Arlo Hotels, a U.S.-based independent brand, first bet on micro hotels, which pack in more guests per property. But now it favors larger rooms. It's betting that creating "experiences" and charging extra may prove more reliably profitable.
Real estate development firm Quadrum Global said this week that it planned to bring The Williamsburg Hotel under its Arlo Hotels brand by September — having in April bought that boutique hotel in Brooklyn, New York, for $96 million.
The move underscored how the Arlo brand has evolved in response to shifting consumer demand since its debut in 2016. Rooms at The Williamsburg are notably larger than the ones at the first Arlo properties.
“When we first invested, we bought into a concept that was all about fitting the largest number of rooms on a tiny plot in New York to make the numbers work,” said Oleg Pavlov, founder and CEO of Quadrum Global and Arlo Hotels. “The idea was that, for a certain customer segment, you just need a bed and a couple of amenities, and the rest of the time you spend in communal areas or out of the hotel.”
Arlo compressed 575 rooms, each about 165 square feet, into its first two buildings in New York: Arlo NoMad and Arlo SoHo. The brand wasn’t alone in betting on the “micro-hotel” concept. Dutch hotel company CitizenM, which raised $1 billion in 2021, typically has guest rooms of merely 160 square feet in size. Marriott’s Moxy brand, launched in 2014, has similarly small rooms that aim to appeal to younger guests trading off space to get cheaper room rates.
Yet, at least in Arlo’s case, the thesis wasn’t quite borne out in practice.
“At the time, the Arlo was targeted at, for lack of a more sophisticated term, millennials, such as solo travelers or people with young families,” Pavlov said. “That turned out not to be the case. We were very surprised.”
Arlo saw the crowds at its first two properties as more affluent and of a wider age range than expected. So as it has added more properties to the brand, it has been shifting to properties with larger rooms: in Midtown New York, Miami’s Wynwood district, and now The Williamsburg in Brooklyn.
Arlo is a small player in a big sea. But backer Quadrum Capital is a player that commands attention within hotel investing circles. The real estate firm has deployed more than $1 billion in equity in the past two decades. So what it did next will catch notice.
Leaning Into Experiential Travel
Executives decided that “experiential travel” was a better bet. The new theory is that guests staying at a hotel not part of a big chain want something memorable.
The company has hired Jimmy Suh, who had been chief commercial officer at The Standard, a buzzy upscale lifestyle hotel brand.
“When you travel, your senses are incredibly heightened,” Suh said. “So we want to capitalize on those heightened senses with elements of surprise. We have a signature scent in every one of our hotels. In the room, instead of the fuddy duddy mints on the turndown, we offer fortune cookies on the pillow, bringing an element of surprise.”
Experiential additions have included an emphasis on programming events.
“In the past 12 months, we’ve gone deep on experiential pillars of art and wellness, with activations that bring in communities around our properties, with things as simple as trivia nights and as elaborate as concerts,” Suh said.
“Last week [at the SoHo property], we had a tie-in with the Frieze New York [art festival], bringing in one of the bigger digital artists who works with AI,” Suh said. “The exhibition was presented against a Damien Hirst painting a few feet away. That same weekend we had a curated wellness activation on our rooftop with some of the area’s trending studio instructors.”
“We know we’re competing against very sophisticated players, the likes of Marriott with its lifestyle brands like Moxy, but we think a smaller player may have an advantage in being nimble, in being able to innovate through trial and error quickly to discover and provide the new consumer experiences that hotel customers may be lacking.”
The executives believe that the “experiential” play has dividends when it comes to marketing their properties.
“Word of mouth drives distribution and hyperlocal experiential drives word of mouth,” Suh said. “Compared to 2019 and before the pandemic, we’ve raised our direct bookings as a share of our distribution by ten percentage points in the past year-and-a-half, which is significant.”
Direct bookings tend to be more cost-effective because they avoid high commissions charged by online travel agencies, the global distribution systems used by travel agencies, and other partners.
Arlo, like other small players, are outgunned when it comes to the power of the giant loyalty programs run by the giant players like Hilton Worldwide and Accor. But Pavlov noted that hotel owners effectively pay a cost to participate in such programs, so some owners are interestsed in driving demand through other means that are cheaper.
Many brands only manage properties rather than own assets. But Quadrum Capital owns all of the hotels in its Arlo portfolio and isn’t rushing to change that model. The unified front of ownership and management is helping it test the value of its proposition. Acquiring The Williamsburg will be a test case of how effective Arlo’s brand and operational savvy is because they will benchmark the next year’s performance against the past year’s before the Arlo took over.
Meanwhile, expect bigger is better to be the motto at Arlo, the former micro hotel brand.
“Each hotel we’ve added in the past few years has had bigger rooms than the last,” Pavlov said. “At the end of the day, it all comes down to service. That’s what people remember and drives ratings and reviews and willingness to pay.”
“Our brand DNA, or our ‘software’ as we refer to it internally, is first, exceptional service; second, community engagement; and the other is providing memorable moments.”
Quadrum Capital is building a new Arlo from the ground up in Washington, D.C., that is set to open in August 2024. It’s looking at another acquisition of the type of the Williamsburg within the next year.
“Our hope would be to have roughly 10 hotels by 2026,” Pavlov said. “We’re trying to be very selective so that we pay reasonable prices and that our team has the bandwidth to really open hotels correctly. So a maximum of two hotels a year.”
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Photo credit: A guest room at The Williamsburg Hotel in Brooklyn, New York, that will become an Arlo-branded property in September 2023. Source: Quadrum Global.