Taking An ‘Extended’ Look

By Dennis Nessler | October 1, 2020

For a number of years now the extended-stay segment has consistently been outperforming other hospitality segments and that trend has only been amplified in the wake of the pandemic as demand has declined significantly for many aspects of the industry.

While the extended-stay segment has seen performance trail off from previous levels since March, it has not been impacted nearly as much as one might expect due in large part to employees who have not been able to work remotely and require long-term accommodations, such as health care and construction workers. In addition, the low-cost model—which includes kitchens allowing guests to prepare their own meals and not be further exposed to others—is particularly appealing at this time.

Mark Skinner, partner at The Highland Group, elaborated on the segment’s relative gains during a Hotel Community Forum (HCF) threaded discussion earlier this week entitled “The Success of Extended Stays During The Pandemic.”

He noted that the 1.2% increase in economy extended-stay hotel demand in July 2020 compared to one year ago was the first such gain in demand reported by any segment of the hotel industry in the last six months. In addition, economy extended-stay hotels also posted their smallest monthly RevPAR loss since the metric started falling in March.

“It will be several months before the overall hotel industry reports positive monthly change in demand compared to the previous year, and economy extended-stay hotels achieving that last month is a very welcome start,” said Skinner in a press release issued in early September.

Skinner was asked during the HCF discussion if he was surprised by the segment’s performance during the COVID-19 pandemic. “It is not surprising in itself but the size of the performance difference is, especially in the economy extended-stay segment,” he said, in direct comparison to the overall hotel market.

Skinner went on to add that he doesn’t see a much of a correlation between the solid performance of the economy extended-stay sector and some of the closures experienced at the higher end of the segment. “Very little, if any, because the rate spread between the segments is too wide,” he said.

However, Skinner did note that while there has been a marked difference in performance between the overall industry and extended-stay hotels he expects that gap to narrow going forward. While he acknowledged the unprecedented nature of the current pandemic makes future projections difficult he emphasized that past performance is still the best indicator for future performance.

“Historic data on both the extended-stay and overall hotel market is essential to consider. The trend lines for both are closely correlated. We are in a very unusual period now statistically, but gradually extended-stay hotel and overall hotel performance will become closer,” he said.

Meanwhile, second quarter earnings from Marriott showed that out of all of its brands, its extended-stay Residence Inn brand had the highest occupancy rate, at roughly 40%, beating out the 18% at Courtyard and 8% at Ritz-Carlton. In addition, shares of real estate investment trust Extended Stay America are up 90 percent from mid-March, outpacing other hotel related stocks.

When it comes to development, activity going forward has all but come to a halt, regardless of what segment you’re talking about, according to Skinner. “Hotel investors are hesitant and lenders have tightened underwriting so the hotel development pipeline will slow down, including extended-stay hotels,” he said.

Skinner did point out that he thinks the success of the economy segment, in general, during the pandemic will drive future development. “This is already happening with new economy brands and some large investments into economy extended-stay stocks,” he said.