ILC: Boutique hotels will edge further into mainstream
ILC: Boutique hotels will edge further into mainstream
24 OCTOBER 2018 12:20 PM

Hotel developer panelists at the Independent Lodging Congress said financing independent hotels has gotten easier as design-driven properties fetch more guests and higher room rates.

NEW YORK—The combination of a steady rise in U.S. hotel room demand, an appreciation for unique design touches and the rise of improved distribution technology during the past decade has made it easier for developers to obtain financing to build or redevelop unbranded boutique hotels throughout the U.S., panelists said at the sixth-annual Independent Lodging Congress at the William Vale Hotel in Brooklyn last week.

Additionally, many hotels in the boutique sector have also been able to boost profitability by charging higher room rates than chain hotels with similar amenities, panelists said, which included KHP Capital Partners’ Managing Partner Mike Depatie, Rockbridge CEO and Founder James Merkel and HHM President and CEO Naveen Kakarla.

“What’s interesting is that you’re able through effective positioning to separate yourself from the brands and distinguish yourself. I’ve learned to appreciate that more in the past 10 years,” said Kakarla, whose company oversees more than 125 hotels, including Boston’s Envoy Hotel and New York’s Duane Street Hotel. “The efficiency of distribution has allowed us to play at a higher rate level than we would’ve at one time. All things being equal, I’ve really seen consumer behavior change, and distribution models have allowed independent hotels to thrive.”

“I remember talking about design, style and the emergence of the boutique fad, where people weren’t sure what it was,” added Depatie, who was CEO of Kimpton Hotels & Restaurants from 2003 until the boutique hotel operator was acquired by InterContinental Hotels Group in early 2015. “I connect the dots today, and clearly, this is the trend.”

Out of the ashes
Merkel, who earlier in the day received the Congress’s Best Hotel Bar award for Rare Bird at Rockbridge’s Noelle hotel in Nashville, Tennessee, credited some of the boutique sector’s emergence to the most recent economic downturn a decade ago, when many hotels fell into disrepair after owners stopped investing to update them. Merkel estimated that his company invests between $100 million and $200 million on 10 to 15 hotel projects annually.

“We started to see that there were limitations with branded hotels. The brands would’ve underpositioned those hotels. That’s how we started investing, to take advantage of that,” said Merkel, who estimated that 40% of his company’s investments are in independent and soft-branded properties. “In the 1980s and 90s, when travel was booming, you had no access to information. That has all changed.”

Indeed, U.S. boutique hotel room rates averaged about $221 a night last year, compared to $127 a night for the overall average, according to Hotel News Now’s parent company STR. Meanwhile, boutique hotel supply has expanded to about 125,000 rooms as of the end of 2017 from about 100,000 rooms five years prior.

Pioneering spirit
Kakarla credited Depatie’s work with Kimpton for much of the boutique hotel sector’s success.

“I think where you inspired a lot of us is that you were able to make design and service comfortable for everyone. You were a corporate transient hotel as much as a leisure hotel,” Kakarla said, speaking to Depatie. “A lot of people really did follow. It’s an institutional-rated investment with institutional-rated private equity behind it.”

But both Depatie and Kakarla acknowledged the boutique approach can present more of a challenge to operators and investors.

“As I did more independent (properties), I started to miss what some of the brands did,” Kakarla said. “When I think of loyalty programs or distribution or clear training, whatever the basic things are, we ignore it because we pick at something else. So I missed parts of it.”

“The degree of difficulty of execution is much harder, whereas, if you get a Hilton Garden Inn franchise, you can get an X, Y and Z management team, and you have a rulebook,” Depatie said. “If you just want the best return on your investment, a brand in a suburban market might be the best bet.”

More than just good looks
Additionally, a strong operating team must complement good design for a boutique hotel to work, Merkel said.

“We’ve designed great spaces that don’t have a soul afterwards,” he said. “We really focus on the team and the culture. If you don’t do that, everything that was intended by the design dies.”

Merkel believes the success of Airbnb proves that the individualized concepts of boutique hotels will have staying power when it comes to demand.

“We have just started to see the disruption,” he said. “I look at Airbnb as proof that you can go direct to the customer and create a prolific brand because they were able to marry up this really inefficient business model with technology.”

Meanwhile, Depatie, whose company has raised about $1 billion to buy, build and rebuild boutique hotels, remarked that the future still looked bright for the boutique hotel sector.

“Celebrating personality is part of the zeitgeist of what’s going on. It’s more than people sitting around a table in Bethesda, let’s say,” Depatie said, referencing Bethesda, Maryland-based Marriott International. “We’re seeing in all consumer products the rejection of one-size-fits-all. Diversity is becoming more of a topic for everyone.”

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