Mid-Rate Extended-Stay Provides Best Return

By Stephen Rushmore, President and Founder of HVS International -- HOTELS Magazine, 5/1/2000

I think the best product on the market today is the mid-rate extended-stay

hotel. Over the years, extended-stay hotels have outperformed the market

in terms of occupancy and profitability. Owners of successful extended-stay

products make more money on their invested capital than any other type

of lodging facility.

The formula is simple. Focus your product toward travelers looking

to stay at a particular location for seven or more days. By definition,

this market segment does not suffer from the weekday/weekend occupancy

and average rate shifts experienced by most commercially oriented properties.

In addition, mid-rate extended-stay travelers do not expect typical

hotel essentials such as daily maid service.

That’s the good news. The bad news is the

extended-stay market is thin. There are not that many people who need

to be in a particular location for seven or more days. Furthermore,

new extended-stay hotels are proliferating, resulting in declining

occupancies that require a gradual shift of focus away from extended-stay

to a more transient-oriented positioning.

Fortunately, most extended-stay hotels can be converted easily to great

transient hotels, and the economics make sense as shown in the following

financial models below.

The first financial statement shows the revenue and expense for an

extended-stay hotel operating in a strong market and achieving an 80%

occupancy with a US$69 average rate. The second statement represents

a typical transient hotel that gets a lower occupancy (71%) because

of the weekend dip in demand, but a higher average room rate (US$72)

because no discounting is required to attract the longer stays. Notice

the profitability of the extended-stay hotel is significantly higher

than the transient hotel, dropping 42% compared to 34% to the bottom

line. Operating costs are much lower in the rooms department, property

operations and maintenance.

The third financial statement demonstrates what happens when extended-stay

demand is diluted because of new competition from other similar products.

Occupancy drops rapidly, average rate declines, and efficiency, while

still good, also drops. This results in an operation that is still more

profitable than a transient hotel, but the bottom-line dollars are fewer.

The fourth financial statement shows what happens when an extended-stay

hotel is converted to a transient hotel. Its occupancy goes up because

it focuses on the larger transient market segment. Its room rate increases

and surpasses the standard transient hotel because of the larger room

size and kitchen amenities. And the expense ratios increase, but not

quite to the extent of the normal transient hotel. The end result is

a more profitable operation.

By Stephen Rushmore, MAI, CHA, CRE, president and founder of HVS International,

a global hotel consulting firm with offices in New York, Miami, Denver,

San Francisco, Vancouver, Mexico City, London, New Delhi and Singapore.