Extended-Stay Hotels Continue to Gain in Popularity
The pandemic and hybrid work arrangements have generated strong demand for longer hotel stays, increasing the popularity of cost-effective extended-stay hotels and making them one of the fastest growing segments in hospitality. With higher margins and lower development costs than full-service hotels, extended-stay properties have the potential to generate higher returns on investment. As a result, banks are more likely to provide funding for what are perceived to be lower-volatility, higher-return hotels, particularly those associated with well-established brand families. We expect capital to continue flowing into this segment as long as outsized returns exist.
Major hotel companies recognize the potential in this segment. Over the past 10 years, globally recognized hotel brand families have expanded their extended-stay portfolios by more than 50% - a CAGR of 7.1% versus 3.2% for the U.S. market as a whole – and they continue to announce the development and acquisition of new extended stay brands, with five new brands announced since fall of 2022.
Figure 1: Number of Extended Stay Hotel Brands in U.S. * - 2013-2023
Within the past few months, Wyndham announced more than 200 ECHO brand properties in the development pipeline. Hilton expects to open “hundreds and hundreds” of its new Project H3 by Hilton. Marriott launched its Project MidX Studios, and Hyatt announced its Hyatt Studios brand, both intended to compete in the midscale extended stay segment. The expansion of major brands into lower-price tier extended-stay hotels through both ground-up development and conversions standardizes the guest experience, potentially driving operating performance. The new brands provide access to a new pool of potential loyalty members as well as an avenue for unit growth, increased royalty and franchise fees.
When compared with limited-service hotels in the same chain scale, extended-stay hotels have higher occupancies and lower average daily rates (ADR), but revenue per available room (RevPAR) is comparable. Ordinarily, ADR has a better profit flow than occupancy, but there are several important differences in the extended-stay model, most notably lower housekeeping costs attributed to the longer length of stay. Using statistics compiled from CBRE Hotels Research’s Trends® in the Hotel Industry database for comparable sets of extended-stay and limited-service hotels, housekeeping labor costs are lower across the board for extended-stay hotels.
In addition to housekeeping, extended stay hotels also save in the front office staffing due to fewer check-ins/check-outs, laundry (beds are not changed as often), guest supplies (more efficient use of shampoo and soap products), and travel agent commissions (guests booking directly versus using Online Travel Agencies). Our data shows that for the Upper Midscale segment, labor costs for the rooms department are roughly $18.20 per occupied room (POR) for extended-stay hotels and $20.84 POR for traditional hotels. In the lower-priced tier (Economy and Midscale hotels), labor costs per occupied room of limited-service hotels are more than double that of the extended-stay comparable set, equating to $20.34 versus $9.31. Extended-stay hotels can service higher occupancy levels with less staffing relative to shorter-term stay limited-service hotels, resulting in labor cost savings.
Figure 2: Labor Per Occupied Room: Extended Stay vs. Traditional Hotels by Chain Scale
The newer brands entering the market, like Marriot’s MidX, have heralded a digital-forward operating model, which has the potential to expand margins even further as technology further drives down labor costs and enhancements to the guest experience. Examples of operating improvements include a focus on maximizing revenue-generating square feet of the hotel, the ability to use digital keys for check-in, and the option for pay-and-go retail. The bottom line, based on our research, is that Gross Operating Profit (GOP) margins, and cash flows, are significantly higher for extended-stay hotels as compared to their limited-service comparable sets in Upper Midscale, Midscale and Economy chain scales and will likely continue to outpace the industry as a whole, at least over the next couple of years.
Figure 3: GOP Margins: Extended Stay vs. Traditional Hotels by Chain Scale
