three extended-stay properties currently under construction. When the price of lumber came down and then swung back up, the company was able to buy all three packages and lock in a “miraculously good” price for their subcontractors, he said.

“We’ve got eight or nine under development in some various stage of construction and we’re going to forge through,” he said.

The extended-stay hotel product, especially in the economy chain scale, is in such high demand that this approach makes sense for his company, he said. Several developers are approaching with permit-ready projects and a sufficient balance sheet and capital stack, he said.

“We just decided regardless of the increases, we’re going to keep pushing,” he said. “We’re still being built with the underwriting. We’re still going to push ahead through this. It’s going to normalize sooner than people think.”

Construction costs are a short-term impediment to deals, but developers are persistent in the belief that projects will pay off in the end, Darter said. Delays will ultimately give way to a gain in hotel supply, which will create more opportunities, he said.

“It’s actually incredibly ironic that at the same time there’s as much interest as there is in extended stay right now that there’s also this impediment,” he said. “It’s a good news/bad news scenario.”

Hilton has rolled out a new Homewood Suites prototype that seeks to address rising construction costs, in part by reducing the physical size of properties, which is the result of owner feedback, said Rick Colling, global head of Homewood Suites at Hilton. The standard acreage of a Homewood Suites hotel has been reduced from 2.5 acres to 2.36 acres, he said. The gross square footage of the building has decreased by 3,250 square feet.

“It’s all based on the environment we live in,” he said. “We had to provide owners and operators the opportunity to invest in a brand that’s efficient and effective and runs tremendous [gross operating profit] margins.”

StayApt is considering projects in 25 to 30 U.S. markets, DeLapp said, noting the pricing in real estate has gone up. The company has taken over projects that were approved but abandoned by original developers.

It still will be tougher to find places to develop, he said.

“You got to really unpack to find the right site, but they’re out there,” he said. Esterline said TGC Group’s director of development is looking at three to five deal proposals a week, and pricing is starting to become a problem. Labor

Labor is the biggest issue currently facing hotels, and Darter said the best companies with the right culture and work environment will win the staffing challenge. One successful hiring strategy has been to consider overall compensation, not just wages, he said, citing other ways to compensate staff, such as through vaccination incentives.

It’s going to be difficult for many hotel companies to raise wages, and margins may change a bit, he said. For example, to make up for higher wages, some hoteliers might eliminate food and beverage options or reduce daily room cleanings.

TGC Group acquired a hotel in Montana where the staff all quit and demanded higher wages as a condition of returning, Esterline said.

“Literally overnight, our labor jumped $2 to $3 per hour just to get people back,” he said.

It has helped to look at the situation from a standpoint that everyone deserves a quality job, a quality employer and an opportunity for a quality of life that they maintain for themselves, he said.

“There may be some short-term pain with that, stepping out and creating those opportunities. I think they’ll right-size themselves with pricing on our side,” he said. Wage pressures won’t go away and will continue to worsen, DeLapp said. Fewer workers are available, and rates are moving to $15 an hour for front-desk and housekeeping positions, he said.

The industry has always been slow to adapt to new things, he said, noting more and enhanced contactless check-ins and mobile bookings will be forced on hoteliers. His company has about five full-time employees at each property, and outsources laundry service and maintenance.

“You’re going to see more and more of those sorts of things happen in the industry,” he said.