Boutique Hotels: Owning, Operating and Investing

Boutique hotels, also known as lifestyle hotels, vary in shape and size; however, all boutique hotels rely heavily on creative energy and highly personalized service to compete in …

Boutique hotels, also known as lifestyle hotels, vary in shape and size; however, all boutique hotels rely heavily on creative energy and highly personalized service to compete in the overall hotel industry.

In addition to providing a unique experience for guests, a boutique hotel investment can also be both profitable and enjoyable for the owner.

Why invest in a boutique hotel?

Boutique hotels are becoming attractive investments for a variety of reasons. Demand for the business, for one, appears to be growing; many sophisticated travelers are opting out of “cookie cutter” hotel accommodations in favor of more personalized experiences, according to Brooke Barrett, co-CEO of Denihan Hospitality Group.

“I think people are looking for…highly personalized service, and…[a boutique hotel’s] premise is based on providing services [to suit a] particular customer’s lifestyle,” Barrett said.

A revival of tourism in the U.S. has, perhaps, created greater demand for customized travel accommodations.

“More and more people are appreciating [the] large degree [that] tourism really contributes to the United States economy, especially [in] the city centers,” Barrett said. “[With a] weaker dollar and…more people traveling to the United States, tourism has really come into its own of being a viable contributor to the overall economy.”

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In general, “hotels have provided investors with the highest rate of return of all property types,” Leigh Hitz, president of Magnolia Hotels, said.

As a subset of the hotel industry, boutique hotels can be especially profitable. Guests tend to consist of affluent travelers, thus placing boutique hotels in the same category as luxury hotels and resorts. Boutique hotels are similar to traditional luxury hotels in yielding strong performance, the result of “management-intensive” operations requiring substantial time and capital resources, according to Hitz.

Furthermore, boutique hotel expenditures are considerably less than chain hotel operating costs.

“We can really move our labor around…so that cost is not as high,” she said. “[And] our marketing costs are [lower].”

As wonderful as they sound, boutique hotels require a tremendous amount of investment and it is probably not realistic for most small investors to open a boutique hotel on their own. However, some boutique hotel brands have structures in place for limited partnerships with investors.

In a limited partnership, an investor’s level of involvement with the hotel’s operations will be—perhaps unsurprisingly—customized to fit the mutual goals of the investor and the company.

To finance Magnolia Hotel projects, limited partners provide the majority of the equity capital, according to Tom Evans, vice president of acquisitions and development for Magnolia Hotels. Traditionally, limited partners have consisted of local and institutional investors.

“Working with local partners can open a lot of doors for us,” Evans said. “In a particular city, we may work with a group of high net worth individuals who bring legal expertise to the mix; in another, we may work with a more institutional investor who is looking for a way to enhance their stature in the community as a ‘good corporate citizen’ and help us navigate the local environment.”

Overall, “hotels that are really successful investments require good business skills and intense effort,” Hitz said. “Nothing in a boutique hotel is ever [on] autopilot.”

Tackling creative challenges of boutique hotels

Owners enjoy a high degree of creative freedom in designing a boutique hotel. Magnolia Hotels, for instance, does not follow standard operating procedures (SOPs) for design, Hitz said. However, determining a boutique hotel’s look and feel requires a great deal of thought and attention to detail.

“[We] always try to stay ahead of the curve in style, but we are also highly concerned about the wear and tear of a hotel too,” Hitz said. “We focus a lot of our design to be lasting, not necessarily just what is hip for today.”

Boutique hotel owners must also customize their personalized services and development models to cater to their intended markets.
“Everyone has their own little niche,” Hitz said.
Magnolia Hotels structure their offerings based on what a typical day would look like for business travelers, who make up the bulk of their guests. For instance, the hotels provide complimentary amenities such as a breakfast buffet, a beer and wine happy hour and a nightly cookies-and-milk buffet.
Additional amenities include a “non-threatening” club lounge, a state-of-the-art fitness center and a plush bedding package.
“We are here to help [business travelers] unwind and ultimately, have a relaxing and enjoyable stay,” Hitz said.
Furthermore, guest service must be of the highest quality in order to drive repeated business.
“Our goal is [that] once they stay, we have to get their return, repeat business,” Hitz said.
 “We spend more marketing dollars on getting our guests to return and having a satisfying stay than [we spend for] advertising,” she said. “We can’t advertise to take on the big hotel chains…so we have to focus on [our service] the moment the guest is there in our hotel.”
In terms of their development model, Magnolia Hotels cater to urban markets by focusing on the conversion of old vacant buildings in cities that are on the rise, Hitz said.
“We like to take advantage of starting fresh on the inside but have a beautiful historic building on the outside,” she added.
However, proper development strategies will vary as a function of a hotel’s particular market. Building a boutique hotel from the ground up, for instance, may not be realistic for most urban settings, but suburban areas may be more suitable for new construction, Hitz said.
Also, “a lot of boutique hotel operators now…make their new urban builds work [by developing] a combination of condos and hotels,” she said. “I believe [that] helps their numbers tremendously.”
Perhaps one of the most significant creative challenges for owners and operators involves the capacity for a boutique hotel to understand and adapt to trends in the market.
“[We] have to look two years out [at] what’s going to happen in the market [and] how we are going to be affected,” Hitz said. “We have to look further [than] perhaps a chain hotel because…we have to be very thoughtful in how we react, how we plan, [and] what changes are we going to put into place.”
Although successfully owning and operating a boutique hotel is a lot of work, Hitz pointed out that the experience can also be enjoyable. “It’s a fun business and [these are] fun hotels, and we really enjoy every day we come to work,” she said.

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