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Investors Bet on Boutique and Lifestyle Hotels

Investors Bet on Boutique and Lifestyle Hotels

The numbers paint a rosy picture for developers and owners who want to dip their toes in the boutique, lifestyle, and soft brand segments. Collectively, these arenas are an $11.5 billion industry and growing, according to a report by The Highland Group.

Demand has increased for boutique, lifestyle, and soft brand hotels over the past six years, clearly since the recession, says Kim Bardoul, a consultant with the Atlanta-based hotel consultancy group and co-author of the 2015 report. For example, with lifestyle properties 300 rooms and under, demand grew at an annual average pace of nearly 20 percent from 2009 through 2014—far above the rate of overall U.S. hotel demand growth of 4.2 percent, the report shows.

“The independent boutique has remained steady in growth, but the soft brand and lifestyle segments have clearly grown stronger in the past two years,” Bardoul says. “I really expect that to grow, because of the awareness the brands have brought to the industry.”

During the same six-year period, supply for lifestyle hotels and soft brands, which are newer products to the market compared to the more established boutique segment, grew at a compound annual average rate of 11.5 and 17.8 percent, respectively. Meanwhile, compound boutique hotel supply grew 3.1 percent—over three times the rate for the U.S. hotel industry overall. Compound demand change for the boutique segment was 6.7 percent, compared to a 4.2 percent increase for all U.S. hotels.

To compile the report, The Highland Group pored through STR hotel census data and qualified hotels into these three segments (see chart). Bardoul says they classified boutique hotels as unique in style, small, and either independent or affiliated with small systems (think Delano by Morgans Hotel Group or Thompson by Commune Hotels & Resorts). Of those boutique properties, 21 percent have less than 60 rooms and 17 percent have 160 to 300, and they range in design and building type. Boutiques have a strong representation in California, New York, and Miami, but appear in at least 46 states, she adds.

“Boutique is a popular but loosely used term, and most people associate it with small,” she says. “Most definitions you pull up use the word ‘small,’ but they also use the words ‘unique,’ ‘highly specialized,’ ‘niche,’ and ‘elite.’ We used that criteria similarly to distinguish between your typical independent hotel, which is very limited in service or amenities without a specific design, from all the others.”

In response to changing traveler tastes and adapting interests of their development communities, the chains have responded by introducing lifestyle and soft brands. The report describes lifestyle brands as prescribed franchise products that are adapted to current trends (e.g., AC and Moxy by Marriott, Canopy by Hilton, Hyatt Centric). Soft brands like Ascend by Choice, Autograph by Marriott, Curio by Hilton, and Tribute by Starwood give hotel owners and operators the opportunity to affiliate with a major chain distribution system while retaining the unique name and properties of an otherwise independent hotel.

“Developers and owners are seeing increased interest in what I’m calling the ‘now’ traveler, and there’s an opportunity to capitalize on that with little risk, especially if you go through a brand,” Bardoul says.

Experience Required
The ability to convert old buildings into hotels has helped fuel developer interest in these three products versus traditional limited-service brands, Bardoul says. “There’s been an increased redevelopment of city downtowns, either within the core business district or in the periphery, providing opportunity for walkable, trendy little districts of various personalities,” she explains.

Adaptive reuse projects add uniqueness to the area and provide both guests and locals with an experience that complements the surrounding neighborhood.

Bardoul cites The Craddock Terry Hotel in Lynchburg, Va., and The Dean in Providence, R.I., as examples of boutiques built around the history and culture of their cities. Craddock Terry has roots as a shoe company factory and a tobacco warehouse, while The Dean has a past life as a church shelter and most recently a strip club. “Both of them have taken the area and implemented it into their product, which independent boutiques clearly have the flexibility to do,” Bardoul says. “It really provides a cool experience.”

More travelers today seek a sense of adventure and unique experiences when visiting a new area. “Consumers are starting to see that there are other experiences out there,” Bardoul says. “Even on a business trip, why not go and explore the community where I’m staying? Instead of just going in, doing my work, taking a shower, finding a place to eat, and leaving, I actually learn a little bit about Providence or Lynchburg while I’m there.”

HHM, a Philadelphia-based hospitality investment firm, has seen firsthand an increase in consumers who crave personalized experiences in hotels. To meet this need, the company rounds out its robust portfolio of branded full-service, select- service, and extended-stay hotels with a small boutique collection of lifestyle hotels. Of the company’s 30 independent hotels, 10 are currently a part of the Independent Collection (IC), which features hotels located in unique residential neighborhoods of gateway cities, including Miami, New York, Boston, Philadelphia, Santa Barbara, and Washington, D.C. The Independent Collection properties are mostly full-service and similar in size, look, and feel, but each has a unique story to tell that’s shaped by the culture of the surrounding neighborhood.

According to Foiz Ahmed, vice president of the Independent Collection, HHM can command much higher rates at its independent hotels whereas its branded properties eventually hit a ceiling. Of course, HHM must deliver on those personalized experiences so guests don’t second guess paying $400 a night. “From a profitability standpoint, we’ve been right at par if not more profitable in these major markets,” Ahmed says. “You take away all the noise around franchise fees or management fees, so it’s a tremendous savings right off the top, but there also really is no ceiling when it comes to rate opportunity.”

Technology has also helped level the playing field for independents. From website optimization to meta-search, independent hotels can pay for tools and services that weren’t accessible in the past, Ahmed says. “It’s a lot easier for the consumer to find us, as well as feel a lot more confident in purchasing,” he says. “Technology has made a huge impact on how our guests are finding and buying us.”

High rates, eliminating fees, and a more level playing field all sound appealing, but first developers and owners have to get lenders comfortable with their independent projects. The good news is that lenders are more open-minded about independent hotel financing, Bardoul says. While a brand name imposes less risk, lenders have noticed major hotel companies embracing these segments, either by introducing their own lifestyle brands or by attaching soft brands to existing independent and boutique hotels. “It seems as though the lenders are stepping back and saying, ‘OK, this guy over here wants to do the same thing, he just doesn’t want to brand it,’” Bardoul explains. “They might scrutinize him a little more, but it opens the doors just a teeny bit more for the independent boutique developer.”

Ahmed agrees that lenders are easing up when it comes to financing independent projects, especially when dealing with a large institution like HHM. “If you’re a one-off owner trying to build a hotel in middle America, I would assume there would be tremendous scrutiny behind that from your lenders, but when you’re trying to do it in urban locations with occupancies way above 80 percent… we’re finding that it’s a fair game whether you want to go branded or non-branded,” he says.

The one caveat to launching an independent hotel is there is always a longer ramp up period, Ahmed advises. “It’s not like we turn on our reservation system and boom, from day one, all of a sudden the hotel is full. Where I’ve seen that over and over again with the branded hotels. But once we’re ramped up and stabilized, our independent hotels perform right alongside, if not better, than our branded hotels.”

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