Sonesta International Hotels’ Brian Quinn and Phil Hugh help developers navigate the fast-track trends driving luxury and lifestyle investment—and change course when it pays to carve their own path.
From accommodating the latest round of asks from high-end travelers to staying ahead of the economic and competitive curves, investing in the luxury and lifestyle hotel segment is a whole new ballgame. In this exclusive interview, Sonesta International Hotels’ Brian Quinn, chief development officer, and Phil Hugh, senior vice president, development, luxury & lifestyle brands, coach hospitality investors through the new playbook aimed at winning big in this fast-changing market.
1. Leverage data and tech to uncover opportunities in the next hot lifestyle and luxury markets: diversified and experiential secondary cities. Hugh credits metrics based on broader data sets and competitor research for validating the potential of emerging markets for top-end hotels across the country.
Sonesta’s data and tech tools back that up with details that help it pinpoint site searches and define optimal brand positioning. And that, he said, opens up opportunities to enter the high-end hotel market in smaller destinations with a lower investment risk and substantial room for bottom-line rewards.
To prove his point, “A developer approached Sonesta with an adaptive reuse proposal for a cigar factory in Tampa. The experiential, authentic, unique potential of the asset was clear,” said Hugh. “But we took a deep dive internally into data mining to give us a more precise profile of the city’s prospects.
The results revealed a lifestyle luxury market that had been running under the radar for some time, according to Hugh. “The numbers for demand generators and the competitive situation showed RevPAR sitting in the highest growth tier—even with supply growth. That told us there was likely still room for additional ADR and RevPAR gains, especially given diverse demand drivers from a leading airport to the fastest growing university in the country [the University of South Florida] and a diverse visitor draw for business, leisure, sports and the arts.
Recent research reports also flagged the potential for experiential destinations such as Charleston, South Carolina and Savannah, Georgia as well as smaller markets such as Winston-Salem and Asheville, both in North Carolina.
“You wouldn’t automatically list these cities as luxury lifestyle must-haves, but if you visit them, you’d see that a cool lifestyle hotel probably would become a rate leader,” he added.
2. Gentrification, brand stratification offer new ways to play the Top 25 markets. Developers willing to trade off higher risk to access the big-ticket rewards and portfolio prestige of having a luxury lifestyle hotel in a major city are focusing on gentrification.
“For example, everybody ‘knows’ Miami Beach could handle a lifestyle luxury hotel and all the reasons it makes sense to add a flag there,” said Quinn. “But lifestyle concepts such as Sonesta’s The James Hotels or less prescriptive brands such as our Classico and MOD Collections, enable investors to build a little more on the cutting edge and reap the rewards of gentrification. Imagine the ROI and EBITDA growth for the hotel investors who caught the initial turn in Miami’s Wynwood neighborhood or the Arts District five years ago.
Brand stratification provides expanded options for more risk-averse investors. An owner itself, Sonesta responded to changing market conditions in Chicago and Washington, D.C. with plans to rebrand two “more prescriptive” Royal Sonesta hotels to their luxury lifestyle-focused sister flag, The James Hotels, added Quinn.
“It is becoming more important to do intensive breakdowns of market opportunities and needs as part of the branding decision,” said Hugh. “So, for New Orleans, that research showed a brand that can accommodate a robust food and beverage offer would play well with the city’s dynamic culinary scene. But, in Miami, a flag that allowed for an elevated dinner restaurant with no requirements for breakfast and lunch was a better fit.
Whatever the name over the door, Hugh said stratification does not equal saturation for top-market brand families. “We’re not going to bring in two or three products at the same time, in most situations, just to say we’re opening rooms. The market should have time to absorb a hotel. If we want to work with the best developers and owners, we have to take a thoughtful approach.”
3. Investors and guests have new ways to experience high-end hotel concepts, from a full wish-list of services and amenities to an intensive immersion in an aspirational lifestyle. Quinn acknowledged that complexity is still an essential draw for the sector, but “more” is not always better, except when it is. Curation is the new “discipline”, he noted.
With increased customer demand and gaps in supply, Quinn said there’s a strong value proposition for a full-service, 5-star product. “Inflation may be slowing, but it has allowed the luxury and lifestyle segment to drive a higher rate. That enables the developer to bring more margin through the business and amplify the benefits of complexity,” Quinn said.
“The $100-million hotel projects are going to have more service touchpoints. They’re going to have more food and beverage, a spa, a business center, elevated experiences in the lobby, guestrooms and meeting spaces,” he added. “That costs money but, if the owner or developer can drive rate enough to pull the margins through the business, they’ll be successful.”
They’ll also get a better hearing from the banks, in Quinn’s view. “Right now, debt and equity sources look at the numbers and the margins for full-service 5-stars and they get the story. They know this market has held up well. So financing is going to be less of a struggle with so many levers to pull for revenue generation.
But the something-for-everyone service approach isn’t the only way to ride the high-end market up. “With any luxury and lifestyle hotel, the owner has to fire on all the basic pillars. Unique design, high-end finishes, fitness, wellness are table stakes,” added Hugh. “But they can differentiate their hotel and better manage upfront costs with a laser focus on one of those pillars.
There are caveats, noted Quinn. “When a developer is considering the return on investment, they have to be very, very disciplined and brutally honest about where that offer is going to meet those targeted guests.”
Part two of succeeding with a tight focus requires that the theme informs every decision in the project so that the experience is seamless. “The upside is the owner or developer isn’t indexing on every pillar. The trade-off is that the concept behind the experience has to be in every detail.
4. Brace for the next gamechangers at the top of the hotel market. Value-add will be the buzzword, agreed Hugh and Quinn. More robust residential brand extensions are on the horizon (watch The James Hotel space for news). Long seen as a way to create an equity plan that gets the right returns, expect hotel-branded luxury and lifestyle residences to look and function like home. But make sure it can be as much like “home” for the guest who wants yoga before the workday as the traveler who wants to host a cocktail party by the pool. Quinn also sees more emphasis ahead on food and beverage as business trips continue to extend over weekends and even 5-star road warriors book longer stays.
“People want to treat themselves when they travel. They want all the high design, technology, elevated culinary experiences and fitness/wellness options they have at home,” said Hugh. “This sector can deliver that. That’s why Sonesta is bullish on this segment. It now has the strongest underpinnings I’ve seen over my career, and I don’t see that changing anytime soon.”
SOURCE: Hotel Investment Today