How To Flag Your Hotel In The Age Of Brand Proliferation

No doubt about it, we’re in the age of hotel brand proliferation. New brands seemingly sprout almost weekly. Counting the precise or official number of hotel brands is difficult. By my conservative estimate, nearly 100 new flags with at least eight properties have been launched since 2008, conceivably pushing the total number of brands to more than 700.

This dizzying array of choices doesn’t the make the decision about which flag to fly on a property any easier for hotel developers. How do you decide when there are so many brands to choose from? Marriott, for example, has 30-plus brands under its umbrella spanning all chain scale and star levels of the hospitality industry.

A successful hotel project begins with the selection of the right brand for your marketplace, physical site and price point. Although the macro dynamics of the lodging business are strong, a microanalysis of the destination in which you want to build will ultimately dictates your brand choice. Here’s a road map for navigating through the maze.

The Flag: First, investigate what brands already have a foothold in your predetermined market. Because of non-compete clauses in franchise agreements, you may not be able to build a full-service hotel under one brand near another under the same brand. In that instance, select the best available franchise banner (in the chain scale segment of your choosing) that would make the most sense for that marketplace.

If the location isn’t already saturated with brands and barriers to entry are low, then select the top flag not currently in the area. If land is plentiful and demand is strong, you want to make sure you’re getting the best brand in the immediate neighborhood.

With so many new brands continuing to emerge, perhaps you might be tempted to go with a newer franchise flag sponsored by an upstart brand company. There may be economic reasons to do so, since newcomers will incentivize developers in order to catapult their brands and begin to build their scale.

My advice, however, would be to align with one of the more established franchise companies, primarily because of the loyalty programs they offer. The most well-known penetrate all chain scale segments from luxury to budget and select service to extended stay. You’ll have a wider customer base from which to draw.

Feasibility: The first part of the feasibility equation determines if it makes business sense to build a hotel on a particular site. Feasibility is determined by the relationship between anticipated cash flow and the total project cost. For example, if the project’s estimated budget to build adds up to $70 million, and the stabilized cash flow works projects at $1 million, or 1% of project cost, then it’s probably not feasible to build this project. Another important item in determining feasibility is an understanding and determination of what is plausible from a zoning perspective.

For instance, if the site permits an 80,000-square-foot building, a 200-key, full-service hotel with a 200-seat restaurant, parking structure and 10,000 square feet of meeting and event space will probably not fit on the site, if that’s what you had envisioned. A full-service hotel would likely require approximately 100,000 square feet just for guest rooms — a figure that includes 500 square feet per guest room, corridors and elevator landings. Therefore, a full-service property may simply not be feasible for that particular site.

So, pivot to a select-service brand. Once you narrow down your selection to select service, then you should determine what level of service is the best fit for the site and demand dynamics in the marketplace. Fortunately, the large, established franchise companies oversee a number of select service flags at varying levels of price points and amenities.

The Marketplace: In order to make the project economically viable, you need to know the estimated building and operating costs as well as the rate you’re likely to achieve. In other words, will the projected income from the development recoup and exceed its cost?

The higher up you go on the chain scale, the higher the rate you can charge. As you canvass the market, you may discover the need for a full-service hotel. The brands highest on the chain scale are upscale select-service products. You may assume the market would readily absorb a full-service hotel because it currently lacks one. But what you may fail to realize is that for that individual market, the highest price point may be an upper-upscale select-service property. Why spend the extra dollars to build a full-service hotel when you can charge the same rate as, say, an upscale select-service property?

If, on the other hand, you assess that demand will skyrocket over the next two years in the market, you would be wise to build a full-service property and live with a rate ceiling for a short period. You’d rather not build a select-service product and then have another developer come in and build a full-service hotel, potentially pushing down your rate. When demand catches up to a full-service rate, you’ll be first in line with the right product.

Knowing the direction the marketplace is headed over your hold period (typically between five and seven years) steers you to the type of hotel you can feasibly build.

An abundance of brand options is beneficial; this endless menu of choices also highlights how pivotal the brand selection process is for the hotel owner and developer. The success of your hotel hinges on selecting the right brand. Choose wisely.

How To Flag Your Hotel In The Age Of Brand Proliferation curated from Forbes - Real Estate