When most people think of commercial real estate, they typically think of office, retail, self-storage, multifamily and other asset classes, often overlooking hotels, a sector that is both large and can be highly profitable.
One of the reasons for this is that owning a hotel is more complex than owning other asset classes largely because they are not just real estate investments but are also operating businesses that need to be effectively managed.
Adding another layer of complexity is that there are countless types of hotels within the asset class, all that require different ownership and management structures and expertise to be successful.
In this article, we look at the different hotel types, how they are owned and managed, and how we here at Wolfgramm Capital focus our efforts to ensure maximum returns for our investors while mitigating the downside.
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Branded vs. Unbranded Hotels
The hospitality industry contains dozens of hotel types but, at the highest level, there is a primary distinction between ‘branded’ vs. ‘unbranded’ hotels.
Branded Hotels: Branded hotels are those affiliated with large, often multinational corporations like Marriott, Hilton, and IHG (Intercontinental Hotel Group). These chains have a consistent brand image and standardized service offerings. Their strict brand standards ensure that guests can expect a certain level of consistency in terms of room quality, amenities, service, and overall experience across different locations within the same brand. Staff are also highly trained to provide consistent service.
Branded hotels also benefit from global recognition and their loyalty programs, which can offer perks to frequent guests such as rewards points, discounts, and room upgrades.
Branded hotels make up about 95% of the U.S. hospitality market. Most large hotel chains benefit from economies of scale, which provide advantages in terms of purchasing power and resources that in turn, provide cost efficiencies.
Sub-Brand Hotels: Sub-brand hotels, often referred to as ‘hotel flags,’ are smaller hotel chains that are owned by the hotel’s parent group. Each hotel flag, or brand label, represents a distinct product or service offering that caters to a particular market segment, style, or customer preference. Sub-branding allows hotel chains to diversify their portfolio and appeal to a broader range of travelers while maintaining a recognizable overall brand identity.
For example, Marriott has several sub-brands, including Marriott Hotel & Resorts, JW Marriott (luxury), Courtyard by Marriott (mid-range), and Fairfield Inn & Suites (select-service). Hilton, meanwhile, has Hilton Hotels & Resorts (full-service), Conrad (luxury), Hampton by Hilton (limited service) and Home2 Suites by Hilton (extended stay).
Unbranded Hotels: Unbranded hotels are essentially independently owned hotels. They are often operated by local individuals or families who may have just one or two hotels as part of their portfolio. Independent hotels do not have to pay a franchise fee to a parent company the way flagged hotels do. They generally do not have their own in-house marketing team and most use relatively simply reservation systems.
Unbranded hotels usually have more freedom to establish their own unique identity, design, and service offerings. They can cater to a specific niche or local market. The independent nature of unbranded hotels also means that they have greater flexibility in setting their own standards, pricing, and policies. They are not bound by corporate brand standards.
Service levels often vary widely at non-branded hotels, as they are not subject to standardized training or quality control processes imposed by most corporate brands. Rarely will unbranded hotels have hotel loyalty programs that offer rewards for repeat guests – at least not to the same extent or with the same sophistication as branded hotels offer. Finally, many unbranded hotels are owner-operated, which means that the business owner is more directly involved with the day-to-day management of the property and hotel operations. The owner may own both the business and the real estate.
Soft Brand vs. Hard Brand Hotels
Another differentiator between hotel types is what we call ‘soft brand’ vs. ‘hard brand’ hotels. The distinction between the two lies in the level of affiliation or branding control.
A soft-brand hotel is part of a hotel collection or consortium that allows independent hotels to affiliate with a recognized brand while maintaining a significant degree of independence. Soft brands are also sometimes referred to as ‘collection’ brands.
The Cosmopolitan in Las Vegas is an example of a soft brand hotel. When you walk into the Cosmo, you won’t see Marriott signs everywhere. You might only see Bonvoy Marriott at the front desk or on your key card. Many people may not even realize that the Cosmo is affiliated with the Marriott, at all. Soft brand hotels often function like independent hotels but have the back-end support of the parent company. This allows them to leverage the parent brand’s software, purchasing power, loyalty rewards programs, and more.
A normal, or ‘hard brand’ hotel, fully adopts the parent brand’s name, logo, and brand standards. Hard brand hotels are expected to adhere closely to the brand’s established standards, including room décor, amenities, service levels, and policies. This ensures a high degree of consistency across all properties within the brand.
