The economy sector rises to the top

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Bill Clinton may have made his way to the Oval Office in 1992, thanks to the slogan "It's the economy, stupid", but in the current US extended stay hotel sector, it's the economy segment which is attracting the smart money.

The last year has seen the leading players in the economy sector announce significant expansion plans as the segment has outperformed the wider extended stay market.

According to the latest figures from The Highland Group, the economy segment reported the strongest growth in occupancy in Q3 2017 and has been the best performing extended stay segment in terms of REVPAR growth for the last two years.

This impressive performance has not gone unnoticed. Late last year, Choice Hotels announced it was acquiring the WoodSpring Suites brand in a $230 million deal. The acquisition will add nearly 240 economy extended-stay hotels in 35 states to the Choice Hotels portfolio, creating an extended-stay portfolio of more than 350 properties with its existing brands, MainStay Suites and Suburban Extended Stay.

Other major players in the space have also been active. Earlier in 2017, Starwood Capital launched its Uptown Suites'premium economy' extended stay brand to operate alongside its existing InTown Suites flag. Uptown Suites is described as "a nationwide brand of upscale, economy-priced extended-stay suites for families, business travellers and long-term visitors".

Jon Pertchik, InTown Suites CEO, said: "Demand for value-oriented extended-stay lodging continues to rise and guests are increasingly seeking a hospitality experience that is pedestrian-friendly and walkable, with high-quality amenities and warm customer service. Uptown Suites aims to transform the economy extended-stay experience for our guests."

G6 Hospitality is rolling out its Studio 6 brand and now owns, operates and franchises more than 1,400 economy lodging locations under the Motel 6 and the extended stay Studio 6 brands in the US and Canada, and Hotel 6 and Estudio 6 brands in Latin America and is aiming to "propel the Studio 6 brand's recognition and positioning in the economy extended stay segment".

My Place Hotels currently has 37 hotels open and operating, with a short-term pipeline of 32 additional properties and medium term commitments for upwards of 40 more hotels to follow. One of its development partners alone, Iowa-based Matt Eller, has plans to build a total of 40 My Place-branded properties.

And the biggest player in the market, Extended Stay America, has had an eventful year which has included new leadership, the launch of its first major development program in many years, a franchise program, the completion of a billion-dollar renovation program, and a significant rise in profits.

There are several fundamental reasons why the economy segment is flourishing and attracting developer interest, according to Mark Skinner, partner at The Highland Group, which reports quarterly on the US extended stay sector's performance.

Skinner says: "The product is very under represented in many, many areas. If you look at upscale and midscale extended stay hotels, there are about three or four times as many as there are in the economy segment. There has been relatively little new construction in the economy segment for a long time, so it's underserved and underrepresented. There's a lot of older product out there, which in some cases has become obsolete. Not only is there a good opportunity for new development of new hotels, but also for replacement of existing assets."

The resurgent US economy is one reason for the success of the sector, adds Skinner: "This type of hotels tend to do extremely well when there's a lot of construction going on, and at the moment there is, all across the United States, be that commercial, residential or infrastructure construction. In fact, major construction projects which employ migrant labour provide a probably the single biggest source market for this sector."

The buoyant nature of the US residential lettings market has also provided an opportunity for the economy extended stay segment. Skinner says: "They also pull a lot of interest from the residential market. The rental apartment market has very low vacancy rates right now so these hotels get used as temporary housing a lot. In terms of price, the monthly cost of an economy extended stay hotel might be a little higher than a modest rental apartment, but not much, and they offer greater flexibility because you don't have to sign a six-month or a one-year lease, you don't have to come up with down payments for your utility services and things like that. You just pay your week's rent up front and if you decide after three weeks you want to leave, you leave without being penalised for breaking your lease."

The year ahead is likely to see further string growth for the players in this segment, and it would be no surprise to see further M&A activity in the wake of the Choice/WoodSpring deal.

Development opportunities in the extended stay sector will be one of the subjects debated at the 2018 Serviced Apartment Summit Americas, in New York City on April 9 and 10. Click here to find out more.


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