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HOTEL/LODGING REAL ESTATE INDUSTRY TRENDS AND INNOVATIONS

Chris Manning Loyola Marymount University

Jan deRoos Cornell University

John W. O’Neill Pennsylvania State University

Barry A.N. Bloom Xenia Hotels & Resorts, Inc.

Anjali Agarwal EVP Asset Management

Stephen Roulac Roulac Global, LLC

Abstract

We review the ‘‘Hotel / Lodging Real Estate Industry Trends and Innovations’’ discussed by panelists at the Thirty-Second Annual Meeting of the American Real Estate Society in Denver, Colorado, in Spring, 2016. More specifically, based on that event’s presentations, questions, and subsequent feedback, we discuss four hotel / lodging real estate trends to suggest additional future research collaboration opportunities for academic researchers and industry practitioners. The shared lodging economy in the super-connected high-tech economy is discussed first, followed by non-traditional sources of hotel financing, new forms of boutique / lifestyle hotels / lodging, and hotel services and resort fees.

The hotel / lodging real estate industry, like many other real estate sectors, is experimenting with and subject to significant innovation. Both internal and external forces are shaping the industry, driven by technological innovation, social change, and globalization. Some industry innovations have become trends, while others are reactions to external disruptions caused by these new trends. To encourage academic research collaboration with hotel / lodging industry practitioners on the challenges and issues currently facing the hospitality sector, the American Real Estate Society hosted the ‘‘Hotel / Lodging Real Estate Industry Trends and Innovations’’ panel discussion at its Thirty-Second Annual Meeting in Denver, Colorado, on April 1, 2016. We were panelists for this discussion. We represent both the hotel / lodging real estate industry practitioner’s and academic’s perspective, and in this paper draw on the most recent hotel / lodging real estate academic research related to the trends and innovations discussed.

We review and provide perspective on four of the most important issues and challenges facing hotel / lodging real estate industry practitioners: (1) the shared

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lodging economy in the super-connected, high-tech economy, (2) non-traditional sources of hotel / lodging financing, (3) new forms of boutique / lifestyle hotels / lodging, and (4) hotel services and resort fees.

THE SHARED LODGING ECONOMY IN THE SUPER-CONNECTED

HIGH-TECH ECONOMY

The shared lodging economy is easily associated with a single company—Airbnb. The shared lodging economy has exploded over the past decade to include a wide variety of firms in many related subsectors. These subsectors / firms include the hotel and vacation rental marketplace with Airbnb and VRBO, as well as tech firms that aggregate and market rentals, other firms that manage searches and meta-searches, and firms that specialize in rental and property management (Shuman, 2016).

ORIGIN AND EVOLUTION OF THE SHARED ECONOMY1

Five key factors led to the emergence and proliferation of the shared economy:

n First, the dramatic growth in the adoption of mobile technology since 2009, allowing consumers to transact for goods and services anywhere, anytime.

n Second, the Great Recession caused very high unemployment (significantly exceeding 10% in 2010) forcing many people to seek alternative ways to generate income.

n Third, continuing corporate downsizing and automation eliminated many jobs (e.g., lower and middle management, etc.), and motivated many talented people to consider other ways of generating income.

n Fourth, the emergence of technologically empowered business platforms connected those seeking talent with the providers of talent, in incremental, short-term, task-based assignments, rather than traditional long-term employment arrangements.

n Fifth, the growth of the millennial population, a generation that has moved away from traditional expectations of success, like owning one’s own home or car.

These factors caused a dramatic shift in the way consumers transact, and accelerated expansion of the shared economy as a new way of doing business. Sized at $110 billion in 2013, the shared economy is projected to grow to $335 billion by 2025 according to Gravity Tank, Inc. illustrated by the five industries depicted in Exhibit 1.

THE AIRBNB REVOLUTION

Airbnb, the largest player in the shared lodging revolution, epitomizes how the shared economy is changing the lodging industry. According to Ting (2015) in 2007,

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Exhibit 1

Disruptive Innovations Transform Major Industries

Source: http: / / www.gravitytank.com / sharing economy / .

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Airbnb soon-to-be co-founders Joe Gebbia and Brian Chesky created ‘‘Airbedandbreakfast.com’’ to cover part of their rent on a San Francisco apartment. Less than a decade later, that start-up has evolved into a lodging industry giant with a market valuation of over $30 billion, surpassing the value of most major lodging companies that have been around for nearly a century.

Airbnb, founded a decade after the online travel agency revolution began, followed a similar path as Expedia to become a formidable threat to the lodging industry. Airbnb uses technology to create an attractive user interface that allows consumers to easily share and book lodging at the click of a button, in exchange for a small fee. Achieving very rapid growth since its inception, Airbnb’s growth in 2016 continued to surpass that of any existing hotel franchise model—and Airbnb owns no real estate.

With Airbnb’s July 2015 launch of Airbnb for Business, the business travel segment of the lodging industry, long considered a core competency of major hotel / lodging chains, is no longer insulated from shared lodging competition. According to Chip Conley, former head of global hospitality for Airbnb, the company garnered more than 3,000 corporate accounts in the first month following its launch. These new business clients, ranging from Morgan Stanley to Google, can specify search filters such as (a) only staying in a place that has Wi-Fi and / or (b) the entire home or apartment, not just a bedroom in a home. According to sources at Airbnb, the company also launched a platform exclusively for meetings and events in 2016, building on its Airbnb for Business platform (Ting, 2015).

In December 2015, Expedia finalized its acquisition of HomeAway for $3.9 billion, making this online travel agent a major player in the shared lodging economy as a direct competitor to Airbnb by over-night establishing itself as the largest seller of lodging accommodation in terms of number of hotels, vacation rentals, and apartments, with an inventory exceeding 1.3 million properties. Once HomeAway is fully integrated, the combined Expedia / HomeAway offering is poised to become a one-stop shop to search and book hotel and apartment rentals, reinforcing its position against the major hotel brands. Customers seeking lodging options will be even more motivated to comparison shop as Expedia / Home Away controls a broader unique inventory pool than any typical hotel site.

Because major hotel brands do not have access to home and apartment rentals, they are not able to offer this shopping experience on their own websites. This advantage could give Expedia and Airbnb an even stronger foothold in the industry. However, if lodging companies continue to broaden their offerings, such as Accor’s purchase of the lodging shared economy companies of OneFineStay and Travel Keys, this advantage may be neutralized (Felsted, 2017).

