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No Room for Complacency

At age 20, the Homewood Suites brand is flourishing. Now get ready for Home2 Suites.

Shortly after Homewood Suites made its debut in Omaha in 1989, developer Jay Shinn became one of the first franchisees for the then fledgling extended-stay brand. His affinity for the product has only grown over time. Today the CEO of Dallas-based Magnolia Lodging is developing a 114-room Homewood Suites in Allen, Texas, set to open in February 2010.

“We like the brand because it balances the business from weekday to weekend,” explains Shinn, an art collector whose showpiece 108-room Homewood Suites in Plano, Texas features black-and-white photos of Native Texans such as pitching great Nolan Ryan and television newsman Dan Rather. “Homewood Suites works well for both business and leisure travel, even though we're primarily in corporate markets.”

Magnolia Lodging owns five hotels in the Dallas-Fort Worth metroplex totaling 600 rooms. Three of the hotels in its portfolio are Homewood Suites, which account for about 360 rooms.

The 3.5-acre site in Allen is ideally located for the steadily growing hotel chain that caters to business travelers. Many of its guests are either undergoing corporate training, on assignment, or attending a seminar. Half of all guests stay five or more nights.

An affluent suburb northeast of Dallas, Allen is a hub for technology firms. The city's population mushroomed from 43,554 in the 2000 census to 77,465 in 2007. What's more, it's only a few miles from Plano, home to business giants like Electronic Data Systems and JC Penney.

“Even though the corporate demand generators are a big factor, restaurant and entertainment areas also are close by,” says Shinn, a 25-year veteran of the hotel business. “We also look for a location that has visibility. It's important that people know an extended-stay hotel is there.”

Expansion mode

From humble beginnings 20 years ago, the Homewood Suites chain founded by Promus Hotel Corp. has grown to 270 properties throughout the U.S., Canada and Mexico. Nearly 40 Homewood Suites are expected to open this year alone, stretching from Boston to Bozeman, Mont., and points beyond. The chain's biggest rival, Residence Inn by Marriott, boasts nearly 600 locations in North and Central America and the Caribbean.

A pivotal point in the evolution of Homewood Suites came in 1999 when Hilton Hotels Corp. acquired Promus, based in Memphis, Tenn., for $3.7 billion in cash and stock. The deal included the acquisition of the Doubletree, Red Lion, Embassy Suites, Hampton Inn, and Homewood Suites brands.

“Clearly, the brand got much greater distribution after Hilton acquired Promus. In fact, it's one of the fastest growing upscale brands,” says Mark Skinner, a partner with The Highland Group, a hotel consultant and research firm based in Atlanta. The upscale segment of extended-stay hotels includes eight brands whose average daily rate is $95 and above, according to the Highland Group.

One big advantage for Homewood Suites is Hilton Honors, a popular rewards program that provides incentives for guests to stay at the Hilton family of hotels. Skinner says Hilton Honors, which has 8 million active members, is one of the best rewards programs in the industry.

Not resting on its laurels, Hilton is launching a sister brand, Home2 Suites, to compete in the mid-priced segment of extended-stay. This crowded mid-priced niche already has 11 brands whose average daily rate ranges from $45 to $95.

“One of the breakout characteristics of this brand is this sense of community space that can be used by the customers to feel relaxed and feel connected. We've seen that in Homewood with our lodge,” says Bill Duncan, senior vice president of brand management for Homewood Suites and Home2 Suites.

The lobby area in Home2 — called the oasis — will include work spaces with flat-screen monitors, a communal table, a fresh market pantry, and an information wall with details on local activities.

In many ways, Home2 is a scaled-down version of Homewood Suites. The prototype is a four-story, wood-frame construction on about two acres with an average of 108 rooms. The traditional Homewood Suites prototype contains 120 rooms built on three acres.

Among other key differences: The average suite in Home2 will be 323 sq. ft. compared with 420 sq. ft. in Homewood Suites. Home2 will provide a continental breakfast, whereas Homewood Suites offers a hot breakfast. The room rate in Home2 will average $90 per night compared with $120 at Homewood Suites.

The average cost per key, excluding land, for a Homewood Suites is $90,000 to $100,000. For Home2 the cost will be significantly lower, ranging from $70,000 to $75,000. That puts the project cost for Home2 in the $7.5 million to $10 million range.

At that deal size, financing is available for the development of Home2 Suites primarily through local and regional lenders who have an existing relationship with borrowers, says Duncan.

Twenty franchise applications have been approved thus far, with another 40 applications under review. Ten Home2 Suites are slated to open in 2010 starting late in the third quarter, with another 40 to 50 hotels projected to open in 2011. The brand's primary competitors will be InterContinental Hotels Group's Candlewood Suites and Marriott International's TownePlace Suites.

