Can Extended-Stay Hotels Be Both A Key Safeguard Against Homelessness And A Hot Investment Target?

America's affordable housing crisis shows no signs of abating as people at the lowest end of the housing spectrum run out of options.

As more individuals and families become housing-insecure, many have turned to extended-stay hotels as a last resort before homelessness. Simultaneously, institutional investors are flocking to the asset class, and the world’s largest hotel companies have just announced new brands aimed at the economy extended-stay market.

Industry experts acknowledge that the constant demand from the affordable housing crisis is part of economy extended-stay’s new appeal as an asset class. But the big-money figures poised to take over the market are coming to drive returns, and the impact on housing insecurity is still unknown.

“From the Choice Hotels perspective, this is not a primary residence,” Matt McElhare, Choice Hotels senior director of extended stay brands, told Bisnow.

Housing advocates worry an influx of major investors and huge corporations not necessarily sensitive to the housing need filled by economy extended-stay hotels could make the subsector less hospitable to society’s most vulnerable.

“If it’s an opportunity to profit, then [big investors] will do what large landlords of low-income housing in the Atlanta area have done, which is profit off the backs of these people,” said Lindsey Siegel, Atlanta Legal Aid Society director of housing advocacy. “And it scares me because it makes me think they’ll have fewer options of where to live in the future.” 

The number of economy extended-stay guests who have no permanent residence is significant, even if the percentage varies widely from property to property, legal aid attorneys and researchers told Bisnow. But treating these individuals and families as hotel guests rather than residents can drain money from them more quickly and leave them worse off than before, Legal Aid of Southeastern Pennsylvania attorney Michelle Dempsky said.

“It’s a reinforcing cycle, because rates are so high — higher than standard rents,” Dempsky said. “If you’re in emergency need, you’re paying a premium for necessity, which puts you in more financial distress, which makes you less able to secure affordable housing, which means you’re stuck there.”

A ‘Band-Aid’ For A Desperate Situation

Being more expensive than permanent housing, extended-stay hotels’ main function within the housing ecosystem is for short-notice stays of indefinite length, often because of sudden loss of housing — a domestic violence situation, a natural disaster and the like, said Dartmouth College associate professor Terri Lewinson, who has published multiple papers on extended-stay hotels and housing insecurity.

Extended-stay hotels also can be the only option for individuals with evictions or other items on their legal record that prevent them from qualifying for standard leases, Lewinson and Siegel said. Those individuals often wind up staying for longer periods of time due to their lack of options.

“We’ve clearly struggled with creating and maintaining affordable housing for people [as a society],” Lewinson said. “Extended-stay hotels built a market that allows easy entry for individuals who are otherwise trying to navigate extremely complex systems to get housed.”

What extended-stay hotel guests trade in exchange for convenience and easy access goes beyond price. If an individual can’t find permanent housing because of mental health, addiction or criminal background issues, those issues may follow them to their hotel room or suite.

“If you’re living in extended-stay, you’re not getting any support,” Siegel said.

Even households without blemishes on their record are faced with a lack of options in today’s affordable housing market. If they don’t have family or friends to rely on, some families find extended-stay hotels a safer and more professionally managed option than, say, an unregulated rental in a high-poverty neighborhood, Lewinson said.

Department of Education data for the 2019-2020 school year found that nearly 3,300 public school students across Metro Atlanta were picked up from hotels by their school buses, according to an amicus brief filed by the Southern Poverty Law Center in support of a lawsuit Atlanta Legal Aid brought against regional extended-stay chain Efficiency Lodge.

“I think few parents want that for their children,” Siegel said. “Most of these are studios with whole families sharing a single room. Most families would want something different, and the fact they’re choosing these means they have few options.”

Even though an extended-stay hotel offers a relatively stable situation, it doesn't provide any advantages to finding more permanent housing in the future. If extended-stay guests can no longer afford the rate at such properties, then their next stop is often a shelter or living out of their cars, Dempsky said. 

