Economy and Extended-Stay Hotels Weather Downturn Better This Time Around

Extended-stay and economy hotels are proving to be relatively resilient during the coronavirus pandemic, and that represents a turnabout for brands that suffered disproportionately during the last economic downturn, according to a new CoStar analysis that examined the loan performance of certain commercial mortgage-backed securities.

The change of course has come as more people, particularly business executives, choose living and working temporarily at hotels.

Of course, all segments of the hotel industry are taking a beating from the drop in travel prompted by the health crisis. But current delinquency data provided by Intex Solutions shows economy hotels having only a 4% delinquency rate compared to 22% for midscale hotels and 21% for upscale ones. The lower delinquency rate indicates a decreased potential for default.

STR, a division of CoStar Group that provides market data on the hotel industry worldwide, and CoStar Risk Analytics combined data to look at how six categories of hospitality chains performed during the Great Recession and today.

“While the impact of COVID-19 on the extended-stay chains is certainly visible in the weekly data, their occupancy performance never dropped as far as the U.S. hotel industry overall and is now recovering much faster,” according to Jan Freitag, senior vice president of lodging insights at STR, in a recent report. “Throughout the pandemic, extended-stay properties can maintain an almost 20-point occupancy premium over the total U.S. figure.”

To conduct its analysis, CoStar examined six chain types, organized by the price of a room. They and their typical hotel flags included:

• Luxury: Grand Hyatt, Loews and InterContinental.
• Upper upscale: Embassy Suites, Ritz-Carlton, Trump Hotel Collection.
• Upscale: Courtyard, Crowne Plaza, Hampshire.
• Upper midscale: Hampton by Hilton, Holiday Inn.
• Midscale: Best Western, LaQuinta Inns, Ramada.
• Economy: Budgetel, Days Inn, Econo Lodge, Extended Stay America, Red Roof Inns, WoodSpring Suites.

Midscale and economy underperformed with high loan-default rates during the Great Recession, the analysis found. Now, based on 30- and 60-day delinquency rates during the pandemic, midscale hotels appear to again be underperforming, while economy shows much more strength.

According to Trepp CMBS hotel loan data analyzed by CoStar Risk Analytics, economy was the worst-performing segment during the initial years of the Great Recession between 2009 and 2010 with a default rate of nearly 27%. Midscale was the next highest at about 22%.

Freitag said there appears to be no one reason for what’s driving the relative health of the economy category ⁠— a group of hotels that tracked slightly below the national occupancy average of 75.7% last year, before the pandemic hit.

Economy hotels tend to attract a wide mix of guests, from construction crews on major projects to people in transition to a new jobs or homes to homeless populations organized by local governments to consultants on extended assignments, and some are people simply living in hotels long term, according to Freitag.

“In normal times, none of these demand sources would ever ‘move the needle’ on their own, but these are not normal times,” Freitag said. “Industry observers are becoming quite aware of a type of room demand that just never goes away. In other words, for some guests, staying in hotels is just a way of life.”

In evaluating the performance of extended-stay economy hotels, Freitag told CoStar News the need for medical care professionals to shelter away from home would only likely be a factor in the 20 or so major markets with a high number of COVID-19 cases, where volunteers were needed to travel from other cities.

Choice Hotels, whose economy flags include WoodSpring Suites and Suburban Extended Stay, gave evidence of the segment’s stability last week. Despite an industrywide revenue per available room decline of nearly 52% in March and 80% in April, the company's extended-stay brands saw a drop in that key metric of less than 14% and 29% in those months.

WoodSpring Suites achieved an average occupancy rate of over 70% in May, making it one of the best-performing chains in the hotel industry in recent months.

"Our extended-stay brands have shown their appeal time and time again for guests in search of a welcoming environment, convenient accommodations and affordable long-term rates — a demand that remains regardless of the broader travel environment," Anna Scozzafava, Choice’s vice president overseeing extended-stay hotels, said in a statement. "Essential workers, for example, have long utilized extended-stay hotels as a home base while traveling for work, and our brands were able to support that growing need during the COVID-19 pandemic.”

Going forward, economy hotels are likely to be somewhat insulated from new supply, which should also help them rebound, STR’s Freitag told CoStar News. As of April, there were about 3,700 new economy units under construction in the United States — only about 2% of the total 207,500.

The three charts below compare the historical and current delinquency rates for CMBS hotel loans by chain type: