Despite major brands adapting and adopting what independent hotels are doing, investors are still looking for true unique and independent properties in the short and long term.
NASHVILLE, Tennessee—With growing demand from investors wanting to build unique properties, independent hotels aren’t going away anytime soon, according to sources.
Speaking on a panel titled “Independents: No flag, no problem” at the recent Hotel Data Conference, Tim Franzen, president of Graduate Hotels, said he sees independents as a long-standing trend and it’s proven by the fact that major brands are co-opting the independent space.
Franzen said he isn’t worried about soft brands encroaching on independents, either.
Raj Contractor, SVP of investments at Host Hotels & Resorts, said from an institutional perspective “everybody is in the (independent) space and looking at assets that have unique attributes and personalities. Frankly, from a private equity standpoint, it’s a lot easier to exit because there’s a lot of people out there that … they think they can buy the hotel and do a better job running it,” he said.
He added that investors enjoy independent hotels because their flexible nature drives down cap rates.
John Davis, VP of Woodbine Development Corporation, agreed that independents allow for a lot more opportunities to exit—whether it’s from an ownership group or management company.
When independents do exit to a potential new owner or management company, panelists agreed that a majority of time the property will remain independent.
“Generally, if it’s a well-located asset that has a name that’s traditional (and) people recognize it, I don’t think you need to flag it,” Contractor said.
Franzen said if the independent property has proved it can successfully perform, the new buyers will likely keep it independent, or at the most position it as a soft brand.
Pros and cons to buying, operating indies
There’s a lot to consider when purchasing an independent hotel versus a flagged property. Franzen said Graduate buys quite a few independents, but because of where they’re located—typically in secondary and tertiary college towns—the company buys a lot of “mom-and-pop-operated” hotels.
Because of that, he said, “you’ve got to go back in and really retrain the staff that’s there, be a little more institutional … certainly things like revenue management can be completely foreign to the team there, the GMs, the sales teams there, so training them on new technology is something you’ve got to do. Those are the immediate challenges I see.”
Davis, who said most of his independents are new-build, sees PR exposure as a critical need. He said the ramp-up time for a new-build, independent hotel takes about three times longer than a branded hotel would.
Independent hotels are much more of an entrepreneurial business, he added, and choosing the right GM is key. GMs with brands are more driven by standard operating procedures whereas with independents, GMs have to think of the property as their own business.
“Personally, (in) independents, we’ve seen better GMs,” he said.
Contractor agreed that the GM has to take on multiple jobs at an independent. The downside, however, is that GMs at small, indie hotels don’t have as much support from a whole team.
“You don’t have the person all the time that’s ready to jump in … (there’s) a little disruption associated with that,” he said.
Stacie Bushaw, national system consultant at Navis, said a lot of companies think they can enter the independent space but don’t realize the nuances of operating an independent hotel.
She said the on-property team is a differentiator between a successful operation and a failed one.
“I work with a lot of different hotels and I look at the difference between a really high-performing asset versus another, it almost always comes back to the team that they have in place from a revenue-management perspective, sales and marketing perspective, definitely the leadership of the GM role,” she said.
Independent hotel staffs have a large responsibility to build relationships with guests, she added. For most hotels, she said, “maybe 15% to 25% of in-house guests are repeat guests,” so it’s about building loyalty with the new guests, too.
Contractor said it will be interesting to see what happens to independent hotels when the next downturn comes.
Bushaw said many hoteliers don’t look at the cost-per-distribution channel and she’s surprised by how much spending is done to drive direct booking, yet some hotels won’t have the right infrastructure at the property to handle the direct bookings.
“It’s really important that the hotel has a strategy. Sometimes (with) labor costs, it doesn’t make sense to have a reservations team. I know that’s a big question a lot of GMs are looking at,” she said. “The worst thing you could do is spend all this money to get them to your hotel and lose the booking … It’s surprising how many times we’ve done a call analysis study where the front-desk agent has told the person to go on the OTA to book.”
Direct can be an expensive channel (for acquisition costs), she added, but when done right a hotel can really optimize it. It also has a higher average stay value, she said.
Franzen agreed it’s a huge pitfall if hotels are so concentrated on marketing and selling but not thinking about the return on investment.
He said his team now uses social media platforms like Instagram and Facebook for bookings, which ended up being a cheaper distribution option.
And when it comes to traditional OTAs, he said they “are a necessary evil; you never want them to go to zero. We’re always going to use them.”
Creating buzz, customer acquisition
Franzen said the roadmap to creating buzz for a property essentially starts with the local community and on-the-ground marketing.
Since a majority of Graduate’s hotels are located near college campuses, he said the local GMs and sales teams will go to campuses, hand out coupons and educate students on what the hotels have to offer.
He said Graduate will even take any opportunity to market the property during the construction phase.
“We spend a lot of time marketing to the students. … We’re going to play the long game with them because they are going to come back to us as alumni at some point,” he said.
Another large part of Graduate’s consumer base is parents of students staying at the hotels while visiting their children. He said that can lock in a customer for the next four or five years.
Challenges with de-flagging
Contractor said the challenge with conversions is it can be a difficult time if the brand doesn’t want to leave and a new management team is coming in. Other disruptions happen when the hotel loses customer history and works to rebuild it.
The key to a smooth de-flagging, Bushaw said, is having the right partners.
“If you think about every single thing that needs to change in the hotel … (make) sure that you have the right partners … for website, booking engine, PMS, CRM and the data… it is so important to a hotel because when you de-flag you lose all of that past data.”