Boutique Hotels Plant Flags Downtown

LOS ANGELES—Development in Downtown Los Angeles is booming, and hotels have officially joined the party. While national chains are signing leases at major developments, like Metropolis, which will be the home of a Hotel Indigo, smaller boutique hotels brands are making their way into the market. The Ace Hotel is perhaps the best example. It opened last year to tremendous success. Now Proper Hospitality, an independent developer, has announced construction of the Proper, a $103 million boutique hotel development blocks from the Ace Hotel. David Phelps, a partner at Akin Gump and expert on the subject, offered us some insights into this topic in an exclusive interview. Here, he tells us why boutique hotels are finding their way downtown, the development challenges for a boutique hotel and how smaller hotels are responding to major chains launching boutique sub-brands.

GlobeSt.com: Why has DTLA historically been home to mostly large chain hotels, rather than boutique hotels?

David Phelps: Previously downtown LA was not generally a popular place for people to live or spend leisure time. Downtown L.A. lacked nightlife and the larger chain hotels in Downtown L.A. tended to cater to a business clientele.  Increasingly, however, young people are moving into apartments in Downtown L.A. and the area is developing into a trendy series of neighborhoods with cafes, restaurants, and bars.  Boutique hotels thrive in locations where people (and in particular a younger more mobile demographic, which tends to be attracted to design-oriented boutique hotels) want to spend leisure time, especially those located within a one-mile radius of popular eating, drinking, and shopping establishments. Downtown L.A. is emerging chic and vibrant and boutique hotels are ever more popular with the Millennials and others who flock to them.

GlobeSt.com: What is driving the growth of boutique hotels now in the market?

Phelps: A demand for unique, personalized hotel experiences has driven the growth of boutique hotels. Increasingly, consumers avoid staying at cookie-cutter chain hotels and instead opt for boutique hotels, which are typically upscale, smaller properties focused on design, technology, and local culture. Standardization has become a negative, and the younger upwardly mobile traveler increasingly looks for unique travel experiences, including hotels, which they can incorporate into their own, personal travel narratives and share on social media. Guests also find the smaller scale of a boutique hotel to create a warmer community, and enjoy the personalized service of a boutique hotel that is tailored to their own demographic (e.g., free wifi, hip lounges to work in, and fun happy hours appeal to young business people). 

Boutique hotels have also benefitted from Internet marketing, which allows them to compete on a more level playing field with big brand hotels.  Travel websites such as Expedia, Hotels.com, Kayak, and TripAdvisor have greatly facilitated the brand recognition of boutique hotels.

GlobeSt.com: DTLA has become an expensive place to build. How have these costs affected boutique hotels, and are they being driven out of the market?

Phelps: Many boutique hotels reduce their costs by renovating existing and historically relevant structures instead of building completely new structures.  Renovating existing structures can also add the benefit of infusing local history and culture into the design of the hotel. The relatively smaller size of boutique hotels (generally 50-200 rooms) also reduces upfront building costs.  In addition, boutique hotels are commanding average daily rates and occupancy levels that justify the increased cost of construction.

GlobeSt.com: Major chains have now begun to launch boutique brands. How has this affected boutique hotel brands, and what are they doing to stay competitive?

Phelps: Some boutique hotel owners believe that boutique and lifestyle brands launched by hotel chains will not be serious competition to independent boutique hotels because, while chain-owned boutiques can imitate the boutique emphasis on modern design and technology, they critically lack the elements of genuine community and local personality that independent boutiques have.  Further, the level of flexibility and personalized care that an independent boutique offers its guests is harder to emulate by a chain-owned boutique, which typically has rigid standards set by a centralized office that could be thousands of miles away.

Brands have also attempted to skirt existing radius restrictions by launching a sub-brand boutique, which satisfies a different chain scale and/or 'brand standard.' Owners of brand managed or franchised hotels are pushing back fearing an over-building of hotels rooms and reallocation of brand resources from existing brands to new sub-brands.

GlobeSt.com: The hotel market in general has only recently rebounded. Give us a snapshot of the market now and where it is headed over the next 12 months.

Phelps: 2015 is poised to be one of the most successful years on record. Going forward I expect to see the further rise of the Millennials, which is now the fastest growing customer segment, and a resulting focus by hotels on interaction and experience including new lobby designs intended to create an interactive work, play and food and beverage experience. I also expect customer service to focus even more on the digital traveler, which aligns service with the new 'independent traveler'; the growth of emerging markets, particularly India and China, and the further emergence of the international traveler; and growing and uncertain competition from the 'sharing economy.' Is the sharing economy a threat to or can it be integrated into the traditional hotel industry?