Understanding the Extended-Stay Business Model

Episode Transcript

Carl Hren: I think it’s on a great upward trajectory because of the resilience that it showed through the pandemic. There’s definitely more people jumping in, so you’ve got a lot more supply coming down the pike. You’ve got numerous major brands that are going to be releasing new products in the mid scale extended stay line. Hilton just announced their intentions. So you’ve got numerous other brands that have already brought on new brands that are going to be entering the market. So I think we’re going to see a big uptick in supply going out. 

Robin Trimingham: Welcome to the Innovative Hotelier podcast by Hotels magazine with weekly thought provoking discussions with the world’s leading hotel and hospitality innovators. Welcome to the innovative hotelier brought to you by Hotels magazine. I’m your host, Robin Trimingham. Today I have a question for you. Our extended stay hotels a great investment or overhyped? The extended stay segment category within hospitality has proved resilient and has continued to show immense growth within recent years. It was one of the few bright spots in the industry during the Covid 19 pandemic and managed to maintain a 59% occupancy rate in 2020. But growth has slowed over the past year as the industry as a whole has resumed normal operations. My guest today, Carl Hren, is the senior vice president of development at Concord Hospitality and he’s also a member of the board of directors of the newly formed Extended Stay Lodging Association, which is known as SLA. And he’s here today to discuss the operational challenges and opportunities for owners and stakeholders in this hospitality niche sector. Join me now for my conversation with Carl. F.O.H is a global food service and hospitality company that manufactures smart commercial grade solutions headquartered in Miami. The company designs and manufactures all their restaurant and hotel products. They have showrooms and distribution centers located throughout the globe, and their products are always in stock and ready to ship from any of their distribution centers worldwide. Welcome, Carl. Thanks so much for joining me today. 

Carl Hren: Thanks for having me. 

Robin Trimingham: I think this is going to be very interesting conversation because extended stay was one of the few bright spots of a lot of what’s been going on for the past couple of years. Let’s just start with a tiny bit of background, because not every hotelier is really familiar with this business model pre-COVID. How was the extended stay category viewed and how would you say the pandemic has changed all of that? 

Carl Hren: We at Concord had a great view of the extended stay sector. It was thought to be very resilient, more so than transient sectors, just because of the longer term stay guests and the type of guests that it was attracting. And I think that the pandemic really served in validating all of those things because through the pandemic, it outperformed every other sector. It had the while it did have a little bit of a dip in occupancy and rate, it was significantly less. If you were running 90% occupancy, it only dipped down into the 70s, whereas the rest of the hotel sectors just did a freefall. And so I think what the pandemic truly did was just to verify how resilient and solid the extended stay market is. 

Robin Trimingham: I think that’s an excellent point and I think a lot of other hoteliers looked at your business model and went, wow, we want some of that. To the extent that there’s been a bit of a rush to add extended stay to your portfolio. Talk to us about why you feel there’s such excitement around adding extended stay to the business model. 

Carl Hren: The primary reason is what we just discussed. People are looking for investments that are lower risk, have lower downsides, all of that stuff and the extended stay midscale economy extended stay especially provides them that that if there should be something else, who knows what to happen? We’re going through a little situation here with the lending and whatnot that it can be more resilient and perform better than other sectors through the ups and downs that we go through as time goes on in all industries. So there’s definitely been a rush to it. I think people need to be a little bit careful because it is a different sector. There is definitely different methodologies and you have to stay on the path that is set out for how to operate an extended stay, what type of guests you’re going after. You can’t be lured into getting going after transient guests just because in the short term they might give you a little more rate that can really cause problems. And so the rush is because of how well it performed during the pandemic. But now I think there’s a second half of this, too, where people need to be careful and brands and people that have been in that industry need to spread the word that it’s you can’t just jump in and then not stay on the path that has made it successful. If people start veering off that path for guess, to call it short term greediness, if that’s the right word, can can cause issues in the long term. 

