In the current environment—characterized by cooling but persistent inflation, higher-for-longer interest rates, and expectations of a recession—many commercial real estate investors gravitate toward the hospitality sector. In our view, select-service and extended-stay hotels are particularly well-positioned for success in the immediate environment and over the longer term. 

Smart investors are already taking action. JLL Research reports investment appetite has climbed sharply, with volume for the select-service and extended-stay sector reaching a record-breaking $20.4 billion in 2022, representing 51% of total US hotel investment volume. 

Here we explore three key factors underpinning the potential for attractive performance in this hospitality segment: the power to navigate various economic pressures, lean operating models, and favorable market fundamentals. We describe where select-service and extended-stay hotels fit within the lodging universe and what types of travelers comprise their demand base.

Primer: Select-service and extended-stay hotels

While there’s no hard-and-fast rule for what makes a select-service hotel, everyone agrees they have fewer services and amenities than luxury or upscale full-service hotels. In general, select-service hotels have minimal meetings, events, and retail facilities and less recreational space. Food and beverage offerings are also more limited: Instead of lavish restaurant and room service options, select-service hotels are more likely to have mini-markets with affordable grab-and-go choices. Select-service hotels strive to deliver thoughtful service and exceptional guest experiences at a value-conscious price point.

Extended-stay hotels aim to attract guests for long periods, often quoting weekly or monthly rates. Amenities—such as in-room kitchens, suites with tables and chairs, and 24/7 guest laundry—are geared toward meeting the needs of guests staying more than just a night or two.

Key customer segments

Extended-stay and select-service hotels typically flourish in attractive secondary and tertiary markets, which draw a diverse demand base. 

Primary customer segments include:

• Commercial/business travelers – These folks are on the road for work, perhaps visiting clients or different branches of their employer’s office network. In the select-service and extended-stay segment, guests often include construction and other infrastructure workers completing large-scale projects, training program attendees, and other professional contractors and consultants.
• Leisure travelers – Families and individuals often choose select-service or extended-stay hotels when enjoying a vacation, attending amateur and professional sporting events, or visiting relatives.
• Temporary housing – Whether due to a career change, new work assignment, change in a family situation, or a long-distance relocation, these people are looking for an affordable place to stay without signing a lease. 

3 key factors underpinning the potential for attractive investment performance

 

1. Power to navigate economic pressures

Select-service and extended-stay hotels are uniquely able to traverse tough economic environments that typically pose a challenge to other asset classes. Much of their strength comes from a wide, diverse demand base: Select-service and extended-stay hotels can draw from several customer segments, creating insulation from economic pressures. 

During recessions, for example, some businesses may cut back their travel budgets, but demand can be back-filled by families taking modest drive-to vacations and travelers trading down from luxury full-service hotels in an effort to cut costs.

In the current economic environment, inflation is understandably top of mind. For hospitality investors, there’s good news: Hotels benefit from the ability to frequently re-price their rates. By adjusting their rates near-continuously, hotels can better keep up with inflation than other commercial real estate and mainstream investments. Select-service and extended-stay hotels are no exception to this advantageous dynamic. 

2. Lean operating models and lower capital expenditures

Select-service and extended-stay hotels have streamlined operations and relatively small footprints. Without an array of high-end food and beverage, spa, and retail offerings to manage, these hotels are easier to operate—and easier to operate efficiently. They’re also less costly to develop and maintain, lowering capital expenditures. 

Lean staffing is an important part of the efficient operating model for select-service and extended-stay hotels. The hotel industry is labor-intensive—but select-service hotels’ staffing levels can be as little as 50% of those needed at full-service hotels. Plus, select-service operators can implement cross-staffing strategies, training employees to work in multiple roles within a given hotel. Today, hotel operators are confronting rising wages and a tight labor market, with the American Hotel & Lodging Association reporting staffing is expected to remain a challenge for many hotels in 2023. In this environment, deploying the right-sized staffing model is more important than ever. 

For investors, lean operating models and low capital expenditures translate to consistently stable profitability. According to JLL Research, the select-service and extended-stay hotel segment consistently achieved gross operating profit margin premiums of ten percentage points in the years before the COVID-19 pandemic—and the segment remained profitable during the 2020 period of serious economic disruption. 

 

3. Favorable market fundamentals

Many secondary and tertiary US markets exhibit strong supply-demand dynamics supportive of select-service and extended-stay hotel investments.

On the demand side, multiple tailwinds are bolstering the customer base, including:

• The rise of “bleisure” travel – As work-life boundaries blur, travelers who opportunistically combine business and leisure into one trip often find select-service hotels best fit their needs, especially when traveling with their families. Extended-stay hotels offer an attractive solution for guests who choose to work remotely from vacation-like destinations.
• Small- and medium-sized business workers hitting the road – While large “Fortune 500” companies have been relatively slow to fully embrace travel in the post-pandemic world, small- and medium-sized businesses are back in travel mode. According to American Express Global Business Travel data cited by the Wall Street Journal, small- and medium-sized business travel transactions reached 80% of pre-pandemic levels in Q3 2022. By contrast, travel by global and multinational firms is back to only 61% of pre-pandemic levels. Businesses with construction crews, travel nurses, and sales teams back on the road often favor affordable select-service and extended-stay hotels. 
• Lack of affordable rental housing – Individuals and corporations looking for temporary housing are up against a hot rental market. Although rental rate increases are starting to cool, the overall US housing supply crunch makes select-service and extended-stay hotels an affordable, accessible solution. For hotel operators and investors, corporate clients can provide a source of steady, high-quality demand.

On the supply side, fundamentals also bode well for investors in existing properties as developers face near- to medium-term difficulties adding supply due to higher construction and financing costs.

Investment considerations

While we’ve covered here some of the underlying factors lending strength to select-service and extended-stay hotel investments, it is always advisable for investors to consult with experts, including tax, accounting, and financial specialists. With all private investments, thorough due diligence is essential before making any investment decision. With hotel investments, it’s especially important to assess the asset management and operations teams to ensure the business is positioned to deliver compelling returns.