Here is how BLLA defines Lifestyle and Boutique Hotels:Boutique Hotel
A term to describe intimate, usually luxurious or quirky and upscale hotel environments for a very particular clientele.
A property that combines living elements and activities into functional design that gives guests the opportunity to explore the experience they desire.
Luxury Boutique Hotel
An extremely luxurious hotel environment created to express unique lifestyle experiences that are synonymous with health and wellness.
Trendy or Modern Hotels
Lifestyle Hotels, Branded Boutiques or anything other combination of words that can create an inviting distinction from traditional hotels is in vogue these days. Every franchiser/hotel chain of substance is dabbling in this phenomenon, a few more successfully than others.
What was germane to a boutique hotel in past decades is beginning to take root in “distribution channel friendly” hotel chains in recent times. Therefore every large hotel chain now has lifestyle hotels of their own in operation or under development across the world.
What exactly is a ‘lifestyle hotel’ you may ask? Well, the beauty of expression is in the words of the beholder. Here are some industry stalwarts and what their definition is. Here are some excerpts from the Lifestyle/Boutique Hotel Development Conference (excerpted from HNN):
“Label it what you’d like, for us it’s about having a local experience as a traveler,”.said David Duncan, president of Denihan Hospitality Group.
Patrick Goddard, president and CEO of Trust Hospitality said. “Guests see the definition “as a reflection of themselves.”” He added, “things such as high-end finishes, personalized experiences from pre-arrival to post-departure, sensory elements and community engagement also are critical components”
“A boutique hotel or lifestyle hotel is a big hotel trying to be small, and that’s OK. This sector is less about branding the hotels than letting the guest brand themselves. … Hotel brands and hotels individually are a similar reflection of one’s individuality.” said Jason Pomeranc, co-chairman of Commune Hotels & Resorts
Finally, here a statement that tied a tiny knot in my brain as I tried to decipher it – “When we think about our lifestyle portfolio, we really think it’s people who crest over from wanting space, state and rates to wanting to define themselves by their choice of where they stay,” said Jay Coldren, Marriott’s VP of lifestyle brands.
So, as you can see there is little consensus on what Lifestyle hotels really are. The idea is novel and it creates demand in an industry that badly needs it. It is a philosophy more than an idea from what I can gather. And the canvas for this philosophy is large with new ideas being painted every day.
So, after some research and analysis here’s what I came up with as the most sensible reason for its creation. Lifestyle hotels are designed to give the modern traveler exactly what he wants in a hotel. It is meant to provide a seamless transition from the lifestyle he cares about or appreciates to a lifestyle he can sustain when traveling. Better yet, lifestyle brands target the traveler’s way of life to create touch points that go beyond the traditional rewards programs that most travelers are used to. The purpose is to give the traveler an immersive experience that will have them coming back for more. They plan to drive loyalty not just by targeting customers penchant for savings, but by appealing to their tastes and preferences.
Lifestyle hotels are a lot like boutique hotels, but with distribution and ‘economies of scale’ clout provided by the chain. It is meant to offer the traveler all the reward perks he had become accustomed to in a boutique type setting offering much more than just savings.
Now, the question really is how do you take a boutique hotel (boutique by definition to me is unique and lonely) and daisy chain the concept? How can it stay boutique and yet belong to a chain? How can it be multiplied and brand standardized thereby providing the economies of scale in FF&E procurement that the franchisers pride themselves in providing? I suppose you can’t unless you are the Indigo brand of IHG. They basically take existing hotels and manage the rebranding such that they are able to provide consistency to them by creating some brand standards that apply across all Indigos, but don’t require total duplication of assets.
Now, the Ascend brand from Choice does pretty much the same thing. How one can have an Ascend transformation of a boutique hotel from 20 rooms to 600 rooms boggles my mind, unless of course it is basically gap management and standardization of a few amenities common to all assets slated for conversion. All this just to bring it under the distribution umbrella of the franchise? How you create value for a 20 room conversion I can’t fathom. I can appreciate the notion that a 100-200 room boutique property, but for as little as 20 rooms?