Robin Trimingham: I have some experience with some of the things you’re just talking about. I worked for a brand and we dealt a lot with business travel and I would get into these very complicated discussions because the business travel had fairly high rates in the properties that I was dealing with. And I would say, Well, we could get all this long stay business and people would just start looking at rev par and they really couldn’t understand that these were two absolutely different business categories that you would want to attract for two entirely different reasons. Some people are saying that this overexuberance for adding extended stay to your property is all going to come crashing back in their face. Do you agree with that or do you think it’s simply a matter of learn the business? Us that you’re getting into before you get into it? 

Carl Hren: Yeah, I would say the latter. As we were preparing and diving into getting into much more of the midscale and economy, extended stay sectors, we did our diligence. We talked to numerous people who had been in the business for a long time brands, other owners, investors, etcetera. And the common theme was be careful of what you’re talking about. And we heeded those warnings and really dove into understanding why those warnings were so important and took them to heart and have really lived by them through these first number of years that we’ve jumped in. And it has paid dividends. So I just think that it’s a matter of the new people getting into this sector, heeding the warnings. Truly understanding why those warnings are valid and then following through and operating the hotels in that in that fashion and everything will be good. Are there going to be some people that might not and they might learn the hard way? Yes. But I think for overall, from what we’ve seen about how strong the people that have been in this industry are, to give you those warnings and give you the back up reasons why. I think that it’s the baseline and stages set to. Help everyone learn and do it in the right fashion so that everybody can be successful. And the overall industry of extended stay lodging can stay on the path that it is, which seems to be just fantastic and growing. 

Robin Trimingham: I think you’re making excellent point because it’s really critical to understand what it is the extended stay traveler is valuing and how they are choosing the properties that they’re staying at. Because what a hotelier thinks an extended stay guest will want is not necessarily the same thing that that traveler wants at all. Sometimes it’s literally about how many steps is it from the door of the hotel to the door of the building that they’re going to for work reasons or whatever, all the time. Sometimes it’s much more about how close is the closest proper grocery store, because I’m staying six weeks and I’m actually planning to cook. You have to really be able to get into their mindset. Talk to me a little bit about how this big rise in interest rates is affecting everything. I was talking to another owner operator recently and he was making the point that interest rates are so high that development pipeline in urban centers has all but dried up. From his perspective, would you say is the same for extended stay or are you having a different experience in this regard? 

Carl Hren: It’s definitely getting tougher and I think there’s two big reasons. I think we’ve seen a rise in construction costs, no question. Over the past couple of years it’s been crazy. The number of various things I think everyone saw would go sky high and it has come back down, but other things have not. And overall construction costs have gone up way over what we had seen year over year for the ten years prior to that. So you’re talking 20 to 30 to 40% depending on the market, depending on how big the project is, depending on the type of construction that has caused deals to become much more difficult to underwrite. And then the cost of lending, you used to be able to get 65% loan and now it’s tougher to get that and just the interest rates being higher. So everything has gotten tougher to underwrite. We’ve just had to work harder to really crunch the deals as tight as we can, make sure we’re going to the right general contractors, make sure we’re going to numerous general contractors to get pricing, make it as competitive as we can, choose the right materials and then really go after the lending and really work our relationships that we have from the past and the banks that really want to work with us to get the best pricing we can for lending money. But there’s no question, I’m not going to sugarcoat it and say that it’s it’s not a lot more difficult now than it was in the recent past. 

Robin Trimingham: Established in 2002, F.O.H is a woman owned global food service and hospitality company that manufactures smart, savvy commercial grade products, including plateware, drinkware, flatware. Hotel amenities and more. Driven by innovation F.O.H. Is dedicated to delivering that wow experience that restaurants and hotels crave all while maintaining a competitive price. All products are fully customizable, and many are also created using sustainable eco friendly materials such as straws and plates made from biodegradable paper and wood and PVC free drinkware. F.O.H. Has two established brands. Front of the house focused on tabletop and Buffet Solutions and Room 360, which offers hotel products. Check out their collections today at FOHWorldwide.com. Do you feel that it’s a more viable option to take an existing property and convert it into extended stay in the current interest rate climate? 

