The Smooth Expansion from Apartments to Extended-Stay Hotels

Witchita, Kan.–In the commercial real estate world, the multifamily market and the lodging market are essentially two different animals, but they don’t have to be. Nick Esterline, a Wichita, Kan.-based real estate owner and developer, has found that there are similarities between apartments and extended-stay hotels, that can allow owners of the former property type to easily make a foray into the latter sector.

Presently, Esterline, who is also a sales associate with Landmark Commercial Real Estate Inc., owns an interest in over 210,000 square feet of office space, more than 700 apartment units and two Value Place Hotels with an aggregate 210 suites. It was back in 2007 when, armed with his extensive knowledge of the multifamily market, he decided to expand into extended-stay. He saw the similarities between the two sectors. Long-term stay hotel rooms are, essentially, short-term stay apartments. Both environments provide clients with the opportunity to set up a home—a kitchen area, laundry facilities, long-term self-parking. And in terms of operations, neither requires the staff that would be necessary at traditional hotels, where more services are provided to clients.

Esterline opened his first Value Place extended-stay hotel, built from the ground-up, in Asheville, N.C., in 2008. The property soon hit its stride, and in 2009, Esterline decided to buy an existing Value Place property.  “The timing couldn’t have been more perfect,” he tells MHN, jokingly. The recession had firmly taken hold by that point. However, all sarcasm aside, he says taking on the second property in the midst of a full-blown national financial crisis had its advantages. “We got an attractive price from the previous owner’s lender so it made all the sense in the world to buy it. It was 65 cents on the dollar compared to replacement cost, and the bank was able to finance it for us.”

Additionally, while business travel plummeted with the economic downturn, the number of families in sudden need of a temporary residence increased. “The Value Place brand is built on a simple model that addresses a basic need for a safe, clean and affordable living environment,” he notes. “And our business model is built on the idea that these accommodations are needed in good times and bad. It’s very much like a liquor store: when times are good, people go get drinks to celebrate and when times are bad, they get drinks to commiserate.”

For Esterline and his Value Stay properties, during the recession, there were fewer business travelers, but more people who just needed a place to live—and fast. These included people who lost their homes to foreclosure and didn’t have the cash up front necessary to rent an apartment, people who were in town to look for work and/or people who were experiencing hardships. “The resident profile may change, but the need is always there,” he says. “Value Place has a spot in pretty much any economic climate.”

So, the market exists, and for those in the apartment industry, getting into the extended-stay game is a natural progression in terms of operations. “You can run it like an apartment because you don’t turn over rooms nearly as often as you would with a traditional hotel,” Esterline says. “Our average stay is usually about 60 days. Also, because you don’t turn over rooms nightly, you can afford to run a shorter staffing model.”

However, it’s not all wine and roses, and the issue of staffing is one example. “You can have a small staff, but it’s critical that you have top-notch people because you can’t afford staffing turnover. It’s not like a full-service hotel where you have enough people to cover for an employee who doesn’t show up. You have to make sure you don’t have people who are going to walk out on you.”

And there are other factors to keep in mind when broadening a portfolio to include extended-stay hotels. “You have to make sure you understand the market you’re going into,” he points out. “A few years ago, financing was so readily available that people were throwing up hotels everywhere. You have to really know your audience and really understand the market before you pull the trigger. You have to know who your residents are going to be.”

But it’s not just a strong knowledge of the local hotel sector that is essential; a firm grasp of the ins and outs of the neighborhood apartment market is also of great importance, and that is an area in which multifamily property owners have a distinct advantage. “You have to be competitive with apartment buildings. With the extended-stay model, utilities are all inclusive; residents don’t have to put down a deposit on utilities, and they don’t have to sign a lease. If you can put that model in and beat apartment rates, you will be successful; if not, you’re going to struggle,” he says.

For apartment owners interested in expanding horizons by journeying into the extended-stay arena, it appears there’s no time like the present. “An extended-stay hotel like Value Place is designed efficiently and they’re easy to construct. Financing continues to be challenging, but construction costs remain low enough that it’s still a good time to enter the market,” says Esterline.

Current statistics support his assertion. In 2010, demand as determined by revenue per available room, or RevPAR, in this sub-sector of the hotel market experienced a year-over-year increase of 10.3 percent, according to hospitality consulting and research firm The Highland Group. Furthermore, as demand increased, new construction declined drastically for the second consecutive year. The gap between supply and demand is narrowing quickly.

Esterline is certainly moving forward. “We’ve been on the hunt for more acquisitions of Value Place properties for sale,” he says. “That’s been our focus. Financing has been dry for new construction, so we haven’t pursued that route lately. For acquisitions, we’ll look anywhere in the country where the model works and it works everywhere, it seems.”