SAN editor George Sell looks at some of the key trends that will shape the global serviced apartment and aparthotel sector in 2020.
• Serviced apartments pivot to leisure demand
2020 has been a catastrophic year for many industries but business travel must be up there among the worst affected. The global market for business travel is expected to decline by 54 per cent in 2020 and 45 per cent in 2021, according to Report Linker. In April 2020, during the early days of global COVID-19 spread, 98 per cent of the member countries of GBTA (Global Business Travel Association) cancelled their international business travel and 92 per cent of them halted all or most of their domestic trips.
Microsoft founder Bill Gates is among many predicting that business travel and office work won’t return to pre-pandemic levels in the future. The Microsoft founder and philanthropist believes that around half of business travel will go, along with a third of working in the office.
Other commentators are more bullish, but any recovery is likely to be slow and gradual. With business travel making up an important slice of business for most serviced apartment operators – and in some cases all their trade – it’s clear that operators need to diversify and attract new customers.
Serviced apartments, aparthotels and extended stay hotels, by virtue of offering self-contained accommodation which allows guests to avoid contact with other people, will take a greater share of leisure travel in 2021. The strict hygiene protocols introduced by virtually all branded serviced apartments offer guests more reassurance than Airbnb-style accommodation which is not so consistent or highly regulated.
Some operators have already established solid leisure demand foundations, particularly aparthotel operators such as Staycity and Roomzzz.
Tom Walsh, CEO of Staycity, said recently: “It’s apparent that full recovery will take some time to achieve but the recent news of the success of the vaccine trials is positive news for the future. Leisure travellers have already demonstrated a demand for short breaks and city-based staycations nearer to home and we are well placed to see our occupancies rise as a result, particularly as our self-catering apartments make social distancing easier.”
His experience is mirrored elsewhere. Talking about The Sebel brand, Simon McGrath, CEO of Accor Pacific, says: “The serviced apartments sector has been rapidly growing in popularity. We are expecting to see a further boom in this area, particularly in the current climate, as serviced apartments limit unnecessary contact with other guests and offer a safe and secure way to travel. Guests can keep to themselves or mingle with their fellow travellers, serviced apartments offer a safe and secure way to travel. The Sebel has 75 per cent leisure and 25 per cent corporate and the average length of stay for the brand is two to 2.5 nights.”
Native’s Guy Nixon adds: “Even with the challenges of this year’s global Coronavirus pandemic, leisure demand for aparthotels has been buoyant in the months coming out of lockdown and we’re well placed to capture post-COVID demand.”
Expect all operators to shift their focus to some degree to leisure business in 2021. Some may even follow Oakwood’s lead and launch a new brand – its new soft brand called The Unlimited Collection has a focus on millennial and leisure travellers.
• Healthy buildings
Healthy building refers to a growing movement which aims to support the physical, psychological, and social health and wellbeing of people in buildings and the built environment, and it is a trend which is being felt across all real estate disciplines, including serviced apartments.
An indicator of how mainstream this is becoming was the launch last year of Delos, a NYC-based start-up, which is backed by Bill Gates and has author Deepak Chopra and actor Leonardo DiCaprio on its board of directors.
Launched by former Goldman Sachs partner Paul Scialla, Delos runs the WELL initiative, a certification scheme that developers, employers and operators can publicly display in their buildings and promotional materials. Features such as treadmill desks, easy access to water or the proximity of desks to windows are examples of the types of features Well rewards.
The WELL certification is modelled on the LEED standard for green buildings, but unlike the nonprofit administrator of the LEED program, Delos is a for-profit company and charges around $20,000 to evaluate 100,000 square feet of building space for compliance with wellness standards.
A well designed healthy building will feature good ventilation and air quality, lots of natural light, flexible and adaptable spaces and a careful selection of materials to cut down on toxins and volatile organic compounds (VOCs).
Olga Turner Baker, founder of healthy building consultants Ekkist, says that health and wellbeing and sustainability often overlap – “quite often when you’re specifying a material which is sustainable it also tends to be really good for your health and wellbeing”.
Turner Baker is encouraged by the general direction of travel: “Awareness has grown a lot in recent years. Developers have gone from knowing almost nothing about this field to being curious and trying to figure out how to implement it. A lot of them talk about it now, and are thinking about it. The next stage is to teach then how to implement it. There is a massive skills gap. Developers have gone through a learning process with sustainability over the last 10 to 15 years – understanding how to apply it, awareness of all the products coming to market and so on. With wellbeing, that education process is underway.”
