CHICAGO—Lifestyle hotels might be lodging option du jour for investors, operators and consumers, but they aren’t immune from some of the challenges facing the rest of the hotel industry.
The most notable challenges, according to panelists speaking during the second stop on the ALIS Summer Update tour last week at the Chicago Athletic Club Hotel, involve rising pressure on the wage and rental-economy fronts.
“To our business, (the biggest issue) is the wage issue, and particularly as it relates to labor, unions,” said Niki Leondakis, CEO of San Francisco-based Commune Hotels, which includes the CAC Hotel in its portfolio. “We’re in a lot of primary markets—New York, San Francisco, Chicago—where this is a real issue. It significantly impacts obviously the economics of an asset. It forces us to rethink how we’re doing business.”
“Airbnb is a concern,” said Raul Leal, CEO of Virgin Hotels. “It should be a concern for properties that don’t provide an experience.”
David Berg, CEO of Carlson, said Airbnb could become an even more formidable competitor once it decides whether it wants to be a matchmaker or a hospitality company.
Because Airbnb tends to be most successful in high-density, urban markets where lifestyle hotels also thrive, regulatory issues will have a big impact, panelists said.
“We ought to have a level playing field,” Berg said, comparing the situation in which hotels pay higher taxes than Airbnb rental operators to the days when Internet retailers such as Amazon.com didn’t have to pay sales taxes. “Let’s have common rules.”
Berg, who stepped into the Carlson CEO role in May, intertwined the two challenges discussed into one common theme.
“When the city of Los Angeles imposes a wage rate increase that went into effect last year just focused on hotel industry, that’s just not fair and does not feel right,” he said. “If you’re going to be in the hospitality business and you don’t have to address health and safety issues and (Americans with Disabilities Act) issues, that just doesn’t seem fair.”
Some upside
The executives agreed that facing these pressures can be beneficial for all hoteliers.
Leondakis pointed to the growing trend of ditching 24-hour room service in favor of a grab-and-go concept in which guests get their food to-go from a lobby restaurant concept as an example.
“In a way that is a good outcome,” Leondakis said. “Things like people taking bagged food up to their room versus 24-hour room service delivery, it’s not just a consumer preference, it’s (addressing) the cost of room service. It’s forcing us to think more creatively about what we can get the guests what they need and want in a more efficient manner.
“You’ve got to think about F&B completely differently with this cost of labor,” she added.
Leal, whose company opened its inaugural hotel earlier this year in Chicago, agreed.
“High volume F&B is where there is going to be challenges in terms of wages,” he said. “It forces us to reinvent the industry a little bit.”
That leads to the question of being able to attract the type of talent needed to keep the industry relevant and support the changing operational landscape, Leal said.
The learning process also has been accelerated by the appearance of companies such as Airbnb, according to Berg.
“In some ways, Airbnb has caused all of us to up our game,” he said. “They’re doing some things that are really, really relevant that consumers want.”
Lifestyle hotel operators haven’t completely mastered the formula for success, the panelists said. For example, group business is often taken too lightly at lifestyle hotels—but it doesn’t have to be.
“It’s a missed opportunity to not consider the value of group business, small meeting business, to lifestyle and boutique hotels,” Leondakis said.
While some of Commune’s hotels don’t have meeting space, group business at properties that have meeting space ranges from 8% to 10% at smaller hotels to 25% at Commune’s bigger hotels of 200 to 250 rooms, she said.
The biggest opportunity comes during slow, off-season periods, according to the CEO.
“If you layer it correctly, group can help you drive transient rate down the road,” Leondakis said.
As lifestyle hotels become more entrenched in the branded hotel world, it adds a layer to an existing problem, said Berg, whose company launched its Radisson Red lifestyle brand earlier this year. The proliferation of brands puts some pressure on the franchisee/franchisor relationship.
But it’s a double-edge sword, according to Leondakis, because the influx of lifestyle hotels into the industry has been beneficial on the financing front.
“It wasn’t that long again when to lenders, the boutique and lifestyle sector, it didn’t exist,” Leondakis said. “Today there’s a lot more credibility in our sector.”
The launch of brands such as Canopy and Curio by Hilton Worldwide Holdings and Tribute by Starwood Hotels & Resorts Worldwide further verifies the mindset of the consumer, according to Leondakis.
“It used to be 1% or 2% of the business; today nobody can develop their brands and launch them fast enough to grab demand,” she said. “It’s definitely put pressure on all of us to be more innovative, more relevant and better operators.”
What exactly is a ‘lifestyle hotel?’
Moderator Scott Berman of PricewaterhouseCoopers set the stage for the discussion by trying to determine the definition of a lifestyle hotel.
Leal said a lifestyle hotel is something that transcends demographics, and it shouldn’t be focused on any specific age group.
“It’s more about a mindset … a different experience that’s not a cookie cutter,” Leal said. “Consumers themselves are demanding the product offering be different.”
“You can’t just look at millennials,” Berg said. “It’s about the millennial-minded traveler and what they expect.”
There’s a simple distinction for guests when it comes to the lifestyle-hotel proposition, according to the Carlson executive.
“What does the guest want when they come into that hotel, and what to do they elect to do?” he said. “It’s elect instead of select.”
Leondakis said there’s now a subset of the lifestyle hotel movement called “micro-lifestyle” that features compact hotel rooms less than 200 square feet in size located in high-cost real estate, dense urban locations and tend to be vertical. Commune’s Tommie brand falls into that category.
The smaller room doesn’t mean it’s less luxurious, according to Leondakis. They’re designed for sensitivity and comfort.
“It’s not just a price buy,” Leondakis said. “The value for the price paid is the quality of the materials and the comfort of the room.”
That spells “success” when consumers enter the formula, she added.
“There’s a certain consumer that’s looking for an experience,” Leondakis said. “That’s what drives lifestyle hotels … it’s more experiential..”
Leondakis said transparency is the key. As long as consumers know what they are getting, the micro-lifestyle will continue because it’s a sought-after product.