MEASURING THE IMPACT OF THE SHARING ECONOMY ON THE HOTEL /

LODGING INDUSTRY

The relative lack of regulation on the sharing economy has facilitated its participants entering markets with low costs through the digital platform. With the postmodern tourist often desiring personalized and authentic travel experiences, the sharing

HOTEL / LODGING REAL ESTATE INDUSTRY TRENDS AND INNOVATIONS 17

economy can respond to this desire because it taps directly into local market players with the ability to offer diverse and individualized products. For example, in the case of Airbnb, any resident’s house or apartment can become a rental product. At the same time, traditional hotel / lodging operators who might wish to expand in a particular destination market, or provide innovative products, may find it difficult to attract investment capital and match Airbnb’s speed to market. In contrast, companies that act as providers for the sharing economy tend to be ‘‘asset light’’ as they do not own or create their inventory, as discussed by Botsman (2014).

The actual impact of the sharing economy on the hotel / lodging industry has not yet been examined in an in-depth and systematic fashion. Dredge and Gyimóthy (2015) note that though there are only a limited number of scholarly articles on the subject, a Google search results in a large amount of recommendations and non-scholarly research. They conclude that ‘‘there appears to be a significant body of ‘grey’ research that is generated by the protagonists of collaborative consumption, but there is little independent scholarly research on the topic.’’ Consequently, the ‘‘body of knowledge’’ on this today is comprised largely of unchallenged information.

Exhibit 2 shows the magnitude (and corresponding threat) of Airbnb in each of the nation’s major markets as of 2015. Not surprisingly, increases in Airbnb supply negatively impact rental growth, known as the average daily rate (ADR) in lodging. For example, according to the Trends report by CBRE Hotels, New York City experienced a revenue decline (revenue per available room or RevPAR) of 5.7% through October 2016 compared to the same period in 2015, due in no small part to the ‘‘Airbnb effect.’’

RESPONSES TO THE LODGING SHARED ECONOMY

There is much public fear about the economic and other impacts of short-term online rentals on communities. These concerns include employment and related employee protections and taxes, zoning / neighborhood quality issues, communities receiving the taxes they are due, discrimination of both guests and employees, displacement of affordable housing, and regulation of illegal activities such as prostitution, illicit drug use, and the production and sale of illicit drugs.

The media is full of stories about short-term online rentals becoming both an area of concern, as well as a growing accommodation option (e.g., Mayock, 2014; Lieber, 2015; Rocheleau, 2015). In an effort to mitigate the threats posed by short-term rentals, the American Hotel & Lodging Association (AH&LA) has been promoting regulation of short-term rentals in major markets across the country. AH&LA’s efforts, focused on enforcing a level playing field, have resulted in some cities (e.g., San Francisco and Chicago), and even some states (e.g., New York and Pennsylvania), passing new regulations in 2016. For example, the San Francisco Board of Supervisors unanimously approved new legislation imposing fines of up to $1,000 per day for short-term rental platforms listing rentals that are not registered with the San Francisco Office of Short-Term Rental. In addition, the New York State Senate recently passed a law prohibiting online apartment listings for less than 30 days to stop apartment building owners from converting them into Airbnb hotels. First-time offenders in New

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Exhibit 2

Airbnb Units as a Percentage of Hotel Supply

Source: PKF Hospitality Research, a CBRE Company, presented by Mark Woodworth at the 27th Annual Hunter Hotel Conference, March

2015.

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York would be fined $1,000, but a third infraction would be much costlier at $7,500. In Chicago, the City Council passed legislation that holds short-term rental platforms accountable for regular reporting requirements and strict density caps. In Pennsylvania, Airbnb hosts are now required to pay the state sales tax. Amsterdam, Berlin, and Barcelona have new laws imposing stiff fines on people renting out their homes ‘‘short-term’’ and are increasingly aggressive about enforcing these laws in the face of fierce resistance from Airbnb (Somerville and Bellon, 2016).

A report commissioned and released by the New York State Office of the Attorney General (NYSOAG, 2014) provides preliminary evidence that misuse and abuse of online platforms exist. Approximately 72% of units examined were found by the NYSOAG to violate state and local laws. Although 94% of hosts offered between one and two unique units, 6% of hosts offered between three and 272 unique units, controlling over 20% of available units, accepting over one third of reservations, and earning over one third of revenue (over $168 million). The New York Times (Streitfield, 2014) reported on October 16, 2014 that New York Attorney General Eric Schneiderman described such activities as operating illegal hotels.

Public concerns regarding shared home providers include to what extent they should be regulated by different levels of government. In a Federal Trade Commission (2015) workshop in June 2015, eBay was used as an example to show how a service originally designed to provide small, part-time consumer retailers with the opportunity to sell to other consumers has since become a website where many businesses sell to consumers and avoid regulation. While conventional hotels operate under both government regulation and consumer rating systems, the shared home economy operates with rating systems, but largely without government regulations, at least until recently. One FTC (2015) workshop panelist claimed that most shared home operators currently decide what taxes they will pay. The FTC workshop indicated that the need for federal government regulation may be particularly acute when the service / product is not branded, as is the case with short-term online rental units. Because so many shared home enterprises are not registered, there are concerns about racial discrimination and the employment status of home providers.

Edelman, Luca, and Svirsky (2016) drew attention to these issues with a field experiment using fake Airbnb profiles with distinctively White vs. African American names (no photos of the guests were included in the profile). He then requested further information about the properties from approximately 6,400 hosts, and tracked response rates over 30 days after the request. The authors found that the response rate for guests with distinctively African American names was significantly lower (42%) than for guests with distinctively White names (50%). Race is a protected class for access to short-term rental accommodations in Title II of the Civil Rights Act of 1964 and for rentals lasting over two weeks by the Fair Housing Act. Todisco (2015) contends that enforcing these laws against rentals on Airbnb is extremely difficult because Airbnb may not be liable for illegal race-based discrimination carried out by their hosts on guests. DeFlamingh and Cameron (2015) ask if hosts are also in a precarious situation, as it can be difficult for state and federal government officials to monitor the well-being of those employed in the short-term online rental business as there is

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not yet agreement regarding whether shared home providers are employees or independent contractors of the shared home websites.

There are also concerns about consumer protections of the quality of short-term online rentals. Although shared home websites provide consumers with certain information regarding the reputation and / or credibility of the providers, concerns include the safety and security for the traveling public, as shown by McNamara (2015), and reports of incorrect information regarding access for individuals with disabilities, as reported by Golding (2014). Although services like the Better Business Bureau provide consumers with rating information regarding companies, many consumers are not familiar with such services, making the rating information provided by shared home providers the primary source of pre-purchase quality information, which may be biased and / or not entirely independent. There are also concerns regarding the effectiveness of shared home websites at handling disputes between purchasers and sellers. A related issue concerns the insurance that is available to hosts and guests in short-term online rentals. Airbnb, for example, offers renters two separate policies that cover up to $1 million in property damage and third party claims of bodily injury (FTC, 2015; Airbnb, 2014); however, hosts must first attempt to recover damages from their guests or their own homeowner insurance policies before they can seek out payment from Airbnb’s insurance policy. Both Leiber (2014) and Hayes (2016) discuss how these insurance policies would be difficult to collect upon, and thus not particularly helpful to hosts.

