target growing US serviced-apartment industry

Hotel or serviced apartment? That is a question investors might begin to consider more frequently as serviced apartments expand in the United States.

Operators and investors discussed the reasons for investing in one product or the other at the first Serviced Apartment Summit Americas. Similar conferences have been held in Europe, where the industry is more mature.

Sean Worker, CEO of BridgeStreet Global Hospitality, a major player in serviced apartments—more commonly known in the U.S. as “corporate housing”—opened the conference by asking how to increase consumer awareness of the industry.

“How do we bring ourselves to the fore?” he said. “How do we bring relevance to our space as do residential and hospitality? How do investors perceive our space?”

Worker and other speakers said they see strong opportunity for serviced apartments as both baby boomers and millennials seek an urban lifestyle that is often found in this kind of accommodation.

“There is no longer a stigma to renting,” Worker said. “It is now often a long-term preference.”

The need for benchmarking
Because the industry is so fragmented, serviced apartments have not enjoyed the kind of data and statistical measurement that hospitality has for many years, and that can be a problem for investors.

“What is the effect of the absence of data?” Worker said. “What is the effect on the investor community when there is a lack of transparency in how we perform?”

Vail Brown, SVP of global business development and marketing at STR, called for an industrywide effort to establish the kind of statistics that STR has been recording for the hotel industry for the last 30 years. (STR is the parent company of Hotel News Now.)

“When this conference started in 2013 in Europe, there was interest in bringing competitive benchmarking to serviced apartments,” she said. “I hope that interest will continue to grow. … As the serviced apartment industry grows and transparency improves, we will see which industries are providing better returns and where margins are better.”

Brown said the process of benchmarking the serviced-apartment industry could begin very easily; it’s just a matter of people in the business agreeing to a single set of measurements.

“This needs to happen for corporate housing,” she said. “It would be great if that happened in the next 12 months but that may be too aggressive a time frame.”

Meanwhile, the serviced apartment industry is growing domestically, according to Mark Skinner, partner with the Highland Group, a consulting company that tracks the extended-stay and corporate housing industries. He said the latter enjoyed almost $3 billion in annual revenue in the U.S. in 2015 and $261 million in Canada. The average stay was about 85 nights, which has been consistent for several years.

“The key takeaway for this product is that inventory is flexible,” Skinner said. “It is leased and then subleased to the tenant. Because the units are leased from the residential apartment community, inventory is based on the availability of apartments. As residential has picked up, demand has increased in line with overall lodging trends.

“The variability in the performance of serviced apartments is far less volatile than hotel or extended stay because operators can vary supply depending on demand.”

A good investment?
An ongoing question at the conference was how serviced apartments shape up as a real estate investment when compared to other lodging options.

“As with any major developing industry, the key piece will always be capital,” said Greg Hartmann, managing director at Jones Lang LaSalle’s Hotels & Hospitality Group. “While multifamily residential and lodging are well-versed in how capital works, it is less so with serviced apartments so that defining the industry will be important.”

In some situations, serviced apartments are appealing because of their limited amenities.

“Revenue from alcohol is a challenge, and the fact that there is little alcohol connected with serviced apartments makes the segment attractive,” Sameer Kazi, head of real estate investments at SEDCO, an investment firm based in Jeddah, Saudi Arabia. “In addition, there is a lower risk involved with the segment because revenue is not as variable as with a hotel.”

However, for a major lodging investor, serviced apartments may not be large enough yet to consider.

“We like to invest in large, full-service, flagged hotels,” said Anthony Balestrieri, director of joint ventures and equity investment real estate for MetLife. “We need to put out big dollars that earn money over time. I can’t get out of bed without putting $30 million to work.

“For us, we have decades of data to look through for certain products, and we need to understand demand generators in a market. A company like Oakwood (a large corporate housing operator) might be large enough for us to invest in, but we do need size.”