3 Ways Hotels are Different than Big Four CRE

Multi-family, retail, office, and industrial assets comprise more than 90% of total commercial real estate square footage in the United States. Hotels make up less than three percent. Even though there is great diversity in the Big Four CRE asset classes, none approaches the complexity of a hotel investment in general terms. Hotels are different than other real estate in a variety of ways.

The operational nature of a hotel is the primary differentiator. A hotel owner is intimately tied to the operations as opposed to being a passive landlord. Lease structure, asset management, and branding are the key points that separate hotels from Big Four CRE assets.

Nightly Leases

Standard leases for Big Four CRE assets are five years or longer except for a one-year multi-family lease. Hotels operate on considerably shorter terms. Guests sign a lease for a single night, and cancellation fees apply for longer stays that terminate prematurely.

Rooms or “keys” define the size of a hotel, but room nights are the standard measurement for sellable inventory. That is, each night is another opportunity to sell a room.

Hotels reprice rooms daily based on real and perceived demand in the market. A revenue manager may dump rooms in a soft period to get heads in beds, and she may be able to boost rate in a tight market to maximize potential revenue. This has a material impact on revenue potential in a market cycle.

Nightly churn adds both risk and opportunity.

Upward economic progress creates opportunity for a hotel to charge higher rates, while maintaining the same expenses. A downcycle has the opposite effect, which requires sound deal fundamentals to account for shrinking margins.

Retail investors feel comfortable with the sales and marketing processes required for building a loyal following and a churn of infrequent guests. They understand the demographic and psychographic profiles related to pairing tenants and choosing the right street corner. This thought process is critical in placemaking and branding, and it exemplifies how hotels are different than other real estate.

Operations-Oriented Asset Management

Commercial real estate investors have multiple layers of management for good reason. Property managers direct the daily tasks to keep tenants happy. Asset managers direct the long-term vision to keep the business plan happy. This creates healthy tension and accountability.

Each real estate organization is unique in its approach to separating asset management from property management. Many organizations with in-house property management try to combine the functions. However, the reality quickly emerges that one or two people on the team become a de facto asset manager.

Three major stakeholders form the modern hotel deal structure – owner, operator, and brand. Asset management responsibility sits at the owner level regardless of whether you have a third-party or internal operator.

Routine maintenance and infrequent tenant requests encompass the usual focus of Big Four CRE property management. Occasionally, these properties will require a big sales and marketing push to fill large vacancies or a quick decision to solve a major capital need. Still, they can generally operate with relatively little oversight.

Hotels are different than other real estate. They have these requirements with an additional layer – managing the manager.

A hotel’s daily population consists of guests, employees, and service providers. Full service hotels also have local patrons that use the meeting space and restaurants without renting hotel rooms. Therefore, a hotel manager must build an ecosystem that aligns with all these personalities.

An astute asset manager looks at key performance indicators to evaluate success, but the property culture is almost more important. A great asset manager focuses on present-day key performance drivers over historical success indicators.

Hotels report performance on a daily, weekly, and monthly basis, but success or failure only shows up in the numbers over the long-term. Property culture is critical for stable performance.

Branding

Hotels need to define themselves to host guests that are not familiar with the area. It’s the difference between going to Dunkin Donuts as opposed to the local coffee shop. You may have a chance for a better experience at the local coffee shop, but you know within a reasonable range what you’re getting at Dunkin Donuts.

While hotels are different than other real estate, they are a lot like fast food. There are many options, but customers have a clear preference for one over the other. Unsurprisingly, the internet has made it easier for a unique property to stand out in a strong, high-demand market. Still, most markets require a brand that consistently brings the right guest to your property.

Brands provide a variety of services to the hotel owner. Sales and marketing are the most clear and obvious benefits. This comes in the form of advertising, centralized group sales, and loyalty programs. Nevertheless, property prototyping is an overlooked and misunderstood benefit that many hotel owners take for granted.

Placemaking gained popularity in the past decade by producing unique neighborhoods that align with a cross-section of demographics. Hotel brands have been doing this for years. Lobby and room designs create spaces that encourage guests to feel a certain way while away from home.

Hotel owners pay handsomely for these brand services.

Licensing, marketing, and loyalty are the three major expenses are associated with branding. Each pour into a different bucket at the corporate level, but they all focus on maintaining system-wide quality and pricing standards.