Notwithstanding potential animosity between the parties, there is much that the hotel/ lodging industry can learn from Airbnb regarding how it appeals to its guests. Specifically, Airbnb represents authenticity in local experiences, offers the comforts of the host(s) home, and provides human connection with a local, making for an experience that is unique to that customer and difficult to replicate, and successfully takes advantage of the extensive data on the Internet to provide guests with positive experiences. Hotel owners may want to consider re-examining their long-standing policies. For example, many customers do not want to be subject to a 3:00 pm check- in or a 12:00 pm check-out. Airbnb caters to flexibility where its hosts work with guests to accommodate their check-in and out preferences. Similarly, not all customers want the expansive amenities that hotels often provide, and Airbnb is able to service these consumers at a low cost. Hotel industry and major lodging brands may have to alter their business model to better cater to the needs, preferences, and behaviors of their evolving customer base. Examples include a 24-hour check-in and check-out policy and authentic, customized experiences versus cookie-cutter brand standard offerings.

NON-TRADITIONAL SOURCES OF HOTEL FINANCING: EB-5, SBA,

AND CROWDFUNDING

Just as there has been considerable innovation and challenge to traditional practices in the innkeeper-guest relationship concerning the experience of the physical property, so, too, has there been much innovation in the financing of hotel / lodging properties.

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New financing innovations include such non-traditional forms of hotel financing as EB-5 immigration financing, government-sponsored loans (SBA 504 and SBA 7(a)), and crowdfunding.

EB-5 FINANCING

The United States Citizenship and Immigration Service (USCIS) administers an Immigrant Investor Program known as EB-5 (Employment-Based Immigration, Fifth Preference). The EB-5 program allows foreign natives to invest $500,000–$1 million in a U.S. enterprise, with the potential to receive permanent residency in the U.S. Congress created the program in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. The fundamental requirement is that each EB-5 investment must create 10 U.S. jobs in traditionally underserved areas. In recent years, EB-5 financing has grown significantly and has become a favorable funding source for hotel development projects, even spawning a series of hotel investor conferences devoted to EB-5. Unfortunately, the EB-5 market is very opaque and far from efficient. The EB-5 program was extended without reforms through April 28, 2017 by the U.S. Senate in December 2016. At this point, it appears that any changes to the EB-5 program will be part of a broader set of immigration reforms to be considered by the current congress and the Trump administration.

For EB-5 transactions to occur, there must be an incentive for all parties involved. EB-5 transactions have two primary parties: the EB-5 investor and the real estate developer. These incentives shed light on why EB-5 hotel financing deals are occurring and provide background for understanding the complexities of the EB-5 marketplace. Mahmoodi and deRoos (2015) provide a detailed examination of the program.

EB-5: The Investor’s Perspective. An EB-5 investor is a foreign national seeking to deploy capital in a U.S. enterprise, with the objective of receiving permanent residency in the U.S. In 2014, an estimated 85% of EB-5 investors were from China. Many of the Chinese families investing in the EB-5 immigration program participate for their children, who may desire to attend U.S. schools and / or become U.S citizens. The EB-5 immigration program is particularly useful for families, as one’s spouse and unmarried children under the age of 21 can receive visas with only one EB-5 investment of $500,000.

To obtain an EB-5 visa, an investor must have an ‘‘at risk’’ investment of at least $500,000 in a U.S. enterprise. An investment ‘‘at risk’’ means that the investor cannot be guaranteed any return on or of capital. In today’s market, EB-5 capital is most often structured as interest-only mezzanine debt with a five-year term for commercial real estate projects. Investors are typically compensated 1%–2% interest per annum on their capital. The return and ultimate objective for EB-5 investors is to receive permanent residency in the U.S. Thus, the financial return on an EB-5 investment is not the primary reason foreign nationals participate in the EB-5 program.

EB-5: The Developer’s Perspective. There are several incentives for real estate developers to utilize EB-5 financing. Financial risk and return are two key factors. EB-5 financing allows developers to simultaneously reduce their financial risk while

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increasing the return on their equity investment. EB-5 capital is typically structured as interest-only mezzanine debt capital that is non-recourse to the developer, thereby reducing the amount of equity required by developers. The EB-5 program also provides developers the opportunity to raise capital at below conventional market rates and also to finance projects that could not be successfully financed conventionally.

EB-5: STRUCTURING

Two methods of structuring EB-5 investments have emerged: the direct investment method and the regional center method. A developer using the direct investment method requires a minimum investment of $1 million per EB-5 investor and must show that each $1 million invested created 10 direct, full-time jobs within the commercial enterprise in which the EB-5 investor directly invested their capital, as detailed by the USCIS. A regional center is defined as ‘‘any economic unit, public or private, engaged in the promotion of economic growth, improved regional productivity, job creation, and increased domestic capital investment’’ by eb5- visa.com. This method requires a minimum investment of $500,000 per EB-5 investor. While this method still requires a creation of 10 full-time jobs per EB-5 investment, regional centers are allowed to include indirect jobs in the job creation numbers. Therefore, the indirect impact of construction employment and project employment (e.g., household earnings, taxation, and output) can be included, which will generally show more than enough job creation than what is required. This combination of benefits, indirect jobs, and a minimum $500,000 investment (vs. $1 million) makes regional centers the preferred solution for investors. Regional centers charge a fee that is typically 1% to 2% of capital raised.

EB-5 capital has restrictions and disadvantages that should be carefully considered by developers. Most importantly, structuring and raising EB-5 capital takes substantial time and funds are often unavailable to the project until visa milestones are met, which can take two years. Developers need alternative financing sources during this time to carry the project; aligning the EB-5 timeline with a project’s construction timeline is fundamental to success. Because EB-5 capital involves a security offering to individuals who are not professional hotel investors, offering documentation oriented to retail investors is required. These documents and the complexity of EB-5 program requirements cause higher ‘‘soft costs’’ than for most other ways of raising capital for hotel development. Moreover, most of the costs must be paid well in advance of receipt of capital and many cannot be paid directly with EB-5 funds. Because many of these costs are fixed and unaffected by project size, up-front costs are a major concern for smaller projects. EB-5 financing is complex and requires substantial due diligence for many months of fundraising. While some work can be outsourced to others, outsourcing generally leads to other costs. EB-5 program requirements, combined with the current uncertainty in USCIS visa adjudication policy, can limit a developer’s ability to sell or refinance the hotel when desired. Because most EB-5 programs are structured for a five-year horizon, problems arise for developers that desire a liquidity event before the end of five years. In addition, securities laws in the U.S. create potential liability exposure for developers. Persons who engage in faulty securities offerings can be personally liable for investor losses.