With an increasing focus on ESG coming from the investment community, healthy buildings will become mainstream, a given element of any major new development in 2021.
• Hotel groups rush to launch extended stay brands
In North America, the extended stay sector has been a shining light in the Covid-induced darkness that engulfed hospitality in 2020.
Its has outperformed mainstream hotels by a considerable distance, and the performance gap has widened the further down the price point scale you go, with economy extended stay the undisputed star.
And as the market begins a tentative recovery, the extended stay sector has reported a bigger growth in occupancy than the hotel sector as a whole, with economy extended stay occupancy for Q3 2020 down just 0.8 per cent compared to the same period in 2019.
“Across all metrics extended stay hotels continue to perform better than the overall hotel industry six months following the start of the pandemic,” said Mark Skinner, partner at The Highland Group. “Occupancy is now higher than during the low points in 2009 and is rapidly approaching parity with quarterly occupancy during the last recession.”
Canny owners, investors and operators are already taking steps to get a bigger slice of what has become the modest, yet highly attractive, poster child for the hospitality sector.
Red Lion Hotels has relaunched its GuestHouse International brand as GuestHouse Extended Stay, an upper-economy flag suitable for conversions. Magnuson Hotels has launched an extended stay brand, with its first properties in Texas and Ohio.
The first property under IHG’s Atwell Suites brand will open in Miami next summer. Karen Gilbride, vice president, Avid hotels and Atwell Suites, IHG, said: “We created Atwell Suites as a result of continuous collaboration and dialogue with an enthusiastic advisory board comprised of IHG owners to offer travellers something truly different in the upper-midscale space. The all-suites segment is fast growing and remains very resilient with strong owner interest throughout 2020. We’re excited to continue the momentum of this brand and look forward to welcoming our first guests next year.”
Navneet Bali, the former chairman of Meininger Hotels, has launched the LyvInn brand, an extended-stay and transient hospitality concept. Initial locations for the brand include Amsterdam, Paris, Berlin, Hamburg, Barcelona and London. LyvInn is aimed at young people and will provide spaces to live in for work and travel. It will feature communal spaces and facilities, as well as state-of-the-art health and safety features.
There are likely to be several more extended stay brand launches in 2021, and we are also seeing hotel groups bring their established extended stay concepts to new markets. A proposed Park Inn Residences property in Port Charlotte, Florida, will be Radisson’s first extended stay property in the US if approved. IHG has opened Staybridge Suites Dubai Al-Maktoum Dubai Airport, the brand’s first property in the emirate. And The first UK Hyatt House opened in Manchester earlier this year.
2021 could also be the year that the likes of Hilton and Wyndham join Marriott and IHG in bringing some of their highly successful US extended stay brands to Europe.
• The return of the asset heavy operator / opco and propco under same ownership
The direction of travel in the hospitality industry for the last 15 years or so has been towards an asset light model. Marriott got the ball rolling in 1993 when it span off its real estate into an investment trust (Host Marriott), freeing it from the burden of debt and catalysing the company’s aggressive growth into the largest lodging business in the world, from 500 properties then to to around 7,000 now. Most of the major hotel groups have followed suit, and some have actually moved further away from the operator model to become predominantly franchise platforms.
But in the serviced apartment sector, there are a few signs that having opco and propco under the same ownership – an asset heavy model – could be an attractive route for those with deep enough pockets. It’s interesting to note that the two biggest transactions in the European market of recent years both follow this model. Brookfield’s 2018 acquisition of SACO (now rebranded as edyn Group) has resulted in an ambitious roll out of the Locke aparthotel brand, primarily through an owner/operator model, although it does take leases too.
And in September this year, in a deal which raised quite a few eyebrows in the sector, investment firms APG and Aware Super committed to fund the growth of Amsterdam-based aparthotel operator City ID to the tune of €500 million over the next four years. City ID currently has just three operational assets in Amsterdam, but it is now aiming to focus on the major European capital cities and will operate as “a fully integrated asset heavy owner-operator”.
In uncertain times, owning real estate in major cities, while capital intensive, offers a business a solid asset base, and being under the same ownership should in theory offer a synergy and enhanced efficiency between opco and propco. In the US extended stay sector, Service Properties Trust is putting this theory to the test, having cancelled management agreements with Marriott and IHG, and moving around 140 extended stay properties to Sonesta, in which it has a 34 per cent ownership stake.
