It's cocktail hour in the lobby of the Element, a new hotel just off the highway in the Boston suburb of Lexington. Khaki-clad business travelers, corporate ID cards hanging from belts, nurse free beers and nibble nachos, staring at laptops or skimming newspapers. A vacationing couple talks quietly at a table. This hotel, which opened in July, is the first of a new chain being launched by Starwood—owner of the Sheraton, Westin and W brands. Designed by the same folks who created W, Element features a hip design and loads of green features; Starwood claims it's the most environmentally friendly hotel on the planet. But aside from the bamboo planters and water-efficient plumbing fixtures, competitors are paying close attention because Starwood has a history of revolutionizing the hotel business—and it says it plans to have 250 locations open within five years. To size up this new competition, partway through happy hour three suit-clad visitors walk into the lobby and approach the front desk. They tell the manager they're from InterContinental Hotels Group, which owns Holiday Inn, and they'd like a tour. It's not an uncommon occurrence. Ten Marriott executives recently checked into Element for an overnight stay—and even chairman Bill Marriott has stopped by for a look. Starwood's team says it's happy to show competitors around—after all, there are few secrets other hotel pros couldn't glean simply by booking a room. "It's a friendly competition—there's space for everyone," says Brian McGuinness, the Starwood vice president who oversees Element.
That's been especially true lately. Element is the latest entry into the lodging industry's hottest segment: extended-stay hotels. Unlike traditional properties, these chains are geared toward guests who'll stay more than five nights. They feature kitchens in each room, on-site laundry facilities and escalating discounts—the longer you stay, the lower the nightly rate. At higher-end chains like Marriott's Residence Inn, guests might pay $125 a night and get a free breakfast; evening "manager's receptions" with complimentary drinks and munchies; a pool; and free grocery delivery. At lower-end chains like Value Place, some locations offer rooms for just $189 a week. In this softening economy, overall hotel-industry revenues are flattening out, but the $5.7 billion extended-stay segment continues to show higher occupancy rates, faster revenue growth and higher profit margins than the overall industry. In the past decade the number of extended-stay rooms has jumped from about 100,000 to 277,000, and the chains are adding new ones three times as fast as traditional rooms.
The extended-stay concept isn't new. It began more than 30 years ago, when Kansas apartment developer Jack DeBoer built a hotel that broke many of the industry's basic rules. Instead of just a bed and a bathroom, rooms in his Residence Inn featured full kitchens, made to appeal to road warriors who grew tired of nightly restaurant meals. His hotel didn't feature a pool or lobby bar, and long-term guests didn't even get daily maid service. But the limited amenities kept costs down, and the discounts for long stays kept the hotel full on weekends, a time when the average business hotel turns into a ghost town.
After opening that first Residence Inn, DeBoer flew to Memphis, Tenn., to discuss the concept with Holiday Inn founder Kemmons Wilson. " 'It won't work'," DeBoer recalls being told. " 'You've got to have a bar so the guys can chase girls, and you've got to have a restaurant'." DeBoer ignored Wilson. By 1987, Residence Inn had 96 hotels, and DeBoer sold it for $260 million to Marriott, which now oversees 546 North American locations. Since then DeBoer has launched Summerfield Suites (which he sold to Hyatt), Candlewood Suites (sold to InterContinental) and Value Place.
Despite that long history, only in the past decade have extended-stay hotels emerged as the industry's big growth engine. One key driver: corporate outsourcing, which has led to a growing population of self-employed consultants who might spend months away from home on assignment. These guests want something that feels a bit more like home, which makes the kitchens a big draw. "When you're staying somewhere 15 days, you can't be in a room with just a bed and stay sane," says Katie Tyson, vice president of Residence Inn. In truth, few guests are whipping up four-star cuisine. Several chains cite research showing that only guests staying more than 10 nights do much in the kitchen beyond reheating pizza or keeping drinks cold. "Just having a kitchen, even if people don't use it—they're willing to pay more for it," says Peggy Fang Roe, who runs TownePlace, Marriott's midrange brand. Mostly, extended-stay hotels capitalize on the fact that some of the things that seem glamorous the first time you go on a business trip—restaurant meals! expense accounts! daily maid service!—become a total drag after a few weeks on the road. By then, many people would prefer eating in front of the TV and not having a stranger rearrange your toiletries each morning.
