By Susan Furbay
The annual conference, spearheaded by some of the top independent hoteliers in North America, focused on innovation as a means to putting reward ahead of risk.
The 2015 Independent Lodging Congress (ILC) took place at the new High Line Hotel in Manhattan, an independent property in Chelsea with original stained glass and pine floors preserved from the 200-year-old General Theological Seminary from which the hotel was converted. Most of the sessions took place in the Refectory, a 3,300-square-foot meeting room showcasing paintings of former seminary leaders and elaborate fireplace mantels. The hotel’s environs and décor suited the conference theme: the financial risks and rewards of operating an independent hotel, with an eye to the industry’s history and evolution.
Defining an “independent” hotel is difficult to do. Some hoteliers operate from a mindset of independence, adapting an entrepreneurial approach to the business of running a hotel. Some strongly feel independence is a matter of a hotel’s character, aspiring to embed distinct, often locally inspired impressions in everything from its guestrooms to its cuisine, art, and décor. By this means, a stay at an independent hotel provides a guest with a meaningful, memorable experience, versus serving a strictly one-dimensional, utilitarian purpose. According to conference leaders, the independent hotel concept is about owner empowerment and the opportunity for direct engagement with decisions about a hotel, ultimately providing guests with an “unscripted experience” that proves attractive.
Apart from these more abstract conceptions, however, independent means something very concrete for most hoteliers, namely operating without the costs and constraints of a traditional chain affiliation. An independent hotel owner sets his or her own brand standards, allowing for changes in style and budget that work for a specific property.
Independence also entails the lack of some operational tools that are the bread and butter of hotel franchises, including brand reservation systems for booking rooms. In this respect, independent hoteliers have to be much more active on the sales and marketing fronts in order to advertise and sell room nights. Beyond successful booking, owners and managers must ensure that the hotel’s service members engage guests with the distinct style and courtesy conveyed by the hotel itself. It can be difficult to manage so many different aspects of what boils down to an artisan property’s operation. To paraphrase one panelist, it’s diligence with a diamond focus.
Practically speaking, a hotel’s success as independent versus chain-affiliated depends heavily on the market and the inclinations of the owner/operator. Hoteliers at the conference with experience in the independent arena cited, without surprise, hands-on hotel experience as one of the crucial traits in operating a successful independent hotel. Vision is another, and one often thought of as belonging to a younger, uninhibited set of hoteliers. Together, experience and unbridled vision make a solid platform from which to launch a potentially risky venture.
One of the most obvious risks of going independent is forgoing the reservations distribution channel provided to all franchised hotels by the national chains. If a brand’s reservation system, typically costing an approximately 10% franchise fee, can generate 50% of a hotel’s rooms revenue, the argument for chain-affiliation seems plain: the brands drive demand to a hotel’s door, and the bookings bring in a strong bottom line. The prospects for an independent hotel are less certain. The onus is on the individual operator to book rooms, and this can be a strenuous, uncertain burden to bear.
Brand-loyalty programs are another popular, well-known feature of the national hotel chains. Travelers strive to accumulate a mass of points that they can apply toward any number of attractive options, from room upgrades to trips to Disney World. The more loyalty, the more points, which persuades (as the theory goes) travelers not to stray from a particular chain of hotels, other factors notwithstanding.
Where does opportunity for ingress lie for independent hotels? Simply in the fact that they are unique. Surveys have shown that certain travelers—particularly the millennial set—value particular, diverse, individual hotel and travel experiences over the prospects of cashing in on points.
The greatest reward for independent owners and operators is the flexibility to create and operate a hotel without the constraints of the brand standards. The flexibility takes form in the hotels’ design, set of amenities, and food and beverage offerings. Furthermore, one can argue that operational savvy can lead to higher net-operating-income margins. Another factor to consider is exiting the investment. A hotel encumbered by brand affiliation and/or management is likely to attract a smaller band of buyers and higher cap rates. Without the overhead associated with brand-mandated property improvement plans (PIPs), independent hotels can have an advantage in the transactions marketplace.
Most independent hotels that take such advantage belong to the upper-upscale or luxury class. The chart below shows a forecast for RevPAR, supply, and demand for independent hotels in these two segments.
Upper-Upscale and Luxury Independent Hotels Forecast: 2015 to 2019
While RevPAR growth is projected to decline over the next several years, independent hotel supply is expected to gain ground. Demand for independent hotels will likely fluctuate, but there is no question that overall interest in independent hotels is growing.
Finding financing for an independent hotel depends on satisfying a lender’s appetite for the risk versus reward involved. Lenders view the brand reservation system as “insurance” for procuring guests; hence, the risk is raised for investment in an independent hotel. A lender must expect higher return on investment to offset the risk, and this can come from an experienced hotelier with a proven track record in a market with strong fundamentals.
Since many independent hotels lease a destination restaurant to a third party, underwriting that tenant/restaurateur adds complexity to understanding the hotel’s profitability. Lenders who have had success lending on independent properties believe that, if done properly, these hotels result in higher profit margins than branded hotels with the same RevPAR. One panelist noted that there is no magic formula for underwriting independent hotels, but careful consideration is given to a bank’s relationship with the particular sponsor—the particulars of the real estate follow.
When seeking a loan, it is imperative for developers to have a prime location and unique concept for their independent hotel project. Developers also have to deliver a detailed plan from concept to stabilization—including concrete strategies for meeting the challenges of an economic downturn or recession.
Closing Thoughts
Discussions at the Independent Lodging Congress made it clear that “independent” does not simply mean “unbranded.” What sets independent hotels apart from their chain counterparts is the behind-the-scenes hard work, beginning with the design of the hotel and the hiring and training of quality staff. To satisfy investors, a prime market location and “standout” concept are crucial, as well. Panelists argue that strong profit margins exist for independent hotels. Furthermore, the freedom from brand-mandated upgrades, which can be imposed on a current owner or the one to whom a hotel is sold as a condition for keeping the brand, creates opportunities for independent hoteliers. There are challenges to independent hotel ownership and operation—notably the lack of a brand-wide reservation system, which can create a hitch in overall bookings, as well as gaining lender confidence. Nevertheless, the enthusiasm and the data from the conference show that the independent hotel segment is on track to expand.