While I haven’t researched the investment requirement for conversion properties (I suppose that would be a very subjective analysis), I still can’t see why it would be an enticing value proposition for the developer. I can see the chain’s value proposition (increased revenue streams), but fail to see one as clearly for the developer/owner of the existing boutique hotel.
As for new development, I think it is a great concept but for conversions I am uncertain about the value proposition especially if conversion costs are high.
Here are links to some of the Lifestyle hotels by different brands:
Hotel Indigo by IHG
Hyatt Place by Hyatt
Aloft by Starwood Hotels
Edition by Marriott
Ascend Collection by Choice
In summary, I believe that this concept is here to stay unless of course the concept is made so murky by eager franchisers that they dilute a great concept. Also, it isn’t easy to simulate or become the next Starbucks, Apple or Nike especially in an industry that is prone to brand volatility.
Next blog, I would like to write about the EB-5 Visa Program and its utilization in hotel investments as I think it is an area that is not very clearly understood by developers. Until next time, take care.
Vikram (Vik) Antin
I recently read that the construction price index has gone up following news of the burgeoning CRE marketplace.
As all in the development community know quite well, the Turner Construction Index went up between 2004 and 2008 to ridiculous levels of increase. That basically followed CRE trends which were equally ridiculous and resulted in what we now call The great recession of 2008/2009.
Around the middle of 2008, there was substantial correction to the construction index and it dropped for a couple of years. Now, while the construction costs haven’t gone up to mid 2008 levels nor are the increases a real concern, but costs are rising now and are back up to 4th quarter of 2007 levels. The index is rising at a clip higher than inflation (4.3% increase in 2013) and is expected to go much higher.
Getting back to costs, ENR shows a more modest annual increase in their construction index shown below vs Turner Construction:
Hotel Development Tidbit: A record number of new properties came online in 2008 (1,341 Projects/ 154,258 Rooms – according to Lodging Econometrics) despite tremendous construction cost increases around that time. I don’t believe we will ever reach that historic level in the next few years nor will the indices fluctuate as much.
So hard costs for hotels are bound to increase and will cost more to build as we move along. Replacement cost will be a consideration in the transaction velocity of hotels in all segments. So how does this cost increase impact the supply side of new hotel development? Is this going to deter hotel development? Here is Lodging Econometrics’ projected hotel construction pipeline:
Now as we all know, STR and other analytics’ providers are very clear about demand for rooms outpacing supply. So, if rising construction costs even marginally decelerate development (at least the start next 12 months and the early planning projects may be affected), then is it fair to assume demand will continue to outpace supply? If so, how does it impact exit cap rates and sales price for hotels? Is it fair to surmise that moving forward as replacement costs go up, and the supply/demand gap increases, transaction velocity of existing hotels increase? I believe so.
The logical expectation then would be that compression of cap rates are going to occur more rapidly. Data shows that cap rates are somewhat steady right now without too much movement. Also, this would give existing hotel owners a much needed respite with added equity.
Over the next couple of years, sale of properties and consolidation of hotel portfolios would make the most sense based on several variables such as franchise length remaining, CapEX requirements, entry cap rates, desired Yield, etc. However, the fact remains that a profit making window of opportunity for hotel owners may be on the horizon.
After what the industry went through over the last recession and economic downturn, I don’t think it is fair to expect a CRE boom. But, I do believe we are coming upon a climate of increased transactions in the hotel space with one caveat – Lending availability and ease of procurement. The banking industry has always been an animal of opportunity, and hopefully it doesn’t miss this one.
My sense is that with improving market fundamentals, capital will become available, but, with increased scrutiny.
Here are some recent transactions in the Mid-Atlantic region in the months of Dec 2013 and Jan 2014 the largest transaction being the Philadelphia Marriott Downtown for $303.4 million purchased by the joint venture partnership of Oaktree (Equity Fund) and Clearview Hotel Capital LLC (Private) and sold by Host Hotels & Resorts :
Thanks for you time. Please call me or email me if you have any specific questions.
Vikram Antin | Managing Director