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Securities lawyers must also consider the effect of other securities laws, including broker-dealer laws and laws governing investment advisers and investment companies.

EB-5 IMPACT AND COMMENTARY

Per a recent Savills Studley (2015) study, approximately 10,000 EB-5 visas are available, meaning a minimum of $5 billion of investment capital is available in any given year. The website eb5projects.com purports to have one of the most complete inventories of EB-5 projects. The site shows that in the ‘‘accommodation and food services’’ category, 248 projects were affiliated with the regional centers and 11 projects were affiliated with the direct method. Over 130 of these projects had investments totaling more than $50 million. Notable projects include SLS Las Vegas Hotel and Casino, Residence Inn at LA Live, Four Seasons New York Wall Street, Knickerbocker Hotel (New York), Marriott Hotel (Los Angeles), and NYLO Hotel South Dallas.

SBA FINANCING

The Small Business Administration (SBA) has two loan programs, the SBA 504 and the SBA 7(a), that apply to lodging projects. Established in 1980, these programs provide financing for growing small- and medium-sized businesses. The SBA 504 loans can provide business owners with up to 90% loan-to-value debt at fixed interest rates to acquire commercial real estate and / or equipment for an operating business. SBA 7(a) loans can be used to fund company investments in real estate, equipment, or working capital. To understand how these SBA loans benefit hotel investors, it is important to understand the requirements, capital structure, and terms associated with each of these financing programs.

SBA 504 PROGRAM

Certified development companies (CDCs) market the SBA 504 program, package and process SBA 504 loan applications, and also close and service SBA 504 loans. CDCs are nonprofit corporations created to contribute to the economic development of the area in which it is located. According to the SBA, CDC’s are subject to both certification and oversight by the SBA and must comply with the SBA’s goals and regulations. The Office of the Comptroller of the Currency estimates that there were 270 CDCs in 2014. CDC loan portfolios are financed by 100% SBA-guaranteed debentures that are sold in the secondary market. The SBA requires all loan portfolios from CDCs to be diversified by business sector.

CDCs are responsible for an area of occupation, which is the geographic area in which a CDC conducts its activities. The SBA reports its SBA 504 program loan volume as between $3.7 billion and $5.8 billion per year.

By law, a CDC’s loan portfolio must meet a job creation goal of one job per $65,000 of SBA 504 loan funding; this can be achieved as an average across the portfolio. Alternatively, CDC’s can report meeting public policy goals by lending to small

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businesses instead of meeting the ‘‘one job per $65,000 of funding’’ requirement. The job creation and public policy goals are the CDC’s responsibility on a portfolio basis; individual borrowers do not need to meet the goals in order to secure an SBA 504 loan.

SBA 7(a) LOAN PROGRAM

The SBA 7(a) program assists start-ups and existing small businesses to finance their investment in real estate, equipment, or working capital. Like the SBA 504 program, the SBA 7(a) program guarantees these loans made by participating banks and other lending institutions. Annual loan volume is between $13.6 billion and $21.6 billion. The SBA guarantee reduces the lender’s risk, thereby making financing available to start-ups and small businesses that otherwise would not be available; however, borrowers are still fully obligated to repay the entire loan.

For real estate borrowers, SBA 7(a) loans are less favorable than SBA 504 loans. First, SBA 7(a) loans have additional collateral requirements. The reason SBA 7(a) loans are less favorable than SBA 504 loans is because they are more expensive and have variable interest rates. SBA 7(a) loans are priced at the prime rate plus 2.25%. In the summer of 2016, that translates into an interest rate of 5.50%, or about 1.0% higher than a comparable fixed-interest SBA 504 loan. In addition, 7(a) loans have higher origination fees that cannot be included in the loan.

While SBA 504 loans are a better option for commercial real estate borrowers, 7(a) loans may be suitable for smaller, working capital loans. Despite SBA 504 loans being better for commercial real estate borrowers, some hotel / lodging owners have opted for 7(a) financing. This is because SBA 7(a) loans are originated at commercial banks (not CDCs) where commercial banks can be further compensated by selling 7(a) loans in the secondary market for a premium. Furthermore, CDCs do not compensate mortgage brokers for 504 loan referrals. With mortgage brokers receiving higher compensation for their clients selecting a 7(a) loan, borrowers need to be familiar with the SBA 504 loan program to avoid being misdirected into a SBA 7(a) financing. Lastly, SBA 504 loans are a better option than an SBA 7(a) loan for financing real estate because the relationship between borrower and lender with a SBA 504 versus SBA 7(a) loan is different. With SBA 504 loans, the borrower works with a non-profit organization (CDCs) where a default is often renegotiated with the CDC. In contrast, a bank is likely to treat the 7(a) mortgage loan borrower more harshly in the event of a default.

CROWDFUNDING

On April 5, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law to encourage funding of U.S. small businesses by easing securities regulations. Title II and Title III of the JOBS Act established the foundation for a regulatory structure that permits companies to raise capital using securities offered through the Internet.

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Title II: Access to Capital for Job Creators. For 80 years prior to Title II of the JOBS Act, it was very difficult for small businesses to raise capital because securities laws banned the advertising of private placement securities offerings to the general public. After Title II was implemented in September 2013, numerous crowdfunding platforms were created. As with prior securities laws, Title II only allowed accredited investors meeting one of the following requirements to invest in these newly permitted private placement securities offerings: (1) earn an individual income of over $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income; (2) have a net worth exceeding $1 million, either individually or jointly with a spouse; or (3) be a general partner, executive officer, or director for the issuer of a security being offered.

Title III: Crowdfunding. Shortly after Title II of the JOBS Act was passed, the SEC passed Title III, which became effective on May 16, 2016. Title III permits non- accredited investors to participate in crowdfunded offerings. Harrington (2016) notes that the approval of Title III ‘‘democratizes fundraising’’ and ‘‘brings change to the previously elite world of investment fundraising and investing in early stage businesses, which used to be the exclusive domain of the wealthy.’’

Title III included the new Securities Act Section 4(a)(6), which reduces many of the costs and burdens for startups seeking to raise small amounts of capital via crowdfunding. To qualify for this exemption under Section 4(a)(6), issuers cannot raise more than $1 million in a 12-month period. In addition, an individual’s total crowdfunding investments in any 12-month period are limited to: (1) the greater of $2,000 or 5% of an individual’s annual income or net worth, whichever is less, when the lesser of these two is below $100,000 per year for that person; (2) 10% of the lesser of an individual’s annual income or net worth when that lesser amount is $100,000 or more; and in this case, the individual’s investment in the issuer may not exceed $100,000; and (3) transactions must be conducted through an intermediary that is either registered as a broker-dealer or is registered as a new type of entity called a ‘‘funding portal.’’

