Mark Skinner, a partner at the Highland Group, says he is not surprised by the statistics that indicate extended-stay properties have been bruised, but not bowed by the recession. Extended-stay hotels encompass a spectrum of price points, from economy and mid-priced to upscale. "This recession has focused very much on the consumer and businesses cutting costs," he says. "The luxury segment has had the biggest drop in RevPAR of any segment and extended-stay hotels relative to their traditional competition are all price buys, so they have benefited in that sense."
By price buys, Skinner is referring to the fact that daily rates at extended-stay hotels are reduced the longer a guest rents the room. "A week's stay in a Residence Inn, for instance, is often less expensive than a comparable traditional hotel, particularly when you take into account that you get a free breakfast and social hours, and can prepare food in room with a fully equipped kitchenette," he says. "People looking to reduce their overall lodging or trip costs are very drawn to extended-stay hotels."
Nevertheless, with an occupancy rate of 64.2%, down from 70.9% at June 2008, the segment charted it lowest-ever midyear occupancy level. Yet that number is just under 10 percentage points higher than the US hotel average.
Skinner says the demand drop-off is primarily due to business and convention travelers trimming their lodging stays. For instance, a training session may be cut to one week instead of two. Also impacting the sector is the slump in the construction industry, which has "heavily affected the economy and mid-priced segments," Skinner says.In addition to contending with a falloff in demand, the segment was rocked in June with the bankruptcy of one of its largest players, Extended Stay Inc., the operator of the Extended Stay America brand. In its bankruptcy filing, the South Carolina-based company stated that "the contraction of construction and new business development began to significantly and adversely affect Extended Stay's revenue stream." It cited a 23% drop in average RevPAR through the first five months of the year versus the same period in 2008.
In 2007, the Lightstone Group of Lakewood, NJ acquired Extended Stay Hotels for $8 billion from Blackstone Real Estate. Fitch Ratings recently downgraded the $4.1-billion loan secured mostly by 664 ESA hotels and reports that the bankruptcy has spawned litigation among the mezzanine lenders.
According to Fitch, an appraisal by the loan's special servicer found that "the value of the properties is significantly below the outstanding loan amount of $4.1 billion. The current valuation represents a significant decline from the original purchase price of approximately $8.2 billion." Lead mortgage and mezzanine financing was provided by Wachovia Bank and Bear Stearns.
At the time the bankruptcy was announced, ESA released a statement saying the properties would continue operations. Both ESA and Lightstone did not respond by deadline for comment.
Skinner declined to comment directly on the ESA bankruptcy, saying he is involved in the matter as a consultant. However, he concedes that as a major player in terms of number of rooms in the segment "if their performance suffers it would drag down the overall numbers," he says.
As of midyear, 17,971 extended-stay hotel rooms were under construction, a drop of nearly 38% compared to a year ago, a function, no doubt of an inert lending market. An annual room growth of 1.7% is projected between mid-2009 and year-end 2013.
"You can't get a hotel financed anywhere nearly as easily as you could 18 months ago," Skinner says. "The construction pipeline in terms of number of rooms has dropped enormously. Many companies that were developing are now focusing on making their existing assets more profitable as opposed to building new ones." Lightstone declined to comment on the matter.

Instant Insights /

Extended-Stay Hotels Bruised, Not Bowed by Recession

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