Among higher-end chains, there's been a move to make the accommodations exceptionally cushy, partly to keep pace with the renovations many homeowners did to their own residences during the real-estate boom. "That's what the hotel industry has recognized—that a traveler doesn't want to go anywhere and find less of an experience than they'd have in their own home," says Rob Radomski, who oversees InterContinental's Staybridge Suites and Candlewood Suites brands. Higher-end chains are adding granite counters, flat-screen TVs, stainless-steel appliances, outdoor fire pits and gourmet gas grills. The rooms at Element feature beige textured wallpaper, glass-topped desks and a leather headboard over wooden platform beds. Instead of wall-to-wall carpeting, there are laminate wood floors and area rugs. The lobby has lots of mod seating and bamboo planters. Beyond style, Element also intends to break new ground as an environmentally friendly hotel: it's filled with energy-efficient lighting and recycled materials. Rooms at the Element average $165 a night—a bit more than its upmarket rivals.
Some chains want to move even further upscale. In the past year, Philadelphia developer Korman Communities has expanded a nascent chain called AKA, which now has nine locations in Manhattan, Philadelphia and Washington, D.C. AKA's suites, which are meant to draw guests away from luxury hotels like the Four Seasons, feature Sub-Zero appliances and tons of space; rates start at $695 a night and decline to $295 a night for long stays. Co-president Larry Korman says AKA is routinely used by CEOs, affluent urbanites undergoing apartment renovations and A-list actors shooting movies. Another key demographic: rich folks whose marriages are on the rocks. Korman says one AKA location has a dozen long-term residents in various stages of divorce. That's hardly surprising: at low-end extended-stay properties, so-called marital dislocation can account for 20 percent of guests, which is one reason some executives refer to them as "heartbreak hotels."
Despite the segment's growth, the executives who run these chains sound a little frustrated that more customers aren't checking in. Lodging consultant and New York University professor Bjorn Hanson says more than 20 percent of hotel stays last five or more nights, and many of these guests would benefit from choosing an extended-stay property. (And since extended-stay guests require less attention from housekeeping and front-desk staff, margins are higher at these properties, so hotel operators would make more money off guests if they made this switch, too.) All the chains say many consumers don't really understand the key benefits of extended stay, particularly the way rates are discounted for long-term guests. Brand managers also say they're extremely careful of how they market the concept. " 'Extended stay' has a negative connotation to the consumer," says Starwood's McGuinness, echoing rivals. "The customers believe it's downmarket and a tired product."
To overcome that, ads avoid using the words "extended stay." Instead, they show happy, rested road warriors enjoying their stylish home-away-from-home. Ads for Hilton's Homewood Suites show travelers doing yoga and practicing golf putts in their suites; its spots use the tag line "How do you make yourself at home on the road?" "It's a tough segment to advertise and market to, but we're all getting more sophisticated at it," says Rebecca Wyatt, senior vice president at Homewood Suites.
Travel is a cyclical industry, and with airlines raising fares and companies cutting budgets, hotels have started to feel the effects. Occupancy rates for U.S. hotels have fallen this year, according to Smith Travel Research, and overall industry revenue has grown at 3.7 percent, half the growth rate in 2007. Some observers worry that the industry has become a little too enamored with the concept. "In certain markets, there are just too many of them—and too many coming," says Mark Skinner, partner at Highland Group. But 77-year-old Jack DeBoer, who invented this niche back in Wichita, Kans., says that in a slowing economy there will be even more value-conscious travelers turning to the brands he's created. No matter if you're in a $799-a-night Ritz-Carlton or a $189-a-week Value Place, DeBoer says, "when you turn out the lights, they all look the same." Just remember: in some of them that means you'll also have to turn out the light in the kitchen.