"The problem is that it’s like performing CPR," she said. "It might save their lives right now, but without addressing the medical problem, you’re not solving the problem. ... You're exhausting short-term Band-Aids to stave off the inevitable."

A Flood Of Money And Development

Meanwhile, the sector is booming. In the first year of the pandemic, extended-stay hotels outperformed traditional hotels, with the cheapest extended-stay properties coming out the best of the lot, said The Highland Group principal Mark Skinner, who has provided industry research for extended-stay hotels for decades. 

“During Covid, you saw occupancy premiums in economy extended-stay of 40% or 50% above the overall levels in hotels,” McElhare said, adding that profit margins remained at pre-pandemic levels, demonstrating the asset class' durability even at the height of a national health crisis. 

If the coronavirus demonstrated extended-stay’s resilience, then two trends are anticipated to cause a huge increase in demand over the next few years among blue-collar workers, the subsector’s target demographic. The reshoring of manufacturing, especially for the electric vehicle industry, promises temporary work opportunities for thousands at a time. And when projects funded by the Bipartisan Infrastructure Law start work in the next few years, it will throw gasoline on that fire.

“We’re preparing for [the infrastructure bill] as we think about where we want to grow, but you’re talking about a 10-year-plus runway for accelerated growth of demand,” McElhare said.

As a result, capital has flooded into the extended-stay sector, which saw more transaction activity in 2021 and 2022 than it had in the previous six years combined, JLL Hotels & Hospitality Americas CEO Kevin Davis said.

“For a long time, you’ve had a situation where you’ve had higher-quality extended-stay brands like Extended Stay America, then everything else,” he said. “Some of the lower-quality brands I won’t name, but there’s been a big gap, and there hasn't been a lot of quality economy extended-stay to date.”

Even before the pandemic, demand for economy extended-stay outstripped supply 2 to 1, McElhare said. And though economy extended-stay offers the highest margins within the subsector, ownership and operation of such properties was so segmented that there was little investor-class product, Davis said. 

That leaves big conglomerates needing to make their own product once they enter extended-stay, as Choice Hotels has done with its two economy brands, WoodSpring Suites for new construction and Suburban Studios for conversions of traditional transient hotels. WoodSpring Suites accounted for 94% of all economy extended-stay rooms under construction in the U.S. at the end of 2022. 

Blackstone and Starwood bought a portfolio of 111 WoodSpring properties for $1.5B in January, demonstrating the sort of investor appetite that has led Choice to target 10%-15% annual inventory growth over the next few years, McElhare said. Choice has a proprietary data platform to assist developers in identifying the best sites for extended-stay hotels and a 60-person team to support developers, stand up new franchisees and support their ongoing operations.

“We’re in a commanding position,” McElhare said. “We know we have a lead.”

Marriott International, Hyatt and Hilton are hot on Choice’s heels. All three either launched new economy extended-stay brands or announced their intent to do so in the past month. Overall, extended-stay inventory is growing at four times the rate of traditional hotels, Skinner said.

Strange Bedfellows

As more corporate brands and institutional investors enter the economy extended-stay subsector, they are wading into part of the housing continuum — though they may not be willing to act like it.

In many states, a rental agreement isn’t required for a guest at an extended-stay hotel to gain the legal standing of a residential tenant. Certain markers can qualify a person as a rental tenant in some areas, such as hitting a threshold for length of stay, paying in monthly increments as opposed to daily or weekly, or even getting official mail sent to their suite, Siegel and Dempsky said. 

“As long as you keep paying on time, they’ll keep you,” Dempsky said. “And if you can’t pay, then they’ll kick you out. But they may not kick you out just to preserve your standing as a hotel guest. It’s more of a gradual shift from hotel-guest relationship to landlord-tenant, until it becomes inconvenient.”

Choice Hotels has options in its system for operators to offer nightly, weekly and 28-day payment intervals, but it doesn’t mandate using all three options, McElhare said. Nor does it have a systemwide maximum for length of stay. A minority of Choice franchisees offer the 28-day option, he said.

When asked if Choice Hotels acknowledges that its economy extended-stay hotels are used as a housing source of last resort by guests with no permanent address, McElhare said, “That’s not our position.”

