While universities have been a central part of Chicago-based Graduate Hotels’ growth, it has targeted markets with multiple demand generators to build a pipeline that will double its portfolio.
ATLANTA—Graduate Hotels, a Chicago-based collection of 10 properties with 10 more in various stages of development, has opportunities and challenges wrapped in its path to growth.
Tim Franzen, Graduate’s president since May 2016, said during a break at the recent Hunter Hotel Conference that while the company’s name reflects its attraction to college towns, it’s not the only thing that it wants in a market.
The company prefers bigger university markets, but the biggest factor is there has to be another demand driver, he said.
“They’ve got to have a large hospital system, a state capital,” said Franzen, who found his way into the commercial real estate business while working for a Chicago law firm. “They also have a budding tech industry. There’s got to be some other reason to go to that community.”
Graduate, a boutique hotel chain owned by AJ Capital Partners, is surpassing its growth expectations, he said.
“Several years ago we set a goal of having 20 (properties) by 2020, and quite frankly, by the end of that year, we’ll probably be closer to 25,” Franzen said. He was AJ Capital’s EVP of acquisitions and development before becoming Graduate’s president.
Graduate is opening three properties this year in Iowa City, Iowa; Bloomington, Indiana; and Seattle. In 2019, it will open five hotels, including properties in Columbus, Ohio; New Haven, Connecticut; and New York City as part of the Cornell Tech campus.
The company prefers hotels with between 150 and 225 guestrooms, but its portfolio ranges from 72 rooms in Madison, Wisconsin, to 300 rooms in Minneapolis, Franzen said.
Graduate’s biggest opportunity is more growth, he said. AJ Capital in 2017 raised a discretionary fund to develop the brand and is in the process or raising another one.
“There are a vast number of markets that can support a hotel like this,” he said. “We’re trying to build hotels that reflect their community or are worthy of their communities. All these markets are really special. They’re all extremely unique in terms of their own culture, history, and oftentimes they have never had a hotel that reflected that, that’s worthy of that. So we’re trying to fill that void.”
Using third-party management companies
The company’s mission is to own and asset-manage its properties—it relies on third-party management companies for the day-to-day operations of the hotels. Graduate currently uses four such operators. That model is also one of its challenges, Franzen said.
“Because we don’t operate and we have several third-party managers, it’s about getting the consistency of hospitality service delivery that we want from the front-desk agents to food and beverage, bars and restaurants,” he said. “We spend a lot of time being into the nitty-gritty with our operators on that to make sure we’re doing it really consistently.”
The company developed its own training modules to ensure third-party management companies are on board.
“We have a whole way to train all of our associates from top to bottom, not just what is Graduate, but then how do you deliver that Graduate promise to our guest,” Franzen said. “That to us is the biggest challenge, making sure we’re scaling appropriately and getting consistent delivery on great service to our customers.”
Graduate Hotels doesn’t have an average-daily-rate ceiling or floor—the rate is dictated by the market, not the home office, Franzen said.
“In some markets, we can be the rate leader. Ann Arbor, Michigan, and Oxford, Mississippi, are perfect examples where we’re the best-located and nicest hotel in town, and so for that reason we’re the rate leader,” he said. “But in other markets we can be a value option. I always use Richmond, Virginia, where we’re about a block away from the Jefferson Hotel, which is a beautiful, old historic hotel in Richmond. And they’re the rate leader, obviously. There’s another hotel called the Quirk a couple blocks away. They do very, very well as well. We can be a value option to them because we don’t have to charge quite the ADRs that they have to, that they’re able to achieve.”
The company’s hotels embrace the college students that live, learn and play in their shadows—even if they don’t actually rent rooms at the hotels, Franzen said.
“Where we focus in terms of students is through food and beverage and usually through our coffee shop,” he said. “We want to play the long game with them. If they come to our lobby, they love to hang out there because it feels like a Wes Anderson movie set to them. If they love hanging out and studying in that space, even if they don’t buy a cup of coffee and they spend six hours there, we’re OK with that. Because at the end of the day, when they come back as alumni, hopefully they’ll stay with us. If they’ve got parents coming to visit them, hoping their parents will come stay with us.”
AJ Capital’s light bulb goes on
AJ Capital Partners is a hotel investment and development company. It occasionally ventures outside of hotels since it launched in 2008, but has primarily focused on boutique and lifestyle hotels, Franzen said.
“Going back to about five years ago, we were looking at other avenues for investment and we started looking at secondary markets,” he said.
It found its niche in its own backyard in 2014. The company owned the Hotel Lincoln in Chicago, located close to DePaul University and executives noticed a lot of visiting parents, professors and administrators staying at the hotel, Franzen said.
“Those two things, looking for a new investment and the relationship the hotel had developed with DePaul University or the people going to visit the university was really, the light bulb went off, and said, ‘Why don’t we focus on university-anchored markets and create our own brand?’ That was the birth of Graduate Hotels,” he said.
The plethora of independent hotels in college markets makes it clear that the concept can be lucrative, Franzen said. Central locations—walkable to campus, nightlife, dining and shopping—are critical for a Graduate Hotels’ success.
The first Graduate Hotel was the former Foundry Park Inn and Spa in Athens, Georgia. It’s an exterior-corridor property located on the site of an old iron foundry.
The stability of university markets is the biggest driver of opening hotels in them, Franzen said.
“We see about a third less volatility in university markets than, say, the top 20 (metropolitan statistical areas) across the country,” he said. “Even as the cycle gets longer and we start looking at potential recessions in the future—although I don’t think there’s one anywhere nearby—as we look for the future, we’ve done a lot of research about past recessions, and these markets performed extremely well. They always had (revenue per available room) dips, but it’s really more on the ADR side, not the occupancy side.”
AJ Capital considers Graduate Hotels a collection, according to Franzen.
“Technically, we are a brand at the end of the day, but we really refer to ourselves as a collection,” he said. “When I hear brand, at least me personally, I think of things that are very uniform. You can go from city to city to market to market, you’re going to get the same product, very consistent.”
Franzen said Graduate’s approach to design—aligning each hotel with the culture and history of the city instead of the university—is what fuels the ‘collection’ mentality.
“We get tagged with being college-themed, if you will, quite a bit, but it’s really not that,” Franzen said. “You’d be hard-pressed to find a lot of literal references to the university. We don’t do a lot of school colors and pendants. You’ll find flashes of school colors, but it’s not literal sense. We try to sell the story of the school and the community and its culture through that interior design.
“We do a lot of research on the history and culture of those communities and people who went to school there, who grew up in those communities, to tell the story through the lens of the local,” he added.