Extended Stay Hotel Investment Profitability | Hotel Marketing
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Extended-stay hotels have always been enticing for developers due to their operational directness and profit margins. Low staff, service, and amenities enable a substantial portion of revenue from the top line to travel to the bottom line. In the past, such properties could realize a 45-50% net operating income to revenue ratio. Even during a recession, profit margins never dip below 25% and have now risen to the 45% mark.

Examined figures from a sample of approximately 270 upper-tier and 120 lower-tier extended-stay properties' operating data demonstrate a clearer picture of extended-stay hotels' financial performance. A comparison between the RevPAR (Revenue Per Available Room) levels of extended-stay hotels and a sample of every U.S. hotel reveals that extended-stay properties fall below the blended average. This performance roots in low ADRs (Average Daily Rates) accomplished by these properties driven by discounted weekly rates.

In the six-year survey period, mid-tier properties' RevPAR averaged 50%, which all hotels achieved, while upper-tier extended-stay properties boast an average of 88%. The room rentals from the extended-stay properties constitute approximately 98% of its total revenue, indicating the limitations in the degree of amenities and services provided by such properties. The RevPAR levels of extended-stay hotels mirror the rest of the industry as they experience and recuperate from the 2008-2009 recession.

However, there is a clear distinction between the mid and upper-tier extended-stay hotels' annual RevPAR changes. The mid-tier extended-stay hotels' RevPAR spiraled 22% down in 2009. The upper-tier properties and the U.S hotels saw the same trajectory, averaging around 16% and 19%, respectively. Nonetheless, during the recovery, the mid-tier properties realized a better recoil at 9% compared to the upper-tier at 5.5% and all other hotels at 6.9%. This example exhibits the mid-tier properties' higher volatility and relative consistency of upper-tier properties during economic turbulence. One of the main factors behind extended-stay hotels' excellent profit margins is their low staffing requirement.

During the extent of the survey, spendings for wages, salaries, and benefits generally play around 45.5% of total operating expenses. The total expenditures for mid-tier extended-stay hotels average approximately 36.9%. At 36.3%, the ratio for upper-tier properties was still inappreciable. Evaluating labor costs as a total revenue percentage reveals extended-stay managers' capability to maneuver labor.

In the six-year survey timeline, the total revenue of mid-tier properties from labor costs ranges from 20.9% to 27.4%. The same labor cost ratio for the upper-tier sample ranged from 20.8% to 24%. Due to a broader range of complementary food and beverage products and the higher frequency of housekeeping service, upper-tier extended-stay properties require higher staffing levels.

The narrow range of labor cost ratios displayed by upper-tier extended-stay hotels implies that their management contains a prominent ability to regulate staffing levels with differing revenues. On the other hand, mid-tier properties' staffing levels are at a minimum - making it harder for management to make adjustments, ultimately causing the labor cost ratio to rise as revenues dwindle.

While extended-stay hotels' total revenue is 48% under the usual average of all hotels in the sample, their profit is at 25% of the overall mark. During the study, the mid-tier properties realized a 56% lower than the general average compared to the upper-tier properties' 13% below the average. Mid-tier extended-stay properties, on the other hand, exhibit substantial levels of volatility in their profit. They also experienced a massive profit decline during the recession but ricocheted stronger during recovery.

To sum it all up, though the mid-tier and upper-tier extended-stay property owners enjoy the profit efficiency of both types of properties, mid-tier segments with a more volatile profit and revenue, while upper-tier properties have a more consistent performance.

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