Per the SEC, companies expected to rely on Section 4(a)(6) ‘‘are likely to experience a higher failure rate than more seasoned companies . . . applying [the] formula to the lesser of annual income or net worth will potentially limit losses in crowdfunding offerings for investors who may be less able to bear the risk of loss.’’

The Real Estate Crowdfunding Marketplace. By 2016, the real estate industry had about 85 active crowdfunding platforms and websites including Acquire Real Estate, CrowdStreet, 1031 Crowdfunding, Patch of Land, RealCrowd, RealtyMogul and RealtyShares. Baltic (2015) predicted that real estate crowdfunding would raise $2.5 billion in 2015, versus $1 billion in 2014. Two months later, Hurst (2016) predicted $3.5 billion in real estate crowdfunding for 2016.

Recent Crowdfunding Real Estate Offerings. In today’s crowdfunding market, many of the investment offerings are single-family homes and multifamily properties. While crowdfunding has become popular for ‘‘house flippers’’ to obtain financing, the market has also matured considerably over the past two years. It now includes all major property types: multi-family, industrial, retail, office, lodging, and storage. Real estate

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investor / sponsors now even offer both interest-only loans with relatively short maturities, as well as equity offerings. Because sponsors have typically invested their own capital prior to doing a crowdfunding offering, many sponsors use crowdfunding to pull out some of their own equity or to refinance debt. For example, some investor/ sponsors purchase a single-family home with 100% cash and subsequently replace part of their equity investment with a crowdfunded interest-only loan. Other investor / sponsors with expensive mezzanine debt financing on a property replace that debt with equity raised through crowdfunding.

In 2016, when crowdfunding was relatively new and limited to accredited investors, most crowdfunding offerings were relatively small and typically raised less than $2.5 million. However, as more accredited investors become more familiar with real estate crowdfunding, and Title III of the JOBS Act is implemented in 2017, crowdfunding may become a more mainstream method of raising both debt and equity capital for real estate investment with larger fundraising campaigns more common in the future.

Crowdfunding Investor Interest in Lodging. An interview with Ian Formigle, Vice President of Investments at CrowdStreet, provided insight about crowdfunding investor receptivity toward lodging investments (Mahmoodi, 2015). When asked about the potential for hotel investment offerings on crowdfunding platforms and why property types besides multifamily / single-family homes or industrial property are not as prevalent, he responded:

‘‘[Investors] understand what they like and don’t like about hotels. They can generally wrap their head around, ‘Is this hotel in a desirable location . . . what are the demand drivers . . . is it attracting the business traveler or the weekend getaway traveler?’ Once we orient the project towards the consumer use, it is easier for [the investor] to understand. Once you start stacking up things that make it difficult for the accredited investor (who is maybe a doctor . . . very skilled when it comes to medicine, but very unskilled when it comes to real estate), it is about getting [the investor] to understand the risk of the revenue streams. So, when you consider office and retail offerings, a doctor is not necessarily going to know why or why not a tenant is going to renew their lease. They can understand better why an apartment dweller will renew their lease. Or, why a hotel guest will come and stay. Not only can you have something that is easier to understand, but the fact that you are splitting the revenue stream of an apartment (by unit) and in a hotel (by room), no single occupant is going to crush that deal. By contrast, if you have a retail project with an anchor tenant lease, the project may be upside down if you don’t have the means to backfill it. From that standpoint, there are things that I like about the hospitality sector . . . it is definitely its own animal . . . there is education that needs to be passed to the investor. We think that hospitality deals are a very good fit [for crowdfunding platforms].’’

Although hotel investment offerings are compatible with the psychology of investors, there appears to be a lack of sponsors seeking to crowdfund hotel / lodging

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Exhibit 3

Hotels on Crowdfunding Platforms

Crowdfunding Platform Hotel Name Location

Realty Mogul Willowbrook Inn Willowbrook, IL

Realty Mogul Hard Rock Hotel Palm Springs Palm Springs, CA

Realty Mogul Holiday Inn Joplin Joplin, MO

Realty Mogul Memphis Courtyard Memphis, TN

RealCrowd YOTEL San Francisco (adaptive reuse) San Francisco, CA

CrowdStreet Holiday Inn Express Boonville Boonville, MO

RealCrowd Hampton Inn Tampa Airport / Westshore Tampa, FL

Patch of Land Super 8 Motel & Knight’s Inn Corsicana, TX

Patch of Land Route 66 Ramada Hotel Kingman, AZ

CrowdStreet Harrisonburg Doubletree Harrisonburg, VA

Realty Mogul The University Inn at Emory Atlanta, GA

CrowdStreet Hampton Inn Philadelphia / Plymouth Meeting Plymouth Meeting, PA

CrowdStreet Holiday Inn Hotel & Suites Lima Lima, OH

Hotel Investor Salt Lake City Marriott University Park Salt Lake City, UT

RealCrowd Stratford Suites Spokane, WA

RealCrowd The Shores Resort & Spa Daytona Beach, FL

investments. The reasons for this could include that (1) there is a lack of sponsors who understand both the hotel / lodging property type and the relatively new crowdfunding market; and (2) hotel / lodging sponsors may view crowdfunding only as a means to raise a small percentage of their capital stack and therefore view it as a waste of time. In Exhibit 3, we list 16 hotels that have crowdfunded a portion of their capital stack (from five crowdfunding platforms) between September 2013 and July 2016.

NEW FORMS OF BOUTIQUE / LIFESTYLE HOTEL / LODGING

The increasing popularity of boutique and lifestyle hotels cannot be denied given the entry of the largest brand families into what has traditionally been the province of independent hotels and hotel companies. Over the past several years, there has been significant industry dialogue about the potential for success of major brands such as Marriott (including Starwood), Hilton, and Hyatt succeeding with their boutique soft brands,2 Autograph, Tribute, Curio, and Unbound respectively, while also debating the impact that InterContinental’s early 2015 acquisition of the Kimpton brand will have on that brand. Even smaller national players such as Red Lion and Loews have announced separate brands to compete within this space. Nearly every public lodging REIT focused on the upper upscale and above chain segments has made recent investments in boutique and / or lifestyle hotels.

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While the terms ‘‘boutique’’ and ‘‘lifestyle’’ often appear in both the hospitality trade and popular travel media, precise definitions for each of these terms, as well as how these new property categories fit into the overall framework of the lodging industry, do not yet exist. Instead, references to them usually focus on the differences between boutique and lifestyle hotels rather than defining each of them independently of each other, and more traditional lodging categories.

