Lessons learned: Strategies for a resilient portfolio

It isn’t an understatement to say that the hospitality industry was hit hard by the COVID-19 pandemic, but if there was one bright spot through this time, it was the relatively strong performance of the extended-stay segment.

The most recent Hotel Business Hot Topics session, “Lessons Learned: Strategies for a Resilient Portfolio,” sponsored by Choice Hotels, explored what made the segment so popular during the pandemic and took a look at why it will be a good one to invest in going forward.

Moderated by Christina Trauthwein, VP, content & creative, Hotel Business, the group of panelists who explored this topic included Jerry Bellows, COO, EXCL Management Solutions; Chip Johnson, CEO/founder, Turnstone Group; Philip Powers, partner, Paladin Equity Capital; Ron Burgett, SVP, extended-stay development, Choice Hotels; and Mark Skinner, partner, The Highland Group.

“What it is, is resilient,” said Burgett. “The ups and downs of the economy have not affected the performance of extended-stay across the segment. We kind of knew it already, but now it’s been proven to a lot of new folks. It’s just a good shield against ups and downs, such as COVID.”

Skinner said that the segment did “very, very well” under very difficult circumstances. “On the loss side, extended-stay hotels collectively saw RevPAR decline by a third,” he said. “Now that, in itself, seems horrible, except when you think that all hotels declined by 48%. And if you look at each and every extended-stay segment, it fared better than the corresponding traditional hotel segment of the same class.”
He added, “The economy extended-stay for the year-to-date [as of September], on average, is running 109% of the RevPAR it was running in 2019. As far as I know, that is the only segment of the hotel industry to be beating 2019.”

The entire extended-stay segment was growing in share even before the pandemic, Skinner reported. “If you go as far back as 2010, extended-stay hotels had 9% of all hotel demand in the U.S.,” he said. “It was increasing anyway, partly because supply is growing much faster than the overall hotel industry. By 2019, that share of demand had grown to 10.5% from 9%, and the share of revenues have gone to 8%. By year-end 2020, that demand share had gone from 10.5% to 14%, and the revenue share had gone from 8% to 11.5%. So, market share for extended-stay hotels gained an enormous amount; the largest gainer, in percentage terms, was the economy segment in extended-stay—partly because it lost the least, but also supply was growing.
Extended-stay supply didn’t decline in 2020 like the overall hotel supply did because of the closures.”

Choice’s Burgett reported that his company has a strong pipeline in the segment. “We have more than 250 deals in the pipeline and out of those, I would say 100 are very active—either going to break ground or expected to break ground in the near future,” he said. “We don’t see any weakening in the interest or the contracted interest. We are seeing groundbreaks dropping off a little bit with construction costs fluctuating so much over the last six months… I don’t see deals dropping out. I do see them being postponed somewhat.”

For Bellows, the extended-stay labor model, which requires fewer employees, has helped this strong segment thrive during the current labor shortage “At our typical extended-stay hotel, we have at most 12 team members,” he said.

He added that labor shortage has caused companies to bring employees from other areas when they can’t find them locally. “They are shipping people in from all over the country to do distribution work, etc.,” he added. “They need a place to stay.”

Extended-stay will also continue to outperform other segments for at least the rest of the year, according to Skinner. “It is less susceptible to seasonal variations than the overall hotel industry,” he noted. “The [rest of the]hotel industry caught up during the summer travel season… I think that the gap will widen again by the end of the year because it is pretty clear that group business is unlikely to come back the way that it was originally anticipated.”

Trauthwein asked the panelists what advice they would offer anyone considering entering the segment.
Turnstone Group’s Johnson said that it is important for anyone considering entering the segment to know their partners, whether financial, management or construction. “Pick a good team, and when I say pick a good team, we’re not property managers in the space,” he said. “We aligned with a group that we believe is best-in-class, and there are a number of good ones out there… Make sure you go with a general contractor who is familiar with the space. In the end, there’s a prototype that’s a box that is pretty similar, whether it’s built in Texas or Florida or Georgia, but it’s really easy to mess that up if you don’t use groups have been there before.”

Powers added that while the opportunities in extended-stay are “huge,” there are some barriers to entry. He said that the most important thing is to find the right site. “Building a project on the wrong site, particularly for extended-stay, is really the worst thing you can do,” he said. “But finding the right site that is near an on- or off-ramp near a major freeway is hard. There are opportunities out there, but they’re few and far between.”