Hard brand hotels rely heavily on the parent brand’s marketing, advertising, and distribution channels. They often use the brand’s central reservation system and the parent brand’s loyalty program, offering rewards and benefits to frequent guests across the entire brand’s portfolio.
Hotel Property and Service Types
Another way to classify hotels is by their property or service type. The most well recognized types are luxury/resort properties, full-service, limited-service, and extended stay hotels.
Luxury/Resort Hotels
Luxury hotels are known for their opulence, high-end amenities, and exceptional service. They often feature gourmet dining, spas, butler service, and extravagant décor. Examples include the Ritz-Carlton, the Four Seasons, or the Waldorf Astoria. These may be in resort locations or in iconic areas, like downtown New York, Beverly Hills, or, in our case, Park City, Utah. The highest-end luxury hotels are generally no more than 200 or 250 rooms, as the parent brand likes to keep these properties exclusive.
Resorts are often grouped in the ‘luxury’ hotel bucket. Resorts are designed for relaxation and recreation. They are usually located in scenic destinations and offer a wide variety of amenities such as pools, beaches, golf courses, and activities like water sports and spa treatments. To be sure, there are also resort properties that do not classify as high-end, luxury hotels. There are also mid-range and budget resorts, too.
Full Service Hotels
A full-service hotel is a type of accommodation that offers a comprehensive range of amenities, services, and facilities to meet the various needs and preferences of guests. These hotels aim to provide a complete and convenient lodging experience, often targeting both leisure and business travelers.
Amenities often include multiple dining options (such as restaurants, bars, and room service), fitness centers, swimming pools, spa and wellness facilities, and often recreational facilities like golf or tennis. Many full-service hotels will also provide conference space or meeting rooms, which make them popular choices among business-goers.
The room types of full-service hotels can range from standard guest rooms to suites. They are typically well-appointed with modern furnishings and amenities. Full-service hotels located in or near convention centers may have several hundred rooms.
Limited Service Hotels
Limited-service hotels, sometimes referred to as ‘select service’ hotels, offer a more streamlined and cost-effective lodging experience compared to full-service hotels. These hotels are designed to provide essential amenities and services to meet the basic needs of travelers while minimizing operational costs. Limited-service hotels are often favored by budget-conscious travelers and business guests who value efficiency and affordability.
Many limited-service hotels offer complimentary breakfast, which can range from simple continental options like cereal and pastries to hot breakfast items like scrambled eggs, sausage, and waffles. Limited-service hotels generally do not have full-service restaurants but may have a small café, snack bar, or limited menu for guests looking for a quick dining option.
Limited-service hotels will generally have smaller staff sizes compared to luxury or full-service hotels. They will have front desk services, housekeeping, and maintenance personnel but may not have dedicated concierge services or extensive room service. Select service hotels will typically have basic business amenities such as a computer workstation and high-speed internet access, but these amenities cater to business travelers and are not intended for large group gatherings.These types of hotels may have small recreation areas and basic fitness centers, but will not have pools, spas, and other higher-end amenities. Most people use the hotel for sleeping at night and otherwise do not spend much time at the property. Finally, limited-service hotels tend to be anywhere between 85 to 120 keys each.
Extended Stay Hotels
Extended stay hotels cater to travelers who need lodging for an extended period – typically more than a few days or weeks. They attract traveling nurses, truck drivers, and other people whose work keeps them on the move. They will also attract people who have been displaced from their homes, such as families who have experienced a flood or are undergoing a large-scale renovation.
Extended stay hotels have similar amenities to limited-service hotels except that every room will have a kitchenette including at least a stove and a refrigerator/freezer.
Many guests will not make a distinction between limited service and extended stay hotels; the difference generally lies with how and to whom the parent company/individual flags market to specific audiences.