Carl Hren: That would not be our bread and butter. We are still looking and we have six extended stays under construction right now. We’ve got 20 plus in the pipeline for the future. So we are still looking at new builds. Have we come across potential deals that we’ve looked at to convert existing buildings into extended stay? Yes. Those have not penciled out or have not been the right location or have the base sizes, the type of the building hasn’t quite worked out yet. I think that there might be those deals out there. We haven’t come across them and honestly haven’t gone after that as much as we had the new build sector. 

Robin Trimingham: Okay. Fair enough. From your perspective, what’s the biggest misconception about the extended stay hotel category and why do you say this? 

Carl Hren: I think that there’s a misconception that at the mid-scale and extended stay that it’s a much more difficult hotel to operate. I think that if it’s done correctly, use the hiring methods and have a great team at the site that it’s just as enjoyable and just as good of an operation to run as any other hotel sector. So I think that there’s a little bit of a misconception out there that causes people to have a little bit of angst to get into the sector. But we’ve found that it can be, if it’s done correctly and you’re able to put together a wonderful team at each of the hotels and have an an above hotel team that is truly understanding and allowing those teams to do everything they need to, giving them all the support that they need to run a great hotel, that it’s a little bit of a misconception. 

Robin Trimingham: I’m going to ask you for a tiny bit more detail here, because not all of our listeners will be familiar with this business model. Why is it perceived to be so difficult. 

Carl Hren: If it is not done correctly? If there can be some situations where things you don’t want happening in your hotel could be going on? 

Robin Trimingham: Okay, Well, I think that could happen at any property if we’re being real about the world today. So absolutely. What you’re telling me is you’ve got to have good security and staff who are properly trained. 

Carl Hren: Absolutely. 

Robin Trimingham: Yeah. I think that’s a perspective that any hotelier can respect and understand the need for at this point in time. Where do you see the extended stay category heading over the next 3 to 5 years? 

Carl Hren: Oh, I think it’s on a great upward trajectory. I think that because of everything we’ve talked about earlier in this conversation and the resilience that it showed through the pandemic, that there’s definitely more people jumping in. So you’ve got a lot more supply coming down the pipe. You’ve got numerous major brands that are going to be releasing new products in the mid scale extended stay line. Hilton just announced their intentions. So you’ve got numerous other brands that have already brought on new brands that are going to be entering the market. So I think we’re going to see a big uptick in supply. And so that can also create some issues where you might get some markets that have oversupply. So that’s one of the things to definitely we’re keeping an eye out for to make sure that we don’t over flood certain markets that can’t handle it with too much product. So so that is definitely on the radar and should be on everyone’s radar. 

Robin Trimingham: That kind of leads me into my next question. So you’ve got all of this these new rooms coming into the development pipeline and the business is on the upswing. How are you tackling all of this from the sales and marketing perspective? How are you marketing yourself to your the prospective guest? 

Carl Hren: Yeah, I mean, it’s just doing all the things that we’ve learned and that are the ways that has have gotten it done for many years in this sector as good or better than our peers do. Not under staff in the sales and marketing. Get out to the local market. Make sure that our people are advertising, that we have wonderful signage on our buildings, that we’re using digital signage where it’s allowed by the different cities. It just takes a true passion for sales and marketing in the local level to get out and get our hotels name and what we provide and where we’re located out to those local people, whether it be traveling nurses, whether it be construction companies, subcontractors, so that they know, go to the local sites, give the super you know, the guys on site that with the general contractor so they can let their subs know that, hey, this hotel down the street could be a wonderful option for guys that are staying for two weeks to four months working on that project. You got to get out to all those different potential clients so that they know you’re there or sometimes they’ll go somewhere else and even end up paying more because they just didn’t know that that option was there. That’s just a huge key, is just having your local sales and marketing teams be overzealous getting out to those people so everyone knows. 

Robin Trimingham: So you’re really talking about tackling this in terms of setting up contracts where the company or the entity is going to send you referrals or guests on a regular basis. How much is social media a thing in the extended stay category? 

