296 | Flexible Business Model: Apartment-hotels are an emerging trend in an industry in crisis

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SERVICED APARTMENTS: WaterWalk Dallas – Richardson, an apartment-hotel development in Richardson, Texas, is among nine franchised properties under WaterWalk International of Wichita, Kansas. The serviced apartment brand is the brainchild of Jack DeBoer, considered the founder of the extended-stay hotel concept. WaterWalk is a hybrid of furnished extended-stay units and unfurnished leased apartments in which renters can enjoy hotel amenities. The apartment-hotel trend is gaining in popularity among travelers seeking safety amid the coronavirus pandemic and among commercial real estate investors in search of asset diversity and pricing flexibility in the subsequent economic downturn.

Combined lodging assets are recession resistant, say developers

Jack DeBoer, the legendary creator of the extended-stay hotel concept, in 2014 opened his first WaterWalk serviced apartment building in Wichita, Kansas. Today, his granddaughter, Mimi Oliver, runs the company that has nine properties open and five in the pipeline. It is exploring more franchising opportunities in 25 markets.

Before the coronavirus pandemic struck the hotel industry, lodging developers had a heightened interest in serviced apartments as well as apartment-hotel concepts that offer flexibility in different lengths of stay, operating expenses and revenue streams. The commercial real estate asset has shown its strength during economic crisis caused by the COVID-19 outbreak.

Longer stays have buoyed the short-term rental sector, which experienced an average 5 percent decline in demand from April 2019 to April 2020 while transient hotel demand dropped by an average 29 percent in the same time period, according to a joint report by The Highland Group and All The Rooms.

Such demand is also supporting apartment-hotels.

Flexible Business Model: A common area at WaterWalk International’s recently opened apartment-hotel development in Plymouth, Minnesota. Episode 296 of Lodging Leaders podcast explores the emerging trend of apartment-hotels and the sector’s impact on the lodging industry during the coronavirus crisis.

Mixed Category

The category includes serviced apartments; lodging accommodations with a mix of hotel rooms and serviced apartments; and privately owned condominiums that are part of a hotel complex’s short-term rental inventory.

Some accommodations can be classified as short-term rentals in the home-sharing category while others are labeled as extended-stay in the hotel segment.

In the extended-stay sector, The Highland Group recently reported that in the third quarter of this year, U.S. extended-stay hotels’ occupancy was nearly 18 percent above the overall lodging industry.

In the short-term rental silo, AirDNA and STR recently reported that from January 2019 through June 2020 hotel RevPAR in 27 markets around the world was down nearly 65 percent from the previous period, while short-term-rental RevPAR declined 4.5 percent.

SHORT-TERM RENTALS: A recent study by AirDNA and STR charts fluctuations in occupancy in the global lodging sectors – hotels; “hotel comparable” units or those with studio or one-bedroom accommodations; and rentals with two or more bedrooms – in the first six months of 2020.

AirDNA and STR also found several changes in travelers’ behavior as a result of the coronavirus pandemic.

  • The decline in business and group demand severely impacted transient hotels while leisure guests buoyed demand in both short-term-rental and transient categories. But between the two, short-term rentals have maintained higher absolute occupancy levels.
  • Though the hotel industry is seeing week-over-week growth since its low point in the spring, the short-term rental sector is much closer to reaching previous year levels in RevPAR.
  • Regional destinations are preferred as travelers stay closer to home.
  • And travelers have shifted away from urban areas in favor of suburban markets.

‘Unique and competitive’

Oliver, CEO at WaterWalk International, is seeing some of these trends play out first hand.

The new-build serviced-apartment brand is designed for suburban markets. It has two upscale business models within the same development – a standard prototype of two buildings, one with furnished extended-stay suites and the other with unfurnished serviced apartments for longer-term leases. The company is finalizing a single-building prototype that has both extended-stay hotel rooms and serviced apartments under one roof.

A smaller land footprint would attract more business, Oliver said. “The concept lends itself to customers, franchisees and investors. There are not many dual products available with true apartment-style living with hotel amenities and services. It’s a unique and competitive choice.”

Apartment-hotels offer owners managers product diversity and flexibility in different economies. Stable apartment revenue combined with hotel rates allows owners to shape the business model according to market demand.

“If you have more demand on extended-stay hotel side you can furnish more units as an owner and boost the top line a little more,” Oliver said.

