Boutique segment a distinctive set

Chief Operating Officer, STR
brad@smithtravelresearch.com

by Brad Garner

The boutique hotel segment is outpacing national averages in supply growth, demand growth and all three key performance measures.

Whatever adjective you choose to use—hip, alternative, fresh or unique—boutique hotels are a distinctive and interesting group of hotels to analyze.

While the definition of a boutique hotel can vary widely, most agree that product offerings/assets in this space offer and promote a distinctive, urban/metro, contemporary and avant-garde feel. Disagreements about the definition of “boutique hotel” probably exist among both hoteliers and consumers, stemming from personal taste in FF&E packages (décor), atmosphere and architecture, both exterior and interior.

At STR, we objectively define hotels in the segment as having an actual or estimated room rate (ADR) of $175 or higher and a room count of 150 to 300 rooms. We also include major players in the boutique segment such as: Morgans Hotel Group (previously Ian Schrager Hotels), Kimpton Hotels, Joie de Vivre, Starwood’s W Hotels, recent product offerings from InterContinental Hotels Group’s Hotel Indigo brand, John Russell’s NYLO brand, Starwood’s Aloft and a number of independents that meet the definitional and objective criteria for the segment.

The boutique hotel segment is a collection of approximately 450 properties and 55,650 rooms accounting for less than 1.5 percent of all rooms available for rent in the United States. Growing in popularity and becoming a hip alternative place to stay for business and leisure travelers alike, the segment experienced notable supply growth in excess of 5.0 percent, starting in the late ‘90s and peaking at just over 7.0 percent before 9/11 and the resulting industry downturn. Currently, the 3.8-percent growth in room inventory outpaces the national average of 2.3 percent for the 12 months ending September 2008.

 

A tough operating environment has reduced demand for rooms 0.2 percent nationally while demand growth for boutique properties has grown by 2.5 percent in the latest 12-month period ending September 2008. Despite favorable levels of demand for the segment, the aforementioned 3.8 percent growth in supply yields a 70.6 percent absolute level of occupancy, which is a decline of 1.2 percent from a year ago.

Soft demand/occupancy in this current downturn has, in turn, affected rates. While the industry at large increased rates at just over 4.0 percent, hotels in the boutique segment were able to raise rates by 5.5 percent in the 12-month period ending September 2008.  However, this level of growth was markedly off from the 10.0 percent to 11.0 percent level enjoyed by the segment in both 2006 and most of 2007. The US$130 premium in ADR commanded by boutiques is certainly noteworthy and can be attributed to the distribution and density of product in major metro markets.

 

Revenue per available room growth of 4.2 percent came from the heavy contribution of the 5.5-percent growth in ADR and the 1.2-percent decline in occupancy. More importantly, RevPAR growth for the segment outpaced the national average of 1.7 percent. Similar to the ADR premium enjoyed over industry average, boutiques posted a US$100 premium in the absolute level of RevPAR for the 12 months ending September 2008.

 

 

If we look beyond this hopefully short downturn and into the future, the boutique segment appears poised to post favorable levels of performance and continue to be a viable option to the traditional hotel room and stay. New entrants into the competitive landscape like Aloft, Indigo, NYLO, and Edition—the Marriott/Ian Schrager partnership—will certainly shape this dynamic segment for years to come. Retiring baby boomers, Gen Xers, emerging Gen Yers and those consumers looking to escape big brands will certainly seek alternative, hip and unique surroundings, experiences and aspirations perhaps only a boutique hotel can offer.