DEFINING BOUTIQUE

One of the first attempts to formally define ‘‘boutique’’ hotels was by Anhar (2001) with the respected HVS hospitality consultancy. Anhar recounts a brief history of boutique hotels, noting the opening of two hotels in 1981 as perhaps the first boutique hotels: The Blakes Hotel in South Kensington, London and the Bedford in San Francisco (the first Kimpton Hotel). Adding to the use of the term, the 1984 opening of the Morgans Hotel in New York City was noted as a boutique hotel by Ian Schrager.

Anhar (2001) indicates that the majority of boutique hotel operators, creators, and owners agree on the primary features of boutique hotels, including: (1) architecture and design (style, distinction, warmth, and intimacy); (2) service (noting significant disagreement regarding whether ‘‘size matters’’); and (3) target market (early 20s to mid-50s, with mid- to upper-income averages) that is differentiated from the typical, branded hotel.

Initially, city boutique hotels were generally limited to active cities such as New York City, London, San Francisco, and Miami. Today, companies like 21c Museum Hotels and the Kessler Collection have achieved success in many smaller cities, such as Louisville, Kentucky, Bentonville, Arkansas, Savannah, Georgia, and Mountain Brook, Alabama by including features identified by Anhar (2001) as ‘‘the use of cooler notes, modernism, and the interpretation of the 21st Century—at times matched with historical components and art.’’ Finally, Anhar notes that entertainment is a critical part of a boutique hotel that can be delivered through a variety of means including hip restaurants, lounges and bars, a unique theme, or spectacular visual decorations.

Anhar (2001) discusses why guests select boutique hotels, noting that (in 2001), it was primarily because they were fashionable, and that boutique hotels were marketed by highlighting the experience and image of the facility, rather than the quality of the facilities offered. Finally, Anhar recognized the potential for boutique hotels to be highly profitable, due to the elimination of many of the costs of brand affiliation, a focus on rooms-only operations, and a high repeat guest factor.

Over time, both practitioners and academics have attempted to more clearly define what is meant by a boutique and lifestyle hotel. The most significant effort to date was a Delphi study by Jones, Day, and Quadri-Felitti (2013), in cooperation of the Boutique and Lifestyle Lodging Association. Using a panel of 41 hotel industry experts, the authors determined that the most important attributes defining a boutique hotel (ranked by order of importance) were: (1) stylish, trendy and cool; (2) intimate; (3) cultural, historic, and authentic; (4) personal customized service; and (5) interesting, unique services. The most important attributes in defining a lifestyle hotel

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in ranked order were: (1) innovative; (2) personality and way of life; (3) less about brand, more personal; (4) health and fitness; and (5) contemporary and modern. Emotions important in defining a boutique or lifestyle experience in ranked order were: (1) recognized as an individual; (2) discovery, curiosity, intrigue; (3) special; (4) creativity stimulated, inspired; and (5) upbeat, energized.

Jones, Day, and Quandri-Felitti (2013) also identified the following perception differences between a boutique and lifestyle hotel:

n Boutique hotels tend to offer an aspirational experience, a total experience, and a focus on the property experience, whereas lifestyle hotels focus on specific activities within the property, such as relaxation, spa, and personal well-being with a focus on the individual experience.

n A lifestyle hotel has more ancillary services, many focused on wellness.

n A boutique hotel has very personalized service and hopefully identifiable charm and / or other unique characteristics.

n A small, historic hotel would likely be classified as a boutique hotel rather than a lifestyle hotel.

n A lifestyle hotel is more focused on aesthetics with (1) contemporary, unusual design and architecture, (2) a high level of technology, and (3) genuinely life-enriching.

Drawing heavily upon their Delphi study, Jones, Day, and Quandri-Felitti (2013) define boutique hotels as ‘‘typically small hotels that offer high levels of service. Boutique hotels tend to be stylish, trendy, and ‘cool’ and provide an intimate hotel experience. Boutique hotels often provide authentic cultural or historic experiences and interesting services to guests. Boutique hotels are unique.’’ Lifestyle hotels, on the other hand, ‘‘tend to be small- to medium-sized hotels that provide innovative features and service. They tend to have contemporary design features. They provide highly personalized service that differentiates them from larger hotel brands.’’

Balekjian and Sarheim (2011), also from HVS International, have offered specific words believed to be associated (or not associated) with boutique hotels. They found boutique hotels were generally associated with words such as ‘‘unique, trendy, hip & cool, intimate, design oriented, warm, and thematic.’’ In contrast, words specifically not associated with boutique hotels included old fashioned, traditional, business hotel, standardized, low-tech, and simple. Their work is consistent with other’s attempts to differentiate between boutique and lifestyle hotels.

Skinner, Bardour, and Berg (2015) conducted a study, sponsored by hotel companies such as Hilton, Charlestowne Hotels, the Kessler Collection, and Choice hotels, that put forth some of the first quantitative information on ‘‘boutique, lifestyle and soft brand’’ (LSB) hotels. Utilizing STR (formerly Smith Travel Research) data, they quantified the breadth and depth of LSB hotels as an $11.5 billion segment of the lodging industry, growing at a 3.1% compound annual pace between 2009 and 2014, over three times the industry’s overall growth rate. Furthermore, the newer sub- segments within LSB, namely the lifestyle and soft brand collection hotels, were

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growing at 11.5% and 17.8% respectively over this same five-year period. In addition, they noted that boutique hotels averaged 33% more room revenue, while soft brand collection hotels averaged only 10% more room revenue, during this period compared to all full-service branded hotels in the U.S. While they do not consider whether the LSB hotels are located in larger urban markets, the findings indicate that most size subcategories of LSB hotels generate more net operating income per available room than the average of all U.S. full-service hotels where smaller hotels generally underperform larger hotels.

Skinner, Bardoul, and Berg (2015) define the three LSB sub-segments: (1) lifestyle brands: prescribed franchised products that are adapted to reflect current trends; (2) boutique hotels: unique in style, design-centric, either independent or affiliated with smaller brand systems; and (3) soft brands: individualized hotels that give owners and operators the opportunity to affiliate with a major chain distribution while retaining their unique design, name, and orientation.

We note that these definitions are subject to broad interpretation with significant potential for overlap in a given hotel category. Thus, it is helpful to note that the Skinner, Bardoul, and Berg (2015) study includes within their study’s lifestyle hotel segment chains ranging in scale from Cambria by Choice and Moxy by Marriott on the lower end to Andaz by Hyatt and Edition by Marriott on the high end. Also noteworthy are the inclusion of brands such as AC by Marriott, Aloft by Starwood, Indigo by IHG, Le Meridien by Starwood, and W by Starwood. Notable soft brands included in their study are Autograph by Marriott, Curio by Hilton, Luxury Collection by Starwood, and Kimpton by IHG, a definition that both Kimpton and IHG would likely take issue with, particularly given their brand’s early entry and history into the boutique hotel segment. The study included smaller brands categorized within the boutique hotel segment, in addition to some independent hotels, including Commune and Joie de Vivre by Thompson (now Two Roads) and Mondrian and Delano by Morgans.