“What we’ve seen through COVID and the downturn is that you can remove furniture and focus on apartment-style living with more leases. This can help you get through a tough time. The model has proven our recession-resistant theory.”

The WaterWalk brand promise teeters between extended-stay lodging and multifamily housing. It primarily targets traditional apartment dwellers looking for an all-inclusive experience, Oliver said. Amenities and services such as housekeeping and prepared meals and utilities are paid for in one monthly amount. During the coronavirus pandemic, WaterWalk has cut back on housekeeping and meal service. Residents in both the hotel and apartment sectors receive supplies delivered to their door upon request.

Oliver says while the coronavirus crisis has driven an increase in business, she saw a shift in consumer preferences before the pandemic that she believes are here to stay.

For example, customers prefer longer stays in units larger than a traditional hotel room.

And the full kitchen and in-unit laundry area as well as a bedroom separate from the living area were attractive options for guests pre-pandemic that continue during the crisis.

The pandemic has influenced the brand’s design and FF&E. Oliver said the units have more hard surfaces, including flooring, that are easier to keep clean. In the common areas, sitting and working spaces are farther apart.

And technology is more widely adopted by managers and used by guests as they try to avoid face-to-face contact and unwittingly discover the convenience of contactless check-in and other customer-focused applications.

VALUE PROPOSITION: A lodging unit under Domio, a new technology-centric brand that partners with owners of hotels and apartments to license its amenities and services to travelers seeking longer stays in accommodations in which they can live, work and play.

Technology Shift

The pandemic and public-health guidance on social distancing has forced hospitality businesses to ramp up the adoption of guest-facing technology.

Domio, an apartment-hotel brand, is tech-heavy as its guests use its mobile app to shop, book, check in and check out, order services and operate the unit’s amenities such as the smart TV.

The company licenses its services to owners and managers of multi-family apartments or condominiums as well as extended-stay hotels.

Domio launched in 2016 and is undergoing a restructuring of its leadership with Jim Mhra, as interim CEO. He was previously vice president of finance at Hilton, the Americas.

In September, Domio co-founders Jay Roberts and Adrian Lam reportedly resigned as chief executive and chief security officer, respectively, as the company struggled to recover from being delisted by Airbnb in August for alleged deceptive business practices it discovered when reviewing the company since its founding four years ago.

After the co-founder resignations, Airbnb re-instated the company and its 500 listings, which depend on Airbnb and other OTAs to market its offerings.

Brian Quinn joined six months ago as chief development officer and is dedicated to expanding the brand’s footprint in the U.S. and around the world.

Quinn, who has led franchise development at Choice Hotels International, Red Lion Hotels Corp. and InterContinental Hotels Group, explains why he joined the company in the midst of a global pandemic that has devastated the travel industry.

Domio was just getting its legs when the coronavirus crisis struck, but the brand was far along enough in development to continue an upward momentum, especially as travelers searched for stay options that gave them more room and amenities than a traditional hotel room.

“It has both things that powerful brands have,” Quinn said. “It has a great consumer proposition around rooms-only with amenities and on the developers’ side it creates a lot of potential for margin.” Light housekeeping, fewer staff and not having to provide common areas such as F&B, meeting rooms and a fitness center drive the rooms-only value proposition, Quinn said.

Technology is an important piece of Domio’s growth plans because it’s where owners and operators can truly realize cost savings. “For the consumer proposition and the developer proposition to both work you have to have adoption of technology,” Quinn said. “COVID-19 has forced the acceleration of technology adoption.”

Though it uses Airbnb as a distribution platform, Domio keeps its eye on the performance of the extended-stay hotel sector as its business model mimics the sector’s length-of-stay patterns.

Domio is an upscale to upper-upscale apartment-hotel hybrid that sits on an “extended-stay chassis,” Quinn said.

It will consider teaming up with studio, one-bedroom and two-bedroom apartments as well as inventory from extended-stay projects and hotels with suites. Its brand offers a hosting station and guest-facing technology that allows it to provide upscale services with minimum staff.

It’s keen on finding walkable communities with restaurants and entertainment and fitness venues.  “We’re working to stay very strict around rooms-only,” Quinn said. “We’re looking for those travelers who need extra space and want their room to serve many different uses.

“On the hospitality side we’re getting demand from owners of suites and extended-stay hotels looking to optimize the asset and think about it differently.”