Locke and City ID aren’t the only examples of operators and real estate under the same ownership, of course. Two of the industry’s heavyweights, Ascott and Frasers, own a proportion of their real estate through their parent companies, although their focus in recent years has been very much on signing management agreements.
In the case of some more established operators, the asset heavy model came about because the operators were the original developers of their units and either couldn’t find a suitable operator or saw the potential financial benefits of cutting out the middle man
Companies such as Cheval Collection, Marlin Apartments and Super City own some, and in some cases all, of their inventory. It’s not a model for rapid expansion, but in locations such as London, where real estate is regarded as a safe haven, it offers very solid foundations, as well as the flexibility to switch inventory between long and short stay business as and when business dictates.
• Workations
The digital nomad phenomenon, of young creative professionals who can work from more or less anywhere with a decent WiFi signal, is being expanded as millions of workers – and their employers – have found they can do their job perfectly well remotely. This is a liberating realisation if the only reason you are tied to living in particular area is because your home is close to your office.
A number of hotels in the UK and further afield have launched workation packages to allow people to work remotely while enjoying their luxurious surroundings. For example, dedicated ‘work butlers’, upmarket stationery and champagne at the end of the day all come as part of the workation package at Dukes London in Mayfair. The butlers offer printing and scanning services, and serve a healthy lunch from the Eat Well, Work Well menu either in-room, at the restaurant or in nearby Green Park.
Tourist destinations such as Barbados and Bermuda are offering travellers the opportunity to apply for permits to work remotely from the islands for one year. Several Marriott resorts in the Caribbean have announced new extended-stay workation packages, combining all the technology and connectivity workers need. The new packages are designed “not only to allow travellers to continue their virtual commutes seamlessly but also to provide downtime and leisure options, which in turn can help spark new inspiration and productivity,” Marriott said in a statement.
Some operators have been ahead of the curve. In early 2019 Amsterdam-based Yays announced it was focusing on the generation of professionals who are able to work remotely and live the digital nomad lifestyle, calling this state a permanent workation. The company gives guidance on choosing affordable fully equipped accommodation with reliable internet connection, in a place where team members can make the most of both their working hours and their leisure time.
Workations offer a great opportunity for serviced apartment operators to capitalise on some of their key strengths – bigger, self-contained units and locations in the heart of their communities. The corporate road warrior might be a rarer sighting in serviced apartments in 2021, but there is a potentially huge market of newly-mobile independent professionals who can help to fill the vacancy void they leave behind.
• Wave of investment and M&A activity
As mentioned in some of the previous trends, the performance of the serviced apartment and extended stay sector through the pandemic has brought under the spotlight of the investment community, and this is only going to intensify in 2021. In April this year, only a month in to the pandemic in the US, Blackstone Group and Starwood Capital Group secured stakes in Extended Stay America, having noted its resilient performance, acquiring 4.9 per cent and 8.5 per cent stakes respectively.
And last month, Dublin-based Staycity Group secured a €70 million refinancing package which included selling a 13 per cent stake in the country to Irish sovereign fund ISIF.
2021 is likely to see a significant increase in both investment in to the sector and M&A activity, as investors seek long term value and both owners and operators look for distressed opportunities. While the sector has performed admirably and stood up to the repeated blows 2020 has unleashed, there are some punch drunk players currently clinging to the ropes who will be acquisition targets for their stronger peers.
In its latest research document published last week, AHV Associates argues strongly that a very positive scenario is now emerging for hospitality in 2021, citing continued substantial government economic support, increased operator margins due to cost savings and efficiencies that will remain post-Covid, and rebounding ADRs due to less competition.
The sector’s performance, combined with a backdrop of low interest rates, well-capitalised banks and large amounts of dry powder in private equity/debt funds, could well result in significant sector consolidation, as well as the emergence of new players.
The build up of dry powder means there is significant pent up demand – European hotel transactions in the first six months of 2020 were down 56 per cent compared to the same period in 2019, with around 75 per cent of the transactions completed agreed before the pandemic was declared. This means that roughly €10 billion that would normally have been spent is now burning several holes in several pockets.
Having piqued the interest of investors, it is likely that a good chunk of this cash could end up being deployed in the serviced apartment sector.
Do you agree with me? What do you think will be the most significant industry trends in 2021? And how did I do on our 2020 trends?
Drop me a line at george@internationalhospitality.media and let me know.
