Anja Graf had a problem. Her ambition of running a modelling agency had finally been realised, with the girls being flown into Zurich from the Czech Republic. The only problem was, there was nowhere for them to sleep.

"They needed to stay somewhere for at least two or three weeks until they made some money," recalls Graf. "Hotels were too expensive, of course. I just couldn’t find any appropriate rooms. So I decided to buy some of my own."

She did so at the right moment. The Swiss property market had just crashed, and the banks that had foreclosed on many of the country’s residential complexes were eager to sell. "I was surprised how much demand there was for these apartments," recalls Graf. "Back then, they just consisted of a living area, a bedroom, and a shower and toilet out in the hallway. But still, our guests rented them and asked if we had any more elsewhere. And then I thought, actually, this sounds like a much better business model than a modelling agency."

In 1999, Graf founded Visionapartments. Having cornered the market in itinerant Czech models, the firm began to absorb the burgeoning demand for extended corporate stays across the continent, expanding as far afield as Warsaw, Berlin and Oslo. Today, Visionapartments offers over 977 apartments for rent across Europe, all of which are significantly larger and more refined than its initial offering in Zurich.

"More and more international companies are looking for this solution instead of putting their employees into a hotel," explains Graf. "Furthermore, the demand for quality has risen. Companies are still willing to pay higher prices for a hotel but increasingly they’re seeing that serviced apartments, in the end, offer a lot more generally."

Above all, they offer guests the greatest flexibility in how long they want to reside in the property, especially important since the average length of stay has grown more elastic since the foundation of Visionapartments. "When I started, it was normal that somebody would get an apartment and stay there for maybe six months," says Graf. "Now, the average stay has fallen drastically, amounting to one or two months maximum, on average."

New frontiers

"We see gargantuan opportunity," pronounces Diane Mayer, global brand manager for Residence Inn by Marriott. "I cannot understate it at all. Europe is the largest hotel market in the world; it’s actually bigger than the US in terms of supply and demand, and it’s more developed. The hotels have been around longer, and there’s good development across all price points within the industry. Really, the only part of Europe’s hotel industry that is not well developed is the extended-stay segment."

Founded out of a Wichita, Kansas, residential building in 1975, the self-proclaimed founder of the extended-stay sub-genre has become one of the largest of its type in the world, opening its 700th ‘aparthotel’ complex earlier this year. With the North American market now judged to be largely saturated, Residence Inn is looking to colonise new territory in Europe.

"In the 16 years that I’ve been working in extended stay, there are certain facts that have always remained true and as we
start to do work in other continents, they continue to be true globally," says Mayer. "For example, a third of all business travel nights are part of an extended stay. In Europe, that is exactly the case as well, and in certain regions, that number goes even higher, to 40%. These are statistics that we gather routinely and they don’t change that much over time."

Currently, Residence Inn is perched on the edge of the European market, with only a handful of locations, which include Aberdeen, Munich and Warsaw. From what its seen, however, many of the design principles that have led to success in the US market are eminently transferable. There are a few small differences, of course. Europeans, it seems, are happy with a room of 30m2, five fewer than their US cousins.

The kitchen appliances are also smaller, although their culinary expectations are decidedly more refined.

"We also don’t have three-meal food and beverage outlets in our hotels in the US," says Mayer. "Americans really don’t expect that out of hotels, until you get up into the full-service, four-star and five-star range. Europe, and frankly everywhere else in the world besides North America, has much higher expectations of onsite food and beverage."

This is not the misplaced confidence of a brand certain that what works in one hospitality market will, with a little tweaking, prove just as popular anywhere else. Residence Inn’s own market research over recent years has discerned a clear gap between guests’ expectations of an extended stay and the reality throughout Europe.

"Roughly three quarters of customers we surveyed specifically want to be in a hotel that is different from what I’ll call a ‘transient hotel’ specifically designed for extended stays," Mayer explains. "They want a more residential guest room, with kitchen facilities, a well-zoned space with a living area and a working area. That percentage has been very consistent again and again across continents, and the five-year increments within which we conduct our studies."

Armed with this knowledge, the US brand is plotting aggressive expansion, with upcoming openings in Aberdeen, Amsterdam, Frankfurt, Gibraltar and Toulouse. "Fundamentally," says Mayer, "I don’t see any reason why Residence Inn couldn’t have hundreds of hotels in Europe."

Money troubles

There is, however, a lingering problem. Limited supply coupled with high demand has fuelled a boom to some extent within the European serviced apartment market, and the extended-stay segment more generally, but that steady expansion has not been tied to the exclusive appeal of building in those categories. This is because serviced apartments tend to occupy a grey area between residential and commercial investments as far as developers, banks and zoning authorities are concerned. "When it comes to banks, usually they have no clue," says Graf. "They ask, ‘What is a serviced apartment?’ as opposed to a hotel. And sometimes it’s very difficult for us to explain that because of the differences in construction permissions across Europe."

As far as most authorities are concerned, you’re either building a residential block or a hotel. Generally, there’s very little legal wiggle room between the two. "What we usually do is get permission for a hotel building," says Graf, which falls in the commercial bracket. "And then of course you have to convince the banks that it’s not. Because when banks finance hotels, they look at it totally differently. They usually finance hotel construction only up to 60%. It’s more attractive for us to sell these new builds as apartments, so we can get the loan up to 80% of the total."

According to Arlett Hoff, a director at HVS and author of several of the agency’s reports on the serviced-apartments sector, this sense of confusion among potential investors stands as a fundamental barrier to the sector transitioning into the mainstream of European hospitality. It starts with taxonomy.

"Many different products fall under the serviced-apartments ‘umbrella’," says Hoff. "There are two ends of the spectrum, really. On the one end, you’re looking at apartments that are very self-sufficient and close to being residential. They can have a minimum level of service attached to them and that’s what I’d define as corporate housing. And then you have the other end of the spectrum that goes towards the hotel side of things, which a lot of the brands in the space are also originating from hotel operators and brands. Those I’d call aparthotels."

The lack of an official consensus on terminology has made investors and the lending community skittish when it comes to supporting further expansion of serviced-apartment holdings. It’s not necessarily a roadblock to expansion for brands at either ends of the serviced apartment’s spectrum, like Residence Inn and Visionapartments, but it can prolong negotiations over funding.

"For most European markets, I would say the sector is hugely undersupplied," says Hoff. "But then again, it’s difficult to prove because the data on the sector is lacking. Most investors in the sector are used to funding commercial real estate, such as office retail. Even aparthotels have difficulty doing their due diligence because there’s very little broad-based data on the sector’s performance or transaction yields available."

Furthermore, the fragmented state of the market means that the reputational strength of serviced apartments is low, at least compared with the more established North American market. "There are a lot of ‘Mom and Pop’ [operations] in Europe, and not a lot of brand names," says Mayer. "The ones that do exist are relatively small in distribution, so there’s not a lot of awareness. And because that was fairly pervasive before the extended-stay hotels started to come onto the scene, I think it made it more confusing, because people weren’t sure if these hotels were like serviced apartments or something totally different."

Despite these concerns, the mood among operators large and small has remained optimistic. After all, it’s not hard to see the problems of definition being overcome in the medium-term considering the strength of current demand. Regardless of the ultimate outcome, according to Hoff, there’s a sense among operators of even greater prospects overseas.

"Europe is certainly on their radar on their way to other markets," she explains. "However, I’d say the Middle East and Asia will be playing a bigger role in the future for sure." And in that sense, perhaps, what is occurring in Europe will constitute only a minor dress rehearsal for what is to come.