Report: Extended-Stay Room Construction is Down, Occupancy Rises

ATLANTA—The Highland Group recently released its 2019 mid-year extended-stay lodging market report, highlighting rising construction costs. These rising costs along with lengthening development timelines continue to weigh in on extended-stay room supply.

Rooms under construction declined at mid-year 2019 and the fall was deeper than at year end 2018. The deceleration in supply growth coupled with the strongest quarterly demand increase in a year moved occupancy to 79.9%, the highest second quarter level ever reported. Generally in line with the overall hotel industry, extended-stay ADR growth stayed below 2% for the third consecutive quarter. RevPAR growth has now been below 2% for a full year and that is not likely to change much for the remainder of 2019.

Extended-Stay Hotel Highlights:
• Lowest net change in new rooms open in three years
• Record high second quarter occupancy
• Strongest quarterly demand growth in a year
• Mid-price room revenue growth exceeds 10% for the 12th consecutive quarter
• Rooms under construction down 8% over the past year

United States Extended-Stay Lodging Supply
The supply of extended-stay hotel rooms reached 485,608 at mid-year 2019. Supply gained 5.6% compared to the same period in 2018. The 25,731 net change in new rooms open over the last year was a significant decline from greater than 29,000 rooms in both the preceding 12 month periods.

Mid-price extended-stay hotels continue to post the fastest supply growth. The economy segment reported its largest annual gain in supply for three years as new room construction accelerates. Decelerating supply growth is a trend in the upscale segment, which reported its smallest quarterly increase in five years.

United States Extended-Stay Lodging Demand
Second quarter 2019 demand growth was ahead of the first quarter and the 5.8% gain in demand through mid-year was only a tiny fraction short of the corresponding increase in supply.

Economy and upscale segment demand growth lagged changes in supply through mid-year, pushing segment occupancy down which resulted in a slight decline in overall extended-stay hotel occupancy.

Extended-Stay Revenues
Extended-stay room revenue approaching $7 billion at mid-year 2019 is almost double its value compared to seven years ago. Revenue growth is well ahead of the overall hotel industry especially at mid-price extended-stay hotels which reported their 12th consecutive double-digit increase in quarterly room revenue in the second quarter 2019.

Staying at 76.5% mid-year extended-stay hotel occupancy was more than 10 percentage points above 65.9% STR reported for the overall hotel industry.

Despite economy and upscale segment occupancy declines, driven by the mid-price segment, Q2 2019 extended-stay occupancy rose to 79.9%, its highest second quarter level ever reported.

Extended-Stay Average Rate
All extended-stay hotel segments posted faster ADR growth in Q2 2019 than in the first quarter and ADR rose 1.2% for the year-to-date compared to the same period in 2018. ADR is growing at about the same pace as the overall hotel industry.

Extended-Stay RevPAR
Second quarter extended-stay hotel RevPar growth of 1.6% was an uptick on Q1 2019 but it was the fourth consecutive quarter of RevPar growth below 2%. RevPar gains are about the same as the overall hotel industry.

The Future
There were 49,755 extended-stay hotel rooms reported under construction at the end of the second quarter 2019. The economy segment reported its highest number of rooms under construction for at least 15 years but falls in mid-price and, especially, upscale segments resulted in a 7.7% overall decline in extended-stay rooms under construction. The ratio of actual rooms opening within one year of reporting construction declined for the third straight year. At mid-year 2019, rooms under construction totaled more than 10% of rooms open. An annual increase in supply this high has not occurred since 2000 when the base of rooms was much lower and it is not likely to happen during this cycle. The actual increase in supply is likely to be about 6% in 2019 and is not expected to rise much above that for the foreseeable future.

Price segments reflect a $50 spread in average daily rates between the upscale and mid-price segments. The segments are for comparison only. There are significant differences in clientele across the range of the mid-price segment. A few economy brands have average daily rates less than $50. Price sensitivity increases considerably at lower price points and there are marked differences in clientele, length of stay and other factors within the segments. The database used in the estimates and projections in this report includes the extended-stay brands in the table on the following page. There are independent extended-stay hotels that were not included, but the sample represents the great majority of extended-stay rooms in the U.S.