News Archive Search
Boutique Business Goes From Burgeoning to Booming
By Ed Watkins & Eric Stoessel
What Ian Schrager and Bill Kimpton started almost 30 years ago on opposite ends of the country in gateway cities like San Francisco and New York has now met in the middle. Independent boutique hotels can work - and thrive - in cities like Milwaukee, and developers at the fourth annual Lifestyle/Boutique Hotel Development Conference in Miami last month talked about potential projects in faraway places like Montana, Kentucky and Tennessee.
The segment has reached mainstream acceptance by consumers, investors and even hotel franchise companies. Jay Coldren, vice president of lifestyle brands for Marriott International, said during the conference's opening general session it's because of a generational - and transformational - shift happening. Gen Y consumers and their preference for lifestyle hotels will be taking over the buying power from Baby Boomers in the next five years.
Coldren heads Marriott's fast-growing Autograph Collection, a pseudo-brand allowing owners more independence, yet with a connection to the powerful Marriott system. Other hotel franchise companies have similar offerings, like Choice's Ascend Collection, and more will follow in the next five years, said Jeff Low, CEO and founder of Stash Hotel Rewards, during a later breakout session.
Lodging Hospitality, in conjunction with HVS Hotel Management and academic partner The School of Hospitality Management at Michigan State University, produces LBHDC. More than 300 hoteliers attended the event at the Fontainebleau, which was highlighted by a keynote conversation with Anthony Melchiorri, the star of the Travel Channel's hit new show "Hotel Impossible."
Investors and lenders are also taking notice of the growing segments. Neil Shah, president and chief operating officer of Hersha Hospitality Trust, said during the ‘Transactions Temperature' panel that in some markets independents have recovered faster than their branded counterparts. They're trading at similar or even premium levels, in part because they are unencumbered of a franchise or management contract. During the last cycle, he said, many lenders were only interested in branded properties, but "not anymore. That's changing as more investors are interested in independents."
The general acceptance of the segment and success stories like the Iron Horse in Milwaukee have helped pave the way for new development in secondary markets. Patrick Goddard, president of Trust Hospitality, said his company even targets some of those non-gateway cities. "There are different prices, investments and it may be harder to get financing, but it can be done," he said.
When LBHDC began three years ago, the lifestyle and boutique segments were burgeoning. They're now booming.
Growth Begins in Miami
Nowhere is that trend more evident than in Miami, and in its Miami Beach submarket, one of two epicenters (Manhattan is the other) of the boutique and lifestyle hotel industry. As Coldren said, "If you're serious about this segment, you must be in Miami."
New data from STR shows the strength of the Miami area markets. Year-to-date through August occupancy for Miami was 77.7%, while RevPAR increased a whopping 8.2%. And perhaps most promising is the news that ADR has almost fully recovered to pre-recession levels, a process that took 48 months.
The success of the lifestyle and boutique segments is having an effect throughout the industry. All hotels, but especially lifestyle and boutique properties, need to become "more experiential and sensory," said Marriott's Coldren. "The alternative is to perish."
An example of how this segment has grown is seen in the financing arena. While many believe it's difficult for non-branded hotels to attract debt or equity financing, Jason Pomeranc of Commune Hotels said a brand can actually be a negative for a boutique hotel seeking financing, particularly in some high-rate markets like New York City.
"With some products and in some markets it's warranted [to affiliate with a brand], but lenders and institutions are starting to see in certain sectors you can do without brands and be better off," said Pomeranc. Commune includes a JdV Collection and the Thompson-brand hotels. He said the company is also developing a new value-oriented, design-driven chain that will compete with boutiques in lower price segments.
The boutique segment is a beneficiary to what Denihan Hospitality President David Duncan called a "raindrop recovery. Recovery very specifically depends on where you are," he said, adding that while nationwide about 35% of jobs lost in the downturn have returned, in New York City 135% of jobs have returned. Denihan has 16 hotels under two brands (Affinia and James) and a collection of independent properties. "That's why we focus on the top five to 10 markets and in the center cities of those markets."
Lenders Taking Notice, Too
In the final analysis, finding financing for a transaction involving a boutique or lifestyle hotel isn't much different than for a more traditional branded property. Most speakers agreed it's all a matter of strength: a strong story, strong sponsorship and management and, perhaps above all, strong cash flow.
"In putting together the capital stack for a boutique property, the first questions to come up are what is the cash flow, how stable is it, how does it compare to the peak of the market and how much more room is there to grow," said Frank Nardozza, chairman & CEO of REH Capital Partners, who spoke on a panel titled ‘The Boutique Lending Landscape.' "If we can articulate the cash flow, we can then get the interest of capital, both debt and equity."
While she agreed "cash is king," attorney Suzanne Amaducci-Adams said capital sources also look at other factors in considering debt or equity placement for a boutique hotel transaction. Location, uniqueness of product, food and beverage offerings and sponsorship are on her list of important items.
"The market is critical. Miami is so hot right now it's a lot easier to get financing for a boutique hotel here," said Amaducci-Adams, a partner with the Miami firm of Bilzen-Sumberg. "The hotel needs to be unique and part of that often is food and beverage. But, at the end of the day, it's all about sponsorship."
Still, some significant barriers exist for boutiques that make acquirers, and especially developers, work harder to get funding for their projects. The consensus among panelists was that boutique and lifestyle hotels are financeable, but it may cost more to do so. Nardozza speculated while loan-to-value ratios for financing of a traditional branded hotel may be as high as 70%, it's more like 60% to 65% for non-branded properties or boutique hotels. And debt yields (net operating income divided by the amount of the loan) tend to be higher, he said. Cassie Resnick, a vice president of Mast Capital, pegged yields for boutique deals at 9%-10% up to 13% if it's a particularly risky deal.
Another panel at the conference tackled the problem of how to overcome the often-negative perception lenders have about unbranded and independent boutique hotels. Craig Greenberg, president of 21c Museum Hotels, acknowledged the issue is especially critical in the markets in which his firm operates. The company has a successful property open in Louisville, KY, with another to open next month in Cincinnati, followed by one in northwest Arkansas.
"It's definitely more challenging, especially in smaller or medium-sized cities, to get money," said Greenberg, who showed the audience an elaborate chart outlining the variety of funding sources-a mix of tax credits, rebates, grants, equity and traditional recourse bank loans-used to develop the first 21c. "In that kind of environment, it usually takes a perfect story to put together a financing package."
"Gateway cities with high barriers of entry and depth of demand are obviously preferred," he said, "but sponsorship is also crucial, especially the depth of experience they have in the sector. It's also important the sponsor has skin in the game, because it forces them to keep their eyes on the ball."
Despite these caveats, speakers on both panels believe financing for boutique and lifestyle products, both branded and non-branded, is becoming more mainstream.
Source for full article: Lodging Hospitality
Visit our sponsors