Longstay, Extended Stay - Germany recognising shift in market needs

One of the most resilient sub-sectors within the hotel and hospitality industry has been the Longstay segment, or Extended Stay, as the Americans call it. By far the biggest deal since the onset of the pandemic is currently being transacted there - the $6bn takeover of Extended Stay America by a 50:50 joint venture between private equity giants Blackstone and Starwood Capital.

Here in Germany, given the disastrous impact of the pandemic on the classic short-stay hotel industry, a lot more attention is being paid to the future potential of both existing hotel assets and projects in the pipeline, with re-branding or conversion to long-stay facilities very much uppermost on developers' minds. Many planned hotel rooms are already being re-purposed on the drawing boards to offices or even residential, but a repositioning within the hospitality sector still remains a frequent option.

A new study, New Hotel Construction in Germany 2021 has just been published by developer Benchmark Real Estate and market researchers Bulwiengesa, which highlights what hotels will actually be developed in Germany this year, and where. This is the fifth issue of the nationwide study since 2019 and is based on the analysis of development activity in the hotel segment for new construction sites for properties with a minimum of 40 beds.

Benchmark's joint managing partner, Götz Hufenbach, said, "The market for hotel developments in Germany has gone through a challenging period due to the pandemic. However, we see a steady demand for modern concepts like long-stay hotels and serviced apartments in specific areas of the market."

His co-partner, Martin Hantel, added: "Due to the uncertainness in the hotel market, the asset class is developing regressively to what it was a couple of years ago: a market for specialists only. In order to archive long-term success, you need to know the different submarkets, hotel concepts and the operators.”

The study shows that in 2020, more than 20,000 hotel rooms were completed - while by February 2021, only 680 of the 34,000 rooms originally forecast for that year had been completed. In 2021, the completion volume could drop further.

There is also a major shift in geographic emphasis underway, according to the study. Most hotel rooms were no longer built in the so-called A-cities in 2020; rather, the market share in B, C, D and holiday locations increased to around 66% of all hotel rooms (2019: 61%). The study authors assume that hotels in the German holiday regions will become even more of a focus for project developers in the future - away from the city, trade fair and airport locations that have been severely affected by the pandemic. About every tenth hotel in planning or under construction with an expected completion by the end of 2022 is located in a holiday region, according to the study.

Around 83% of all newly created hotel rooms between 2019 and 2020 will be in the midscale and upscale hotel sector. Rooms in budget hotels have a market share of 15%, while luxury rooms only account for just under 2%. 

Growing in popularity among developers are so-called long-stay concepts. While definitions of "Longstay" differ, they generally involve - in addition to the usual hotel service - a certain homely and sociable atmosphere. Long-stay hotels are primarily aimed at business travellers looking for a temporary home. In 2020, the share of long-stay rooms in all completed hotel rooms was already 15.8%, according to the study's authors. 

The growth is essentially taking place where there is a shortage of residential space, with the authors citing the example of the Hyatt House in Frankfurt, developed by Benchmark itself. Over the past two years, 56 pure apart-hotels have been added, with about 7,310 rooms for long-term stays. But the long-stay concept is also taking root outside the big urban areas, particularly in holiday regions - presumably because of the new trend towards working from home, or at least not having to be ever-present in the office.

With banks reluctant to increase lending to the sector, the likely way ahead is for takeovers and market shakeouts to be initiated by investors with deep pockets. For example, B&B group has recently taken over Leto Hotel Group, and Whitbread's Premier Inn has swooped on 13 hotels of the struggling Centro-Hotels group.

Looking ahead, the study's authors predict the coming-on-stream of about 27,600 new hotel rooms in 2022. This would be down 19% on even this year's projected figures, and an indicator of generally lower development volume in the sector ahead.

But Bulwiengesa managing partner Andrea Back-Ihrig is optimistic about the potential in these emerging sub-sectors. She said: "We see the realisation of sustainable projects in the area of serviced apartments, long-stay concepts and holiday hotels. We are also expecting to see a certain crowding-out, where new developments crowd out older hotels with maintenance and refurbishment backlogs. Here, private individual hotel operators will have the hardest time surviving the economic damage caused by the pandemic, a gap which can only be closed by developers working closely with hotel operators."

Another company playing close attention to the somewhat blurring lines between residential and long-stay living is the Berlin-based Skjerven Group, which has traditionally been involved in investment and privatisation of residential property in the capital city. As CEO Einar Skjerven said recently, before the overthrow of the Berlin Mietendeckel by the German Supreme Court, "The advantage is that the regulatory restrictions as they apply to residential do not apply to commercial residential. So those people who are trying generally to create more living accommodation in urban areas have a certain wind in their sails when it comes to getting the necessary permits required for a re-purposing of a property, particularly a struggling hotel which we can convert into 'commercial' residential.”

After contacting 120 owner-run hotels with more than 50 bedrooms in Berlin since the start of the year, Skjerven said he received ten positive responses, of which he's in serious negotiation with two. The goal is to realise between two and five such projects this year, he said. 

Other serviced-apartment providers such as Stayery and Brera have also recently talked about the increasing demand for longer-stay accommodation, albeit very much tailor-made for the needs of certain professional groups and organisational needs. There is obviously still work to be done in convincing many local authorities about the exact nature of the shift from short-term classic hotel services to more hybrid versions, but the process is well under way.