Carl Hren: It’s becoming even bigger. It’s a fantastic way to reach people because people are connecting Not only the example that I just gave, if one subcontractor on a job site has a great experience at our hotel, they’re going to let other. The electrician puts five guys up at our hotel and they have a great experience. They’re going to let other subcontractors. When the one foreman talks to the other foreman, they’re going to recommend, Hey, you should look at X hotel down the street and that and we’re going to grow that fashion. The same thing happens on social media where people post their great experiences. So not only getting out and letting everybody know, but then delivering. Once you have those people in house, delivering on those expectations and that web of getting more people in because of word of mouth and in this case, word of digital keyboards, letting other people know how great the experience has been, has been a fantastic way for us to grow our business. And it’s it’s working. It’s amazing how much it’s changed and how much of that has led to more business digitally than just word of mouth was the way in the past. 

Robin Trimingham: This program attracts viewers from the whole spectrum of the industry. So owners operators will see this as well as people managing boutique properties. What’s your advice? Is it better to make your first foray into this by understanding the business model and allocating a percentage of your rooms? Or should you be going full on and looking for whole property in. 

Carl Hren: The way that Concorde was set up? I don’t think we would have or have at all changed a percentage of one hotel to a more extended stay sector. It’s knowing what your product, your flag really wants to cater to. And so if we’re a transient hotel, we’re flowing down that business model and sticking with that business model. We haven’t taken half of a transient hotel and tried to make it into an extended stay hotel that maybe it could work. But that’s not the path we’ve gone. It’s been more to create properties that are truly extended, stay and have jumped in with both feet to make that work. And it’s been very successful. We could not be more excited about the results that we’ve had in these number of years that since we’ve jumped in, it’s been everything that everybody said it could be and more. 

Robin Trimingham: Well, that’s good to hear. We’ve got a couple of minutes left here. I know. That you’re on the board of the new Extended Stay Lodging Association. Talk to us a little bit about that and some of the tools or ways that you guys can help. 

Carl Hren: So Doug Artucio is the leader and was the founder and just has been great to work with the Extended Stay Lodging Association. And we now have a board. We’ve presented our website and all that stuff and it’s going to be a great thing for all extended stay properties to be able to join at a reasonable cost and then get all kinds of benefits from it, whether it be talking to other people that are in similar situations that they’re in asking questions, forums, learning will do all kinds of various podcasts like this where people can ask questions for people that have been involved, whether it be development related questions, design and construction related questions, operating model, pro forma questions, all of those various things. It’s going to provide a forum for people to truly learn and understand how they can get involved in the industry and then be successful once they’re in. It’s just going to be a great tool for anybody involved in extended stay lodging to become better at what they do and learn from others that are involved in it. 

Robin Trimingham: Thank you. What’s your key message for everybody who hears this broadcast? 

Carl Hren: Well, hopefully you can tell by my demeanor that we are just so excited to have jumped into extended stay lodging. And it’s been so successful that I just I want everybody to see how exciting it is. And if everybody works together and learns and does the extended stay lodging sector of this business treats it with respect that it’s going to continue going on an upward trajectory, which obviously is good for our business and good for everybody’s business. So we’re excited to have everybody joining in and just want to make sure that everybody understands it is a little bit different. Like we’ve said already, it’s a little bit different than the rest of the hotel industry, but there’s no crazy secret sauce that nobody understands. It’s learning a little bit. It’s being open minded to a little bit of a different operating model and how it works. But if you’re if you’re willing to have that open mind and really go after it, it can be just crazy successful and provides for just an excellent future and growth potentials for your companies. 

Robin Trimingham: I think that’s a good place to leave it. Thank you, Carl. You’ve been listening to the innovative hotelier. Join us again soon for more up to the minute insights and information specifically for the hotel and hospitality industry. You’ve been listening to the Innovative Hotelier podcast by Hotels magazine. Join us again soon for more conversations with hospitality industry thought leaders.