LISTEN: THE LONG HAUL: Episode 287 of Lodging Leaders podcast examines the state of the extended-stay industry during the coronavirus crisis.

While the serviced-apartment concept might be new to hotel and multi-family developers and investors in the U.S., it’s common throughout the rest of the developed world. “It’s a full segment in the global hospitality world,” Quinn said. He attributes the slow adoption of the programming in the U.S. to strong legacy brand franchisers.

“These brands that have been around for 30, 40, 50 years and have been taking care of the market,” he said.

Just prior to the coronavirus crisis, the serviced-apartment concept was gaining a foothold in the U.S. “The pandemic has just blown the doors open around the opportunity,” Quinn said. “We’re just scratching the surface.”

GATEWAY PROJECT: The Indigo Road Hospitality Group is assisting with program development and branding for an as yet unnamed condominium-hotel development in a community gateway in Naples, Florida. The property will have 125 hotel rooms and 24 private residential units that may be placed in the hotel’s inventory when not in use by owners.

Mixing Interests

In creating a lodging hybrid, the big challenge is managing the property to squeeze out as much revenue as possible from co-existing business models and give owners a return on their investment.

Larry Spelts, president of lodging at The Indigo Road Hospitality Group in Charleston, South Carolina, recently wrote an article that’s posted on the company’s website about how a residential-hotel mix can make money and share revenue across the board.

His idea comes from experience.

When working for another company some years ago, Spelts helped turn around a troubled hotel-condominium asset in Orlando, Florida, by replacing its traditional revenue-sharing practice with a hotel-management model.

Spelts said the existing method was fractured because the owners association had contracted with one management company to operate the complex’s common areas while another management company had an operating agreement with each unit owner.

When the residential units would change hands, the management company would ink a fresh agreement with the new owner. By controlling the common areas, the owners association and developer began to leverage out the manager of the privately owned units who waged war from an office off-site.

In a traditional condo management agreement, the third-party manager splits the unit’s rental revenue with owners.

For the sake of illustration, let’s say it’s a 50-50 split.

Owners keep their full 50 percent but the manager has to pay operating expenses from its half of the draw.

In the case of an economic downturn, such as the one the hospitality industry is experiencing now, the management company begins to cut staff and services which negatively impacts on the guest experience and the property’s culture. “So now there’s no alignment of interests between the management and unit owners,” Spelts said. Unit owners eventually see a decline in revenue.

In Orlando, Spelts convinced the owners association to accept a hotel-management model in which owners of the condos share in a percentage of the revenue after expenses and offer an incentive fee to the property manager in the form of a percent of the gross and a percent of the net as long as it hits the net income numbers.

He points to the Carlyle in New York City, a landmark condominium hotel that Spelts once helped manage. Owners of the condos stay only part time and rent out their units when they’re not residing there.

Spelts cautions that every condo association’s bylaws are different and need to be read and understood by all parties involved.

Some privately owned units are nicer than others and can command a higher rate and, therefore, a higher percentage of gross rental revenues. In that case, the unit owner receives a percentage equal to what it contributed to the gross.

The revenue-sharing strategy turned around the Orlando property. “It was truly transformational,” said Spelts, adding he hopes to do it again one day.

Spelts might get such an opportunity when a condo-hotel project The Indigo Road is involved in comes to fruition.

The company has been selected to assist with program development and branding for an as yet unnamed 125-key independent, luxury hotel with 24 private residences in Naples, Florida.

Spelts contacted the retired business manager at The Carlyle to get his guidance on how to structure a similar revenue-sharing model for the hybrid condo-hotel in Naples.

Owners of the condos will most likely use the residences a few times a year. To keep from carrying the entire cost of their investments, owners can turn over their units to the hotel’s inventory.

Spelts doesn’t believe the apartment-hotel or condo-hotel model will significantly impact the traditional transient hotel sector, but the coronavirus pandemic has introduced changes to the overall lodging industry that will probably be here to stay.

“I think it’s going to be for hotels to do what they’re already been under pressure to do from Airbnb and VRBO – to create a value proposition by providing things that are difficult for Airbnb and VRBO to provide,” he said.

Hotels can craft unique guest experiences. Employing a staff that understands the brand promise and carries it out gives hotels an advantage over home-sharing platforms. And a dedicated concierge can help guests make the most of their visit through discovery of the property as well as the surrounding community.

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