Inn Demand
Shifting employment patterns are driving a boom in extended-stay hotel construction throughout Southern California as skilled workers travel to meet short-term needs in such growing fields as entertainment and technology.
Demand for these so-called knowledge workers is behind the development of hotels catering to business travelers who need to hunker down for weeks at a time. Extended-stay properties have become the most rapidly growing segment of the lodging industry and are popping up as fast as their Wall Street-backed owners can find sites.
“There has been so much activity it has caused sort of a bidding war between various operators,” said Jim Biondi, a broker in Grubb & Ellis’ South Bay office.
The two most aggressive developers are billionaire H. Wayne Huizenga’s Fort Lauderdale, Fla.-based Extended Stay America Inc. and Homestead Village Inc. of Atlanta. In the last year, these two hotel chains have snapped up 17 sites from San Diego to Santa Barbara. And that’s just the beginning, analysts say. Not only are these big players looking for dozens more locations here, but so are such industry stalwarts as Holiday Inn and Marriott, which are just starting to roll out their new brands of lower-priced extended-stay hotels. Although Homestead Village declined to reveal the number of sites it is considering, Extended Stay says it has at least 14 more Los Angeles-area locations on the drawing board.
“We are pretty aggressive,” said Michael Wilson, vice president of marketing for the 3-year-old chain. “But we feel it’s an underserved market.”
That’s because few hotels have been constructed in the Los Angeles Basin since the building boom of the late 1980s, Wilson said, though occupancy has been steadily inching upward. Meanwhile, technology, entertainment and construction companies have been expanding rapidly, bringing in consultants and other short-term employees who require such amenities as kitchenettes, washing machines and voicemail.
“These people don’t want to sit on their bed and eat out three times a day, or be in a large hotel when a convention is going on,” Wilson said.
A handful of companies, most notably Marriott and Oakwood Corporate Housing, have catered to travelers and corporate relocations for decades. But the niche’s biggest growth spurt has come in the last five years, as a new breed of budget-conscious hotels has been born and the number of operators has jumped from nine to 21, said Michael Mahoney, West Coast director of Coopers & Lybrand’s hotel consulting practice.
Extended-stay hotels account for about a third of all hotels being built around the country, he said. And given the current pace of growth, the number of extended-stay rooms nationwide is expected to pass the 100,000 mark this year, increasing from 60,000 at the end of 1996, he said.
Industry observers say the construction boom also underscores the ongoing shift in the nation’s economy to just-in-time delivery of goods, as knowledge workers go where they are needed for specific projects.
The construction surge started two years ago in Silicon Valley, prompted by the area’s expanding base of high-tech firms. Last year, the hotels began trickling into Southland business parks, taking sites near key aerospace facilities in the South Bay and in such high-tech areas as Irvine and San Diego’s Mira Mesa.
In Los Angeles, many of these developers are flocking to entertainment hubs like Glendale, looking for sites near sound stages to house production staff and other crew members.
“Southern California is one of our key sites for development,” said Ken Pierce, a vice president with Homestead Village. “We are still searching for appropriate sites to build on.”
Hotel experts say these properties are popular with developers because they are comparatively inexpensive and quick to build, taking just six to 10 months from planning to completion.
“You can do 10 of these in less time than it takes to do the design and planning for one full-service hotel,” said Bruce Baltin, a hotel analyst for PKF Consulting in Los Angeles.
Most of the extended-stay hotels are drafted from a single blueprint, a plan of 110 to 150 rooms without a plush lobby or inside corridors.
And once they’re up and running, they’re a lot cheaper to operate. With guests checking out every week or two, not every day, less maid service is required. And nobody has to be hired to staff a 24-hour lobby.
“We break even at 26% occupancy,” Extended Stay’s Wilson said.
Critics say such appealing profit margins have pushed development to a reckless pace in Dallas and San Antonio. They fear overzealous development could spread.
Hotel operators respond that in most markets, demand far outstrips supply, although few can specifically quantify the demand for this type of specialized hotel. Some hotel research firms have estimated that the 300-plus hotels in the U.S. are meeting only about 11% of total demand. So far, these hotels account for just 1.9% of the total number of hotel rooms nationwide.
“We aren’t delivering more hotel rooms than the market can absorb,” Mahoney said. “But I do suggest that the developers of any type of hotel look at not only the existing market, but the proposed construction” by other hotel developers.
