Palisociety sees plenty of growth opportunities in the small, boutique hotel space. The only problem? More of the bigger brands are beginning to see the same benefits of focusing on these properties.
An alternative hotel universe actually thrived — or at least appeared to — over the last year while all operators in the industry struggled with their worst financial year on-record.
Boutique hotels or, using the industry buzz word du jour, lifestyle hotels that blended in with their surrounding neighborhood were hotter than ever. All the major brands seemed to focus what limited growth there was over the last 12 months around these hotels. Accor was on a lifestyle hotel shopping spree when it joined forces with Ennismore, owner of the Hoxton hotel brand, and later partnered with Miami-based Faena in January.
But not every lifestyle hotel operator wants to tie up with a massive, global conglomerate. Los Angeles-based Palisociety sees advantages in staying relatively small in scale.
“It’s just not our time yet to be connected to a bigger brand, which isn’t to say we wouldn’t be,” Palisociety founder and CEO Avi Brosh said. “Right now, we’re enjoying what we’re doing and having a lot of success. There’s more runway for us to keep doing what we’re doing.”
The company, which focuses on neighborhood-oriented hotels with between 50 and 100 guest rooms, opened a 24-room boutique hotel in Santa Barbara, California, this month. The opening follows Palisociety’s acquisition earlier this year of Arrive Hotels & Restaurants, a smaller hospitality brand with properties in markets like Austin, Texas; Memphis, Tenn.; and Palm Springs, Calif.
The acquisition stands out, as industry analysts and investors generally expected more of a crashing wave of opportunistic deals and mergers and acquisitions as a result of the pandemic.
At one point, there was even speculation of IHG and Accor joining forces. Instead, growing consensus is there is too much valuation disparity between buyers and sellers that prevents a major wave of discounted hotel transactions. Any type of acquisition now stands out, as it managed to clear the valuation discrepancy hurdle.
“I was actually thinking we’d see more in terms of mergers and acquisitions. It’s interesting to see that hasn’t really happened,” Brosh said. “I think there’s still a little bit of moving the deck chairs on the Titanic in terms of what’s going on.”
It’s not specifically clear what made Palisociety’s play for Arrive such a success. Pricing and further terms of the acquisition aren’t public knowledge, and Brosh would only say it helped that leaders from both companies operated in a similar segment of the market.
Palisociety’s 11 hotels are largely on the West Coast along with a property in Miami. The now-named Arrive by Palisociety brand’s five hotels, with another two under construction, are spread across the U.S. Sun Belt.
“It’s hard to make a deal when you haven’t walked in another man’s shoes,” Brosh said. “We both came to the table with a shared appreciation for the challenges.”
An established lifestyle hotel brand like Palisociety is poised to do well in coming years, if you believe what some of the major hotel companies are saying.
Accor CEO Sebastien Bazin estimated on an investor call last month lifestyle hotels will account for 20 percent of the global hotel supply in the next 20 years. The sector represents a quarter of the projected franchise fees to be generated from the company’s 212,000-room development pipeline.
Hyatt, IHG, and Wyndham have similarly ramped up growth in their own lifestyle hotel divisions over the span of the pandemic. While hotel companies may say these hotels are about creating more personalized experiences for guests, there is also a financial benefit for owners.
“Ultimately, it’s just easier to get to that breakeven threshold on a smaller hotel than a larger hotel,” said Jorgan von Stiening, president of Palisociety. “I see our path to recovery as being a lot more streamlined and faster than the overall hospitality market on average.”
The strong outlook in the lifestyle sector is another contributing factor as to why there haven’t been so many hotel deals in the market so far.
“I can’t speak for Hilton Garden Inns at the airport. I don’t know what that world is like,” Brosh said. “But in terms of the well-positioned, well-designed lifestyle and boutique hotels in major or tertiary markets, we’re not seeing what a lot of people were thinking was going to be 50 percent valuations compromised in such a way that it would be a bottom feeding frenzy.”
Big Brand Competition
The global hotel giants have a lot of financial misery to overcome from the pandemic. Accor may want to significantly ramp up its lifestyle hotel operation, but it still lost $2.4 billion last year.
But these massive companies clearly see boutique and lifestyle hotels playing a larger role in the industry’s future. Accor is even getting directly in Palisociety’s sub-100-room arena with its Maison Delano sub-brand, which is launching with a 56-room hotel in Paris.
The heightened focus on lifestyle hotels doesn’t necessarily mean a crowded playing field, Brosh said. Instead, it’s an opportunity for Palisociety to stand out.
“The customer ultimately picks up on the fact we are independent-minded and have an independent spirit,” Brosh said before later adding, “I actually think as the Kimptons go away and as the Ennismores roll up and SBEs liquidate their position … That, to me, allows us to stand out more. There needs to be someone out there that’s actually cultivating the independent hotel customer.”
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Photo credit: Palisociety (pictured: Palihouse Santa Barbara) may have found recent growth through an acquisition. But the boutique hotel company has no immediate plans to link up with one of the global giants wanting to get into this market segment. Palisociety