U.S. select-service and extended-stay hotel investment volume soared 5.5 percent in 2022 over the previous year’s record performance and is poised to grow even further in 2023, according to JLL Research. Liquidity approached $20.5 billion, accounting for more than half of total U.S. hotel investment volume and an increase of 210 basis points, the highest portion in U.S. history.
In addition, through November 2022, RevPAR for the sector was up 9.5 percent to 2019, 1.9 percentage points better than the U.S. overall, according to STR/CoStar.
As such, investment volume into the sector over the past two years (2021-22) was greater than in the previous six years (2015-20) combined, highlighted by Blackstone and Starwood Capital’s $6-billion acquisition of Extended Stay America in 2021
A SELECT CASE
A key reason for the skyrocketing investor interest is that selectservice hotels represent a defensive and attractive sector due to high yields and lower levels of volatility. Not only has the sector historically been more insulated during periods of economic disruption, but it has achieved higher and more consistent yields relative to other commercial real estate property types.
Prior to COVID, the sector regularly achieved GOP margin premiums of 10 percentage points relative to the broader U.S. hotel industry and, more importantly, remained profitable during the downturn due to its lean operating model, diverse customer base and increased average length of stay.
Historically, 70 percent of select-service and extended-stay investment volume has been concentrated in urban and suburban markets. In 2022, these markets accounted for 57.8 percent of total volume, with regional/small-town markets filling in the rest, as investors capitalized on the changes in consumer demand trends, particularly as travelers increasingly choose to explore new, less-dense destinations. In addition, markets, including Los Angeles, Phoenix and Orange County, which historically have little select-service and extended-stay investment activity, saw a boom in liquidity this past year
Extended-stay hotels, a subsector of the broader select-service sector, have transformed over the past two years in response to the changing workforce and the rapid decline in apartment rental affordability. The segment is now attracting more budget-conscious leisure travelers.
As demand for extended-stay hotels has risen, so, too, has supply. Extended-stay hotels currently represent 9.6 percent of the total U.S. hotel supply, an increase of 3.1 percentage points relative to 2012, according to the STR Census. There are currently 38,000 extended-stay rooms under construction (24% of the total U.S. pipeline) and a deluge of new brands entering the space, including Extended Stay America Select Suites, which launched in 2022, and Echo Suites by Wyndham and Apartments by Marriott Bonvoy, being introduced to the market this year.
With a broad demand-base and product that caters to both business and leisure travelers, expect performance to accelerate even further in 2023. While macroeconomic volatility and capital market dislocation is likely to suppress some short-term hotel investment activity, the select-service and extended-stay sector should be less impacted and driven by smaller check sizes and investors’ ability to leverage existing relationships with local lenders.
With nearly $7 billion in securitized select-service hotel debt slated to mature over the next 16 months and rising interest rates not expected to subside, well-capitalized buyers will have an opportunity to acquire quality select-service and extended-stay assets in the coming year.
As traveler preferences continue to evolve, expect markets that cater to a wide audience to see not only growth in demand, but also increased investment activity as these markets present an opportunity for investors to diversify their portfolios and mitigate risk.
Urban markets, including New York City and Washington, D.C., for example, may offer an opportunity to acquire quality selectservice and extended-stay assets at a relative discount, given their slower RevPAR recovery. Expect these cities to grow over the longterm as group demand and international travel returns.
Story contributed by Zach Demuth, global head of hotels research, JLL Hotels & Hospitality Group.