Construction dip, unemployment hurt extended-stay motels

By Buck Wargo

Wednesday, Aug. 25, 2010 | 2 a.m.

The downturn in the construction industry and high unemployment that deter people from moving to Las Vegas have taken a toll on the extended-stay motel business.

Occupancy has fallen sharply since the recession began, and room rates have been lowered to lure visitors, just as Strip hotels have cut rates to boost business.

Extended stay is an industry that depends on temporary workers and people who move here needing a place to stay on a weekly or monthly basis.

Jeremy Aguero, principal of Las Vegas research and consulting firm Applied Analysis, said there aren’t much data tracking the extended-stay industry in Las Vegas, but that interest in investing in it is picking up in anticipation of better times.

“It is interesting that five people have probably asked me about this in 10 years, and I probably had five in the past five weeks,” Aguero said. “It seems to be on people’s radar, which is indicative of other properties, too. The attitude of Southern Nevada was how to survive and now it is how to take advantage of the recovery.”

Aguero said falling commercial property prices are enticing people who think if they buy low enough, they might make money as the economy improves.

“You are seeing that with all types of income-producing properties,” he said.

A year ago, Marcus & Millichap Real Estate Investment Services listed the 387-unit Emerald Suites on Las Vegas Boulevard South near South Point for $36 million. That price was recently reduced to $25 million to attract buyers.

A second Emerald Suites, a 96-bed complex at 4777 Cameron St., just west of the Orleans, is listed for $6.5 million, down from $8 million.

Al Barbagallo, director of Marcus & Millichap’s National Hospitality Group, said a stark contrast exists between many small hotels with 55 percent occupancy rates and major Strip properties running in the upper 80 percent range.

In 2006, the Emerald Suites occupancy rates were about 75 percent. Six months ago, they were 48 percent, he said.

“It’s starting to come back, but it will be gradual,” Barbagallo said. “That is good because we don’t want any more peaks. That creates a bubble, and bubbles burst.”

Average room rates at Emerald Suites are down from $65 a day to about $45 a day, he said, adding that the drop was necessary to compete with other hotels’ falling prices.

“We do get some tourists who stay who are looking for a deal and don’t want to stay at a gambling facility,” Barbagallo said. “But sometimes what happens is people say, ‘If it only costs me an extra $30 a day, I will stay on the Strip.’ ”

Aguero said the sector will keep struggling for a while because it depends on jobs and people moving to Las Vegas looking for job opportunities.

“I think that industry has benefited from the transient nature of our economy,” Aguero said. “The primary motive to move to Southern Nevada was jobs. We led the nation in population growth for the past 10 years, and those extended-stay hotels were well positioned to benefit from that trend. With job losses and people leaving, you have exactly the opposite today.”

Mike Mixer, Colliers International Las Vegas managing partner, knows the industry firsthand as a partner in the 600-unit Siena Suites on Boulder Highway that opened in 2006.

The occupancy rate ran 80 to 90 percent during the boom and has fallen to 65 percent today. Room rates have declined with it, from $70-$80 to $40-$45, he said.

Mixer said the occupancy went down in part because Nellis Air Force Base expanded its residential facilities. Siena Suites lost the people who had been moving here for new jobs.

“That market is dried up and gone,” he said.

Mixer said what’s helped his extended-stay motel more than others is that it has maintained a core group of residents who live there permanently.

There are some large extended-stay complexes in Las Vegas and several mom-and-pop operations. One of the best-timed moves before the recession hit, Mixer said, was entrepreneur Robert Bigelow selling off some of his Las Vegas-area Budget Suites of America properties before the downturn, apparently to help finance Bigelow Aerospace. Bigelow’s staff didn’t return calls seeking comment.

Stephen Siegel’s Siegel Suites has 17 properties in the state, including 15 in Las Vegas. Its focus, like an apartment complex’s, has been more on long-term tenants, and that has helped keep occupancy levels up, he said, adding that valleywide the hotels have an occupancy rate in the high 80s, down from 95 percent a few years ago.

“We have lost people who have bought a house or rented a house,” said Michael Crandall, director of business affairs, noting their lower prices and rental rates.

Weekly rates have fallen from $199-$249 to $179-$199 today, Crandall said. Besides those price reductions, it has used other innovations to keep occupancy up, he said.

About a year ago, Siegel Suites started offering five dinner coupons a week to tenants to eat at Siegel’s hotels such as the Gold Spike.

“We find that gets more people through the door who want to live with us and keeps people from moving out,” Crandall said. “There is a lot of competition out there with $99 move-in deals. We are not going to play that rate game, but we needed to close the back door and that was free food.”

Mixer said the economy has taken a toll on the industry, with values falling from $100,000 to about $40,000 a unit.

If occupancy falls and room rates decline, that reduces values, and the hotel industry has been one of the hardest-hit markets, Mixer said. That makes some susceptible to being taken over by lenders if deals aren’t made — although he said his complex is in good shape.

“We plan to hold it and ride out the market,” Mixer said. “We feel most of it is behind us, and it won’t be that much longer until we get some normalcy. It won’t be back to the heyday, and it will take a while but as the economy improves, the Strip begins to get healthier and room rates edge back up, then we become a more value play again.”