Standing out from the crowd

From a product standpoint, the Homewood Suites brand has stood head and shoulders above the competition for some time, says Justin Knight, president of the Apple REIT Cos., whose portfolio of 193 hotels includes 26 Homewood Suites totaling more than 2,800 rooms. “We've owned a number of first-generation Homewood Suites that have continued to perform extremely well, that do not have any functional obsolescence really of any kind,” says Knight.

Because it was not the first chain to enter the extended-stay space, the architects of the Homewood Suites brand had the advantage of being able to study the strengths and weaknesses of hotels already established in that niche during the 1980s, says Knight.

Still, the Apple REIT Cos., based in Richmond, Va., isn't putting all of its apples in the same extended-stay basket. Collectively, the four non-listed real estate investment trusts that make up the Apple REIT Cos. own 29 Residence Inn by Marriott properties totaling more than 3,500 rooms.

“If there is one disadvantage to Homewood Suites, it is not the No. 1 recognized extended-stay brand,” says Knight. “As the market picks up, Residence Inn historically tends to perform extremely well. Because of brand recognition, Residence Inn picks up a transient piece of business at a higher rate, which really juices the returns on that particular brand.”

Homewood Suites is popular with hotel owners and guests alike because the public spaces are smartly designed, says Shinn of Magnolia Lodging. “The lodge functions as a breakfast area, a meeting area, and a socializing area, plus a business center is included and typically a small meeting room or two.”

Another drawing card: the spacious suites come with fully equipped kitchens. Other features include a complimentary hot breakfast, plus free Internet access in each suite. A reception Monday through Thursday evenings also provides guests with a complimentary light meal and beverage.

Amid a deep recession and a decline in business travel, Homewood Suites holds a competitive edge, Shinn believes. “When you are offering a full suite, kitchen, social hour and breakfast, it's very attractive to all types of travelers, especially in this day and time when the economy is down and travel budgets have been cut somewhat. The amenities that we offer make it more versatile versus a typical hotel where there is a charge for everything.”

Overbuilding concerns

While extended-stay hotels are weathering today's economic downturn better than the U.S. hospitality industry as a whole, the sector is not recession-proof. During the first four months of 2009, revenue per available room (RevPAR) among extended-stay hotels dropped 16.3% compared with the same period a year ago, reports Smith Travel Research. Across the entire hotel industry, RevPAR declined 18.2% during that stretch.

The good news for the extended-stay segment is that room demand dropped only 1.9% January through April on a year-over-year basis. The bad news is that supply rose 9.3%. As a result, the occupancy rate at extended-stay hotels averaged 61.2% during the first four months of 2009, down from 68.1% during the same period a year earlier.

“The cautionary flag is that there is more supply,” says Jan Freitag, vice president of global development for Smith Travel Research. But he is quick to point out that the national data doesn't tell the whole story. “You could probably make an argument that a lot of those extended-stay properties are the right product in the right market, otherwise the bankers wouldn't have supported them.”

The supply-demand figures for the broader hotel industry reveal somewhat of the opposite problem. While room supply across all hotel segments rose a modest 3.2% during the first four months of 2009 on a year-over-year basis, demand fell 8.1%. The occupancy rate across the entire hotel industry averaged 52.6% during the first four months of this year.

Duncan of Homewood Suites says that 20 years of historical data show that demand in the extended-stay segment tends to hold steady or dip only slightly during a recession. That's because when companies restructure, reorganize or outsource work, those moves create new demand for extended stay.

The deployment of new technology or the launch of a new product or service in Corporate America also is a demand driver for extended-stay business, explains Duncan. “Typically the travel is so essential to the ongoing financial success of these businesses, if they pull the travel they will lose the revenue generated from it.”

Back in Dallas, Magnolia Lodging has brought a lot of pride to the Homewood Suites brand by developing award-winning hotels. “Homewood is very good at providing the specs that they need you to adhere to,” says Shinn. “They're also flexible enough that they don't expect cookie-cutter hotels.”

Matt Valley is editor-in-chief.

A Hotel Study In Contrasts

Much of what ails the broader U.S. hotel market is a sharp drop in demand on a year-over-year basis. That problem is far less acute in the extended-stay segment, where supply is more of an issue.

% Change in Supply YTD* % Change in Demand YTD*
Total U.S. Hotel Market 3.2% -8.1%
Extended-Stay Sector 9.3% -1.9%
*Year-to-date through April 2009
Source: Smith Travel Research
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