“We know we’re providing a hotel that’s a better fit for guests that have longer-stay occasions,” he said. “The overwhelming focus from our marketing perspective as we educate our franchisees is attracting blue-collar and gray-collar workers.”

A majority of economy extended-stay guests are workers with permanent addresses elsewhere, Skinner and JLL’s Davis said, though households experiencing housing insecurity also make up a substantial portion. In the Atlanta area, a majority of guests at economy extended-stay hotels have no other place to call home, Siegel said.

“When our clients who were living in Efficiency Lodge testified about the clientele living there, they said they did not know of anyone who was a short-term guest,” she said. “As far as they were aware, all of their neighbors were long-term residents.”

Efficiency Lodge acknowledged in its own Securities and Exchange Commission filings that people experiencing housing insecurity were a target demographic for its properties, Siegel said. The company has appealed a series of lower-court rulings in its former guests' favor to the Georgia Supreme Court, which has yet to issue its decision.

“They know exactly who they’re targeting, and I expect it’s the same with the Marriotts and the Hyatts and others getting into this business,” Siegel said. “They can see the trend of people squeezed out of traditional housing markets, and they can see the opportunity in housing those people. So for them to come back and say they’re not intended to be long-term housing is disingenuous on their part.”

In states like Georgia and Pennsylvania, there is no statute that covers the residential rights of an extended-stay guest, but housing courts are willing to hear cases brought on behalf of such guests, Siegel and Dempsky said. 

If a guest seeks legal assistance immediately upon being locked out, an attorney can file an emergency injunction to let the guest back into their room or suite. If more time has passed or if the guest doesn’t wish to return, judges have awarded monetary damages.

The same elements that give economy extended-stay hotels a low barrier to entry leave its guests more vulnerable to behaviors that are straightforwardly illegal in rental housing, such as surprise lockouts, intimidation tactics and harassment, Lewinson and Dempsky said. A lack of awareness among guests of their rights gives more cover to behave with impunity.

“Sometimes a hotel would give up as soon as we filed something legally, and sometimes they wouldn’t,” Dempsky said. “But it’s still financially viable for them to simply eject tenants if only one of every five ever file a complaint.”

In Dempsky's practice area of Montgomery County, Pennsylvania, extended-stay operators that have been taken to court before are more likely to pursue official eviction filings on subsequent occasions, she said.

Choice Hotels directs its franchisees to follow all applicable local laws if they have issues with guests, McElhare said. The conglomerate also gives franchisees a list of property management companies to choose from for running day-to-day operations.

Because there is a relative lack of institutional or corporate-scale economy extended-stay hotel brands, local and regional operators can be more likely culprits when localities blast extended-stay hotels for creating magnets for crime and unsafe behavior, Davis said. 

"If you think about some of these hotels and the price point, these are assets that you have to stay on top of, many of them, in terms of ensuring they're safe, secure and litter gets picked up," Davis said. "So in terms of institutional ownership, there arguably would be better stewardship of the assets."

Institutional ownership and management bring efficiency in terms of driving profits and room rates in all asset classes, extended-stay hotels included. Softening demand indicators in the first three months of the year indicate that the sector can't sustain massive rate jumps, Skinner said.

But all major hotel conglomerates distribute market-level hotel demand and performance data to ensure their operators can optimize profits, McElhare said. As more supply is poised to enter the market in the next couple of years, its effect on guests' bank accounts is up in the air.

"Just like gentrification pushes families out of communities for higher prices, the same could happen in the extended-stay hotel market," Lewinson said.

On the other hand, she said "an advantage could be that if there were more operators and more interest, there would be more competition and an improvement in the quality of the environment."

"So it sounds like one of those situations where we can improve the housing, but will it still be available to those who need the improvement most?"

CORRECTION, MAY 12, 10:30 A.M. ET: This article has been updated to clarify Choice Hotels' profit margins preceded the onset of the pandemic and the hotel properties targeted by its Suburban Studios brand for conversion.