Jeremy Allen, Chandler Hotel Group
That trend was reinforced last December when IHG purchased Kimpton Hotels & Restaurants. For its part, Hyatt launched Andaz several years ago, and Marriott has rolled out the Autograph Collection, Moxy, EDITION and AC Hotels in the past few years. Even Best Western has unveiled its new urban boutique concept — Vib.
I get the following question a lot: “Why should we invest in boutique hotels?” The conventional wisdom among investment funds tasked with finding hotel assets is to look for branded assets in the top five markets that are deemed less risky by pundits.
However, some hotel investors don’t realize the substantial RevPAR (revenue per available room) premiums you can get with boutique properties over standard branded hotels. Among boutique properties, we’re seeing RevPAR premiums of 10 to 20 percent — sometimes 50 percent — over traditional hotels (see chart).
Boutique hotels have less rigorous brand standards, if any at all, and offer more opportunity on the exit because there are numerous possibilities for that next buyer. They provide incredible opportunities for investors looking at that three- to five-year window.
Lenders also are taking a closer look at financing these assets because there is trailing 12-month data available that backs up the story. Boutique properties typically excel in urban markets with high barriers to entry and infill sites that cater to both business and leisure travelers who are looking for that localized personal experience.
Motor City’s Moment Arrives
Ten years ago, I was helping Midwest investors find lower-priced assets on the West Coast in up-and-coming growth areas. Now as hotel values have skyrocketed out West, these same investors have sold out and are now targeting Midwest markets with lower-priced opportunities, open financing channels and local municipalities willing to provide incentives.
Detroit is a case study for this movement. The rebounding auto industry and growth in the convention business are among the reasons Detroit is experiencing a resurgence. I grew up in Southeast Michigan at a time when it was common for suburbanites to head downtown for the Detroit Auto Show at Cobo Hall or have a meal in Greektown, but that was the extent of it.
Everyone had a dream to one day become an integral part of rebuilding the city to its original luster. Now I think that dream is becoming a reality for a lot of people.
The reopening of the landmark Book-Cadillac Hotel in 2008 as a 453-room Westin Book Cadillac set the bar for the city. Once groups started seeing the success of this historic property that originally opened in 1924, the floodgates really began to open. Now there are a number of high-profile boutique hotel developments that have recently opened or are in development.
The 136-room Aloft Detroit, which opened last December in the restored David Whitney Building (a 19-story structure completed in 1915), is a great example of the recently opened hotels in the boutique segment.
The historic building has been a great fit for Starwood’s Aloft model, which is now getting into adaptive reuse developments. The Aloft brand has the DNA of a W Hotel, but at a lower price point in order to compete with Courtyard by Marriott and the Hilton Garden Inn.
The Aloft brand, which has had incredible growth as of late, is a less costly option to go boutique, fitting well into secondary markets that are missing that element.
The Secret is Out
It’s become a race to secure locations in downtown Detroit. The Wurlitzer Building has been pegged by a New York group for a 100-room hotel. Meanwhile, Aparium Hotel Group is moving forward with its 100-room project — the Foundation Hotel — in the old downtown Detroit firehouse headquarters.
The Ilitch organization also is planning a hotel for the new Detroit Red Wings hockey arena and entertainment district. The arena, which will seat more than 20,000 people, will open in time for the 2017 NHL season.
According to the Detroit Free Press, the Financial Guaranty Insurance Co., one of the city’s former bankruptcy creditors, has development rights for a potential 300-plus-room hotel on the site of the to-be-demolished Joe Louis Arena.
Investors looking at buying hotel assets should consider independent and branded boutique deals due to their emerging appeal and inherent upside. This strategy is clearly gaining momentum in downtown
Detroit.
– Jeremy L. Allen is a senior associate with the Chandler Hotel Group, a national hospitality investment advisory firm. He can be reached at jeremy@chandlerhotelgroup.com. This article appeared in the May 2015 issue of Heartland Real Estate Business.