For many real estate investors, extended stay hotels are a bit of a mystery, viewed as a\ distant cousin of limited stay hotels, and catering specifically to business travelers. But those who understand property types like self-storage should find familiar attractive qualities here. Demand is buoyed by major life events (work re-location, temporary dislocation, extended travel needs, etc.) except instead of parking a sofa for six months, the consumer is securing a roof over their head.
Interestingly, unlike other hotel segments, extended stay’s business model has not only exhibited resilience but thrived in the face of the Covid pandemic. In 2020, Extended Stay America Inc. maintained average occupancies of 74% compared to 44% for all hotel types. Perhaps more than any other asset class, it has benefited from the shift to remote work, offering a “best of both worlds” option for employees not tethered to a desk and eager to travel for extended periods. What’s more, the re-opening of the economy brought greater demand for extended housing amongst workers hired for temporary or contract-based positions.
But even before Covid, the segment had a defensible business model. Extended stay hotels typically run at operating margins of 50-60%, significantly higher than other hotel types due to the combination of longer average stays and lower operating expenses than their more transient-focused counterparts. According to CBRE, globally recognized hotel brands have expanded their extended stay portfolios by 50% over the last decade. The fact that Blackstone and Starwood Capital acquired Extended Stay America Inc. for $6 billion in 2021, and subsequently acquired another $1.5 billion portfolio from Brookfield Asset Management, validates the thesis and illustrates a strong appetite from institutional investors.
The idea that extended stay is an effective way to bet on business travel or even the future of remote travel is well-socialized. But its more compelling (and less intuitive) differentiator is that it serves as a credible alternative to conventional multifamily housing. It’s arguable that multifamily operators should be less focused on the relative returns of new construction versus stabilized projects and more focused on the relative return of extended stay versus multifamily. Extended stay hotel equity yields average 18.3%, according to global consulting firm HVS, well in excess of most value-add and many ground-up multifamily development deals today.
Operators are actively capitalizing on the opportunity. Damon Healey, CEO of Eternal Companies, previously led Brookfield Asset Management’s nationwide expansion of their extended stay hospitality division before selling the portfolio to Starwood and Blackstone. His spin out acquires stand-alone hospitality assets and portfolios that are performing well but may be too small for larger institutions to pursue. “We acquire assets in submarkets that are supply-constrained or lack a deep development pipeline. They’re already outperformers but may be early 2000s vintage and in need of renovations. By completing a property improvement plan, we can really position them as the most attractive local option for those seeking long duration stays.”
The comparison between these assets and rental housing might not sound intuitive at first glance. Extended stays are still hotels after all. But they are limited service in nature, tend to have small staffs that don’t need to be on site 24 hours a day or perform duties like housekeeping daily. Both extended stay and multifamily offer units with kitchens, a perk missing from most other hotel categories, and often have comparable amenities like gyms. Extended stay even eliminates the need to purchase home furnishings. If the length of extended stays is an appropriate proxy for comparability, Bloomberg noted that 67% of room nights booked in 2021 were for stays 30 days or more (a sign of residency) versus 45% in 2019. Even more remarkably, according to the Urban Institute, 42% of extended stays are for longer than three months. This is about more than just business travel.
Frontier Development & Hospitality Group’s founder and CEO, Evens Charles, explained how hotels and multifamily properties have been converging for years. “Multifamily properties are increasingly looking like hotels in their design, lobbies, amenities, etc. and a lot of the extended stay brands are focused on making their brands feel as residential as possible.” Charles would know. Frontier owns nearly two thousand keys in major market like Washington D.C. Atlanta, and Nashville with branding include Marriott Suites, Homewood Suites, Embassy Suites, and Hampton Inn.
But why would a non-business traveler opt to live in a hotel for such an extended period? Charles observed that newfound awareness amongst consumers during Covid played a key role. “Extended stays have always been the go-to options for government contractors, displaced residents for insurance purposes, medical reasons, people visiting to be near to a hospital, or corporate remote workers. But a lot of extended stays got more exposure during Covid because people didn’t want to have to interact with anyone, so a lot more people have now experienced the product and are now therefore utilizing it than before.”
There are other practical reasons a tenant may not opt for a traditional rental. Today’s residential leasing model is shockingly in-flexible. Standard leases are still almost universally 12 months in length, creating a long-term financial commitment regardless of how long or much a tenant needs an apartment. For many residents, this can be a real pain point. Anyone who has attempted to terminate a lease because of a birth, death, or sudden move can relate. It is often just as stressful, if not more, than the underlying event itself.
Secondly, qualifying for a lease is difficult for many Americans. If you do not have a traditional job with W-2 statements and work in the cash or gig economy (think handyman, barber, day laborer, creative, etc.), or conversely are an entrepreneur or consultant without predictable streams of income, many landlords will either reject an application or require large upfront financial commitments, even if you can afford the unit.
Then there is credit. It is routine for landlords to run a credit check on prospective tenants. But consider the fact that 35% of consumers have subprime credit scores. 22% of Americans do not have a FICO score at all. This does not even account for instances where qualified applicants are discriminated against by landlords. For individuals in any of these categories, identifying a home can not only be difficult, but may force them to accept living circumstances that feel inconvenient, unappealing, or even unsafe.
It seems odd that today’s leasing model is so rigid in a world where people’s life circumstances have become so nuanced. It creates unnecessary structural impediments to obtaining housing and fails to address the modern consumer’s growing need for convenience and flexibility. Extended stay hotels address this by offering the trappings of a stable, residential lifestyle, without long-term commitments, extensive screenings, or move-in hurdles.
And then there is the elephant in the room. Housing affordability. Nearly half of American workers don’t earn enough to afford rent a one-bedroom, according to the National Low Income Housing Coalition. Considering this and data from HUD indicating that the median gross rent for extended stay hotels is often lower compared to conventional apartment rentals, it makes sense that extended stay has become a “house hack” of sorts.
While extended stay hotels will not be the sole solution to housing affordability, it can certainly play a growing role, especially in the face of insufficient rental stock. It’s entirely plausible that the cyclical trend of higher usage and longer stays will become the new norm, and plausibly increase whenever recessionary pressures further stagnate wages and lead to higher unemployment. Aside from the attractive relative returns, this means the property type should be formally incorporated into the asset allocations of social impact-minded investors, who often shy away from hotel assets for fear of mission drift.
Anecdotally, I’m witnessing a trend play out in the capital markets, where there is a growing pool of investors entering the extended stay space. Eric Andrew, COO of Diversified Lending Solutions, elaborated. “We are certainly receiving more requests to arrange debt and equity amongst buyers who are acquiring extended stay hotels to capitalize on their growing footprint as a permanent housing option. Extended stay hotels offer better yields than traditional multifamily, while still letting them express a view on housing.”
In a world where citizens are more transient, less tethered to one place, and seeking sources of flexibility and affordability, extended stay hotels will continue to benefit from business travel. The more lucrative opportunity to monitor, however, will be the extended stay hotel operator’s success in positioning these assets as compelling and reasonably affordable alternatives to conventional permanent housing and multifamily options.