As evidenced in the literature reviewed, boutique, lifestyle, and soft brand hotels are a vibrant and active segment of the hotel industry with a large number of guests eschewing traditional hotels for those that appeal to their senses through design, style, and service. As more and more LSB hotels are built and converted, further definition of each of these three LSB sub-segments will likely become necessary for data gathering and research purposes.

HOTEL SERVICES AND RESORT FEES

In 2012, the Federal Trade Commission (FTC) ruled that add-on surcharges such as resort fees had to be disclosed to customers before bookings are complete. Nevertheless, since then, resort fees have grown in popularity, particularly in highly sought-after and competitive destinations like Las Vegas, Hawaii, Miami, and New York City. Hanson (2016) found that in 2015, U.S. hotels collected $2.44 billion in fees and surcharges; and in the first half of 2016, resort fees had increased 8% to an average of $19.52 per night. A sampling of the top markets from this New York

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Exhibit 4

Average Resort Fees: December 2015–June 2016

City / Region State Dec. 2015 June 2016 Change

Florida Keys FL $19.95 $24.73 24%

Myrtle Beach SC $8.42 $10.30 22%

Miami FL $20.52 $24.65 20%

Orlando FL $11.94 $13.95 17%

New York NY $23.13 $25.72 11%

San Diego CA $16.20 $17.75 10%

Lake Tahoe CA $15.60 $17.05 9%

Las Vegas NV $23.33 $24.64 6%

Palm Springs CA $19.97 $20.61 3%

Panama City Beach FL $18.48 $19.07 3%

Fort Lauderdale FL $18.72 $19.19 3%

Park City UT $22.22 $22.77 2%

Orange County CA $13.03 $13.20 1%

Maui Island HI $23.24 $23.32 0%

Breckenridge CO $24.00 $24.00 0%

Aspen CO $28.22 $28.24 0%

Summit County CO $22.50 $22.50 0%

Snowshoe WV $18.09 $17.74 22%

Oahu Island HI $19.68 $18.87 24%

Tucson AZ $19.40 $18.65 24%

Sedona AZ $18.13 $17.43 24%

Los Angeles CO $13.72 $13.20 24%

Phoenix AZ $23.92 $22.68 25%

Average $18.09 $19.52 8%

Note: The source is Resortfeechecker.com.

University study found that the resort fee represented, on average, 10% of the ADR in the first half of 2016. Exhibit 4 displays the average resort fee and percentage change by market.

In late 2016, the Obama administration’s National Economic Council criticized the hotel industry for using resort fees to ‘‘. . . raise the final price—by driving down the perceived price to lure consumers to make purchasing decisions based on misinformation. At their worst, such fees can be fraudulent or deceptive; at a minimum, they make prices unclear, hinder effective consumer decision making, and dull the competitive process’’ (National Economic Council, 2016). These sentiments were echoed in the FTC’s Economic Analysis of Hotel Resort Fees (Sullivan, 2017) who finds ‘‘. . . that separating mandatory resort fees from posted room rates without first disclosing the total price is likely to harm consumers.’’

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In the hotel industry, approximately 7% of properties were reported to charge mandatory resort fees in 2014 (Jones, 2015), typically between $10 and $25 per guest room per night (Repetti, Roe, and Gregory, 2015). Such fees began to appear in the hotel industry in 1997 when they were typically referred to as amenities tariffs. These resort fees are usually for items such as the use of Internet services, fitness facilities, local telephone calls, newspapers, bottled water (Roe and Repetti, 2014), and in-room safes (Jones, 2015).

In a 2016 poll conducted by the AH&LA, 80% of respondents said they were willing to pay resort fees if the amenities were deemed ‘‘worth it,’’ and more than half of the 1,000 travelers surveyed said they would rather see the fee listed separately than included within the published rate (AH&LA, 2016). The airline industry has long charged for ancillary benefits such as checked bags and additional legroom and the consumer has accepted this as the cost of flying. Thus, it is reasonable to expect that hotel industry ‘‘resort fees’’ will eventually be accepted by their customers like in the airline industry.

Many of the hotels that charge resort fees in the U.S. are resort properties with proportionately high levels of leisure travelers (Jones, 2015). Rushmore, O’Neill, and Rushmore (2012) report that resort hotels are different from other hotel properties because they offer extensive recreational amenities, and resort owners want to provide these amenities to their guests without having to monitor them throughout the property to make certain every person using these amenities has compensated the resort for their expense.

THE CONTEXT FOR SERVICE FEES AND PARTITIONED PRICING

Service fees, service charges, or surcharges are common in many industries. Wang and Lynn (2007) show that tips are often considered to be a type of service fee that may be mandatory or discretionary. Morwitz, Greenleaf, and Johnson (1998), Ancarani, Gerstner, Posselt, and Radic (2009), and Morwitz, Greenleaf, Shaley, and Johnson (2016) all distinguish ‘‘partitioned pricing’’ that uses common service fees (to include restocking fees, cancellation fees, travel agency user fees and / or port charges, shipping and handling charges, and delivery charges) from ‘‘bundled pricing’’ where prices are inclusive.

PARTITIONED (OR DRIP) PRICING

Morwitz, Greenleaf, Shaley, and Johnson (2016) report that partitioned pricing with service fees is common in a variety of businesses such as commercial banks, retailing, rental cars, event ticketing, real estate, cell phone service, and other utilities. Walden (2007) discusses how additional fees also exist in the field of secondary education where surcharges may include technology fees or student service fees that are usually mandatory. Partitioned pricing (also known as drip pricing) may include extra fees for extraordinary services, such as paying a dry cleaner an extra fee for cleaning one’s clothes more expeditiously than the norm (e.g., one day early).

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Morwitz, Greenleaf, Shaley, and Johnson (2016) conclude that in general, consumers are relatively less sensitive to surcharges associated with a high benefit component of a product or service. Thus, while consumers tend to be concerned about service fees that appear to provide little or no benefit, such as booking charges or licensing fees, they are less resistant to service fees where extra services are provided. They also discovered that as surcharges become more numerous, consumers pay more attention to them.

Morwitz, Greenleaf, Shaley, and Johnson (2016) argue that partitioned pricing is also used by companies to convey to consumers that a portion of the price goes to other firms or agencies and does not contribute to a company’s profit, such as when taxes, airport concession fees, or fuel surcharges are priced separately by rental car companies and airlines. A benefit of this type of pricing is that it may also be used to communicate information to consumers regarding how prices are determined. Further, they find that partitioned prices may be used to communicate to consumers that a worthy party is benefiting from the surcharge, such as restaurant kitchen staff receiving compensation from a service charge. Völckner, Rühle, and Spann (2012) find that such pricing is perceived as positive by consumers by assisting them to understand the various components of the product and / or service they are purchasing. In addition, Manning (2003) argues that partitioned pricing may also be used to direct consumers to less costly and / or more efficient routes to conduct business, such as online versus telephone booking.