How to Understand ‘Star’ Ratings
Hotel star ratings, also known as hotel classifications or gradings, are used to provide travelers with a general indication of a hotel’s quality, amenities, and services. These ratings are typically awarded by independent organizations, agencies, or travel associations based on standardized criteria. While the specific criteria and standards for star ratings can vary by country or organization, there tend to be some general trends among each ‘star’ classification:
- Five Star Hotels: These are the most luxurious of accommodations, providing the highest level of comfort and service. Most 5-star hotels have elegant, spacious rooms with premium amenities like multiple fine dining options, 24-hour room service, wellness facilities like spas, pools, and fitness centers, and recreation like golf or skiing. Guests can expect exceptional guest service including personal concierge and butler service. 5-star hotels provide careful attention to design, decor, and overall guest experience.
- Four Star Hotels: Four-star hotels have upscale accommodations with a high level of comfort and services. They feature spacious and well-designed rooms with upscale furnishings. They will generally have at least two on-site restaurants and bars, as well as a fitness center, spa, and swimming pool. Enhanced guest services, such as valet parking and turndown service, are usually provided.
- Three Star Hotels: Mid-range hotels with more comprehensive services and amenities are usually classified as three-star properties. These have comfortable and well-appointed rooms, with modest on-site dining options, and will usually have modest fitness facilities, a business center, and meeting rooms. Most will provide 24-hour reception and concierge service.
- Two Star Hotels: These properties are affordable hotels with modest service and amenities. Most extended stay and select service properties are considered 2- to 2.5-star hotels. They generally do not have any on-site restaurants but may provide a small continental breakfast for guests.
- One Star Hotels: One-star hotels offer the most basic accommodations with limited services and amenities. They are usually not brand affiliated. They tend to have limited on-site facilities, if any. These hotels tend to cater to the most budget-conscious travelers looking for no-frills stays.
It is worth noting that these star ratings should only be used as a guide. They were invented prior to the advent of Google and other online review platforms. For example, a hotel might get four stars on Google based on customers’ experience, but that might only be a 2.5 star based on the industry’s standard classifications.
Moreover, what is used in consideration for star ratings has also evolved over time. For example, it used to be that the only difference between a four- and five-star luxury hotel was the bathroom fixtures. That is why J.W. Marriott, for instance, is considered a high-end hotel but does not classify as a 5-star property under Marriott’s brand standards since the bathrooms are not required to have double sinks and separate tubs/showers.
And again, location matters. What is considered a 2.5-star Holiday Inn Express in Saudi Arabia might look and feel more upscale than a Ritz Carlton in downtown Austin, TX, for example. For this reason, many brands have started to move away from using star-rankings and now refer to properties as ‘upper scale,’ ‘upper mid-scale,’ ‘mid-scale,’ and so forth.
Join the waitlist for our next investment opportunity and learn more about our unique approach to hotel investing.
Which Type of Hotel is Best for Investors?
Each of these hotel types offers a different value proposition. At Wolfgramm Capital, we use a barbell approach: we invest in ultra luxury properties on one end of the scale, and limited service/extended stay hotels on the other – and typically nothing in between.
We are drawn to luxury properties given their limited supply. The Waldorf Astoria is a good example. There are about 12 Waldorf hotel properties in the United States, one of which we own outright in Park City, Utah, and others in which we have smaller interests. It is extremely difficult to get a Waldorf franchise; the vetting process is both long and cumbersome. Owners must have the operational experience needed to manage the property to the Waldorf standards, which few can have.
This scrutiny helps Waldorf maintain the value of its brand. It is also why these properties have been trading at a 4- to 4.5% cap rates, which is very rare in the hospitality space. These properties are tremendously valuable, which can be made all the more valuable by investing in strategic value-add improvements – creating forced appreciation and potentially massive returns upon refinance or sale.
With these kinds of cap rates delivering 20x multiples on income, a $1 million investment can yield a $20 million return.
That said, while capital appreciation opportunities are significant with ultra luxury properties, cash flow on luxury properties tends to be lower than the cash flow from limited service or extended stay hotels.
This is why we like to invest at the other end of the spectrum also, the select service hotels. You will never turn a $1 million investment in a Fairfield Inn into a $20 million boost in the value of that property. The ability to add value and force appreciation just is not there compared to luxury hotels. But these properties cash flow well. Those with strong operating fundamentals can generate 15-20% cash on cash returns every single year.
Conclusion
There is certainly a learning curve that comes with owning and operating hotels. However, those who take the time to understand the sector’s nuances will find that these properties can be highly advantageous – particularly among those looking to diversify their investment portfolios.
Contact us today to learn more about how you could invest alongside our team.
