CHICAGO—Much like the rest of the hotel industry, the name of the game for the 320,000 extended-stay hotel rooms in the U.S. is all about raising average rates.
During a breakout session Monday at the Midwest Lodging Investors Summit in Chicago, extended-stay experts lamented the drop in rate the sector experienced during the recession and said now is the time for operators to be aggressive when it comes to increasing ADR.
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Kevin Lewis of the American Hotel & Lodging Association’s Extended Stay Council said mid-market and economy extended-stay properties have enjoyed increases in revenue per available room, and a refocus on local sales-and-marketing efforts present a good opportunity for rate growth during the next 24 months.
Bill Duncan, who runs Hilton Worldwide’s Homewood Suites and Home2 Suites by Hilton brands, said the well-established Homewood brand is experiencing capacity issues during peak mid-week nights, and that’s a sure signal to operators that it’s time to boost revenue through rates.
Liz Perkins of Apple REIT Companies said using proper revenue-management techniques is more important than ever, but the first step in aggressively raising average rates at extended-stay properties is to ensure the general manager and the rest of the staff has the confidence to be aggressive.
“It’s about building back the confidence level that they deserve to have onsite—not next year, but now,” Perkins said. “Our extended-stay brands are reaching healthy occupancy levels.
Don’t let yourself sit with that a lack of confidence and not push forward.”
Perkins said Apple’s extended-stay portfolio has collectively seen RevPAR increases of between 5% and 7%—mostly because of improved occupancy. Additional RevPAR growth will come through more aggressive rate structures, she said. Apple has about 80 extended-stay hotels in its portfolio.
Fundamental shifts
The nasty economy of late 2008 through early 2010 had a long-lasting affect on the entire hotel industry. The extended-stay segment, which represents about 6.5% of the total rooms in the overall industry, saw some fundamental shifts of business during the recession.
Apple did what it needed to do to keep cash flowing, according to Perkins. She said the industry as a whole signed contracts with clients to get business in the door and remain competitive.
“One of the things going on was during the recession there were a lot of longer term contract business taken in at lower rates,” said Mark Skinner of The Highland Group. “That may be an issue now … getting some of that (business) out to raise rates more quickly.
“As those (contracts) come due, do they really give you the production (to help drive rate)?” Perkins said. “Partnering with the right accounts and playing that game of revenue managing the business you have—even taking less government (business) if that rate went down.”
The much-publicized decrease in government per-diem rates had a dramatic effect on extended-stay hotels, Duncan said.
“Government is still the top producer for extended stay—the per diem cuts played a big role in lower rates,” he said. “It is suppressing rate growth in an important strategic segment (of business).”
The panelists agreed that an expected increase in government per-diem rates in October will go a long way in helping the recovery of the extended-stay segment.
The rate-raising highway
Perkins said that if extended-stay hotels stay aggressive in their own backyards—which is the basic sales tenant the segment has thrived under for the past 15 years—rates will move upward.
Beyond that, there is no clear-cut reason for extended-stay rates to be so suppressed, Skinner said. There are a number of things working in the segment’s favor, including:
- The slowest rate of supply growth for more than 20 years;
- room demand and revenues at all time highs; and
- the largest increase in demand for a decade occurred during 2010.
Skinner said the average length of stay at extended-stay hotels increased by two nights from 2008 to 2010—another reason operators should feel comfortable about raising rates. But as those operators venture down the rate-raising highway, they must not forget to maintain a healthy rate of business that stays for five nights or more, the panelists said.
“Profitability is having the extended-stay base,” Perkins said. “That’s what makes it attractive to owner.”
She said Apple’s mostly upscale extended-stay portfolio experienced a big drop off in transient business during the recession.
“The farther the price point you go down, the more it was affected,” Lewis said. “At the economy level, all the construction and training (business) dried up. On the economy side, we saw a disproportionate increase in occupancy in transient business. If we do too much transient (business), our business model blows up.”
Duncan said Hilton’s extended-stay properties strive for a mix comprising at least 50% business travelers and use transient travelers to fill in.
The panelists said they expect second-quarter numbers to show an improved average rate, and the extended-stay segment will use 2012 to gain serious momentum. With limited supply growth expected through at least the first half of 2013, operators will have ample opportunity to increase rate, they said.
When Skinner asked the panelists if they thought double-digit RevPAR growth was in the cards for extended-stay, they agreed that reaching that milestone is a distinct probability during 2012.