On the other hand, Roe and Repetti (2014) argue that organizations that do not charge additional fees will often promote themselves as having a point of differentiation over those that do. Sheng, Bao, and Pan (2007) claim that not having partitioned pricing provides firms with a competitive advantage and find that the effectiveness of partitioned pricing depends on consumers’ perceived fairness of the surcharge.

Cheema (2008) finds that partitioned pricing reduces the likelihood of purchases when consumers are considering purchases from low-reputation sellers and / or when surcharges are perceived to be relatively high or unreasonable. Völckner, Rühle, and Spann (2012) report that partitioned pricing may also have a negative effect on consumers’ perceptions in cases where consumers perceive that higher prices correlate with higher quality.

Ancarani, Gerstner, Posselt, and Radic (2009) discuss how the use of partitioned pricing with supplementary fees tends to reduce overall prices for consumers in many industries, including hotels, restaurants, airlines, and retailing where certain supplemental fees have lowered costs for the provider as well as prices for the consumer. For example, when hotel, restaurant, and airline reservations include cancellation fees, consumers are less likely to abuse cancellation policies. More specifically, Jones (2015) shows that late check-out fees may have had the effect of minimizing hotel guests overstaying beyond the check-out time. In addition, Ancarani, Gerstner, Posselt, and Radic (2009) show that in the retail industry, restocking fees have had the effect of reducing consumer abuse of money-back guarantees.

Repetti, Roe, and Gregory (2015) show that although 67.0% of hotel consumers prefer bundled pricing over partitioned pricing, consumer preferences for partitioned versus

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bundled prices may depend on the consumers themselves and how much time and energy they want to commit to their purchase decision. Kim and Kramer (2006) and Burman and Biswas (2007) find consumers’ preferences for partitioned prices depended on whether the individuals had high versus low need for cognition (i.e., the tendency to engage in and enjoy effortful cognitive activity). Sheng, Bao, and Pan (2007) find that consumer resistance to surcharges decreases as the surcharge decreases as a percentage of the base price. Thus, no single pricing strategy is preferable in all situations.

In summary, partitioned pricing may only be useful in situations when consumers have time, energy, and desire to evaluate such prices, in conjunction with hotel operators having a limited ability to increase rates due to heavy competition for guests who are paying out of their own pockets. This suggests that partitioned pricing may work best in resort hotels and in hotels with a high proportion of leisure-oriented guests. On the other hand, bundled pricing may be the superior approach in properties with a high proportion of commercial guests. In addition, partitioned pricing is probably never advisable in hotels suffering from reputation problems (e.g., a property with substantial negative online guest evaluations).

FUTURE RESEARCH COLLABORATION OPPORTUNITIES

The hotel / lodging real estate industry is undergoing innovation and change at an increasingly rapid pace. The industry changes discussed above reflect that the ‘‘market for hotel / lodging space’’ and the ‘‘market for hotel / lodging real estate investment’’ may now be separating. This is in sharp contrast to the past when they have historically worked synergistically such that demand growth in the space market automatically meant growth in hotel / lodging property investment. Three of the four trends discussed above urgently need to be investigated to help industry practitioners and property investors develop innovative business strategies to better compete in the future. These three trends are: (1) the shared lodging economy in the super-connected high-tech economy, (2) new forms of boutique / lifestyle hotel / lodging, and (3) hotel service and resort fees. Through collaborations with industry professionals, academics can more effectively undertake this research to meet this pressing need, as well as undertake collaborative research on the emergence of real estate crowdfunding.

THE SHARED LODGING ECONOMY IN THE SUPER-CONNECTED HIGH-TECH

ECONOMY

It will become increasingly important to investigate how the next generation of hotels and lodging (along with investment in related properties) can best relate to consumer preferences. More specifically, how will customers in the three large lodging demand categories—leisure, business, and groups—adapt to the new forms of transient lodging accommodation (e.g., Airbnb) and how can this be translated into strategies for the owners of real estate that will serve the next generation of hotel / lodging businesses. The D.K. Shifflet & Associates and PhocusWright reports and databases offer a good starting point by suggesting two key research questions related to

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consumer preferences: (1) which consumers are no longer choosing to stay in hotels and (2) are there replacement customers for those leaving traditional hotels?

Research should also be undertaken to investigate how investors in traditional hotel / lodging platforms can better compete with the new hotel / lodging forces discussed above. More specifically, how will branded hotel companies continue to add value to underlying real estate investment and how should traditional hotel property investors adapt their hotel properties to better compete with the Airbnb and Expedia business models?

It needs to be kept in mind that branded hotel companies operate under two fundamental models: (1) license the brand to a hotel owner and provide brand services (i.e., the franchise model), or (2) bundle the brand with management services to operate hotels on behalf of hotel owners under a hotel management agreement (i.e., the branded manager model). In the franchise model, the hotel brand’s major contribution to the hotel property owner is mainly to revenues—contributing to both occupancy and higher average daily room rate with only minor assistance to control costs. While there is no question that branded hotels obtain higher revenue per available room than unbranded hotels, an interesting research question is whether the additional revenue due to having a hotel ‘‘branded’’ offsets the royalty costs and other costs associated with the franchise license. A focus on EBITDA to answer this question for franchised hotels may be ill advised, as it would be difficult to separate the impact of the brand from the quality of the operator / owner. In the branded manager model, the hotel company contributes to both revenue enhancement and cost controls with a clever combination of brand services and management expertise. Here it may be easier to investigate the research question: Do branded hotels have higher EBITDAs than ‘‘identical’’ unbranded hotels (as EBITDA is net of all fees paid to the branded manager)?

As the industry matures and innovates, hotel property owners and others will increasingly wish to know: How are the benefits of a brand changing in our rapidly evolving super-connect high-tech travel related economy? Also, can the benefits of a brand be obtained at a lower cost than before? A well-designed study could use the STR and CBRE databases of hotel revenue and hotel performance to investigate this research question. Several research designs are possible; one could compare the performance of paired properties, ‘‘identical’’ except for the brand, over time; one could use an event or case study methodology to examine the performance of hotels that have been branded versus unbranded hotels. As an example of these methodologies, see the recent study by Nelson, deRoos, and Ukhov (2016) examining the impact of newly built publicly owned hotels on the existing hotels in the same market. Or, a researcher could examine the performance of similar branded and independent hotels in a given market or markets over time.

Hotel / lodging real estate researchers need to investigate whