Lenders and operators of branded hotels are up against a number of obstacles, which is why now is a good time to be an independent.
In the hotel world, you’re either branded or unbranded.
Branded hotels like Marriott International and Hilton are supported by incredible infrastructure and name recognition. Unbranded hotels are not. This basic premise is why lenders, owners, developers and customers have historically flocked to the names we all know well. But trends are shifting and unbranded hotels are finally seeing momentum move in their favor.
Unbranded hotels don’t face a number of obstacles that are becoming bigger problems for operators and lenders of branded assets. They can upgrade their assets when the market tells them to, not when the brand tells them to. And they can upgrade to the standards the market demands, not to standards that a brand demands. Property-improvement-plan costs are out of control. They’re a major reason for financing defaults, foreclosures and painful loan structures. With inflation creeping higher, non-branded hotels are in a far superior position than branded hotels.
Millennials like boutique hotels. Well-established brands are stuffy and undesirable in an era when a treehouse on Airbnb is sought after. Boutique hotels are better able to compete for the customers that Airbnb is siphoning from traditional brands because their customer experience can be tailored. Boutique owners have the flexibility to compete in a way that branded asset owners do not. They can benefit from branding strategies, digital media, big data and creativity to win their customers rather than sticking to an old formula that will soon be broken.
The infrastructure and systems provided by major franchisors are golden handcuffs. Yes they provide a large percent of customer traffic, but at a significant cost. Franchise fees, excessive PIP costs, restrictions on management and other hidden expenses bind owners and their lenders to the will of international brands that are flooding local markets with competition. This trade-off is becoming far less beneficial for branded hotels. Soon the handcuffs will come off.
In the 100% digital era, purchasing channels are changing fast. Many of the previously obvious benefits of branding with a large network are being eroded. Instagram influencers staying at a boutique property can drive sales more than a credit card with points can. And the cost of that customer acquisition doesn’t come with franchise fees and other expenses that eat into gross margins. Being cool matters to hotels, and although the large brands are trying to develop hip products, it’s like McDonalds trying to market themselves as healthful.
Financing is at the core of development, operating and branding decisions. Owners must build what they can finance. Lenders should get smart about this before borrowers turn to crowdfunding for financing. Crowdfunding capital providers are often young and in touch with the future. They are soon-to-be far more willing to finance the hospitality experience of the future. And banks will not be happy when their hospitality lending business is gone, so they must adapt now. If they do, not only will they benefit, but hotel owners and customers will, too.
Zak Selbert is the founder and chief executive officer at Vista Capital Company. Vista is a boutique real estate investment banking firm that specializes in arranging financing for hotels. He can be contacted at 310-285-3803 or firstname.lastname@example.org.
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