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Writer's pictureErik Ransdell

Navigating the Hospitality Landscape: Strategic Insights for Investing in Branded vs. Independent Hotels


Photo: Keem Ibara


By Erik Ransdell and Mike Annunziata

Strands Realty Group

February 26th , 2024


Exploring the hospitality industry's investment spectrum, this article delves into the critical decision-making process of investing in branded versus independent hotels. With the hotel sector undergoing significant shifts in consumer preferences and market dynamics, the choice between these two investment paths represents more than just an economic decision; it's a strategic move that shapes the future of a portfolio. This discussion aims to illuminate the nuanced differences, potential benefits, and challenges of each option, offering a comprehensive guide for investors navigating this ever-evolving landscape.


Understanding the Market: A Statistical Overview


According to a recent report by JLL Hotels & Hospitality Group, the global hotel industry is a multi-billion-dollar sector, demonstrating an annual growth rate of approximately 5%. In the United States alone, the total investment in hotel real estate reached $30 billion in the last year, a significant portion of which was allocated to both branded and independent hotels. This dynamic market presents unique opportunities and challenges for investors.


The Evolution and Appeal of Independent Hotels


The allure of independent hotels has surged in recent years, with market trends indicating a strong preference for personalized and unique guest experiences. As per a study by Conde Nast Traveler, independent luxury hotels have outperformed their chain counterparts in guest satisfaction ratings. These establishments cater to the 'experience-driven' traveler, a demographic that has grown significantly, with millennials at the forefront. In fact, market research from Skift indicates that independent hotels have seen a 3% higher growth in occupancy rates compared to branded hotels over the past five years.


The Steady Strength of Branded Hotels


Despite the rising popularity of independent hotels, branded hotels remain a firm choice for many investors. According to CoStar, branded hotels account for approximately 70% of the total market share in the hotel industry. The power of brand recognition cannot be understated – a Hilton or Marriott, for example, brings with it a level of trust and loyalty that independent hotels often struggle to match. These brands typically enjoy higher average daily rates (ADRs) by 10-15% compared to independents, as highlighted in a report by STR.


Operational Models and Profitability


Choosing the right operational model significantly impacts profitability. Hotel Chantelle reports that franchise models, while offering brand recognition, come with fees that can range from 4% to 12% of total revenue. In contrast, management contracts offer more operational control but involve fees ranging from 3% to 8% of revenue. The balance between control and support is a key consideration for investors.


Marketing and Branding: A Foundation for Success


The importance of marketing and branding in the hospitality sector cannot be overstated. According to a Wall Street Journal analysis, hotels that invest in comprehensive marketing strategies can see an increase in revenue of up to 20%. This approach is crucial for both independent and branded hotels, though the strategies may differ. For instance, branded hotels benefit from corporate level marketing campaigns, whereas independent hotels often rely on creative and localized marketing efforts.


Navigating Financial Implications


The financial aspect of hotel investment requires careful consideration. Branded hotels often entail higher initial investments and ongoing operational costs. However, their established reputation can lead to quicker returns on investment. Independent hotels, while potentially lower in initial cost, require strategic marketing and operational efforts to achieve profitability.


California Market Focus: A Case Study


In California, the contrasting fortunes of branded and independent hotels offer a compelling case study. Take, for example, the Los Angeles market. In 2020, despite the pandemic, the average occupancy rate for branded hotels like the InterContinental Los Angeles Downtown was approximately 60%, while independent hotels such as the Ace Hotel Downtown Los Angeles saw slightly lower rates, around 55%. This 5% difference highlights the resilience of branded hotels in uncertain times.


Further, the average daily rate (ADR) for branded hotels in this area stood at around $250, while independent hotels averaged about $200. This discrepancy can be partly attributed to the brand loyalty programs and wider marketing reach of established hotel chains.

Moreover, the revenue per available room (RevPAR), a key performance metric in the hotel industry, showed a similar trend. Branded hotels in Downtown Los Angeles reported a RevPAR of approximately $150, compared to $110 for independent hotels. This 36% difference underscores the financial impact of brand affiliation.


Yet, the appeal of independent hotels in California is growing, particularly in niche markets. For example, boutique independent hotels in areas like Santa Monica have seen a year-over-year increase in occupancy of about 10%, indicating a growing market segment that prefers unique and personalized lodging experiences.


This data paints a clear picture of the current landscape in California's hotel market, revealing the strengths and potential of both branded and independent hotels. Investors must weigh these factors - occupancy rates, ADR, and RevPAR - alongside their investment goals and market predictions to make informed decisions.


Future Outlook and Emerging Trends


Looking ahead, the hotel industry is poised for continued evolution. According to a forecast by CBRE, the next decade will see a significant shift towards ecofriendly and sustainable hotels, a trend that is increasingly influencing investment decisions. Additionally, the rise of boutique chains, which blend the characteristics of both independent and branded hotels, is reshaping the landscape.


Investor Insights: Making the Right Choice

As an investor, the decision between a branded or independent hotel investment hinges on several factors: market trends, personal investment goals, desired level of operational involvement, and long-term financial objectives. It's essential to conduct thorough market research, understand the local demand, and align your investment with your broader portfolio strategy.


Conclusion


In conclusion, the decision between investing in branded or independent hotels is complex and multifaceted. Each option offers distinct advantages and requires a strategic approach tailored to your investment goals and market dynamics. This comprehensive guide is designed to help you navigate the diverse and dynamic landscape of hotel investments, ensuring informed and strategic decisions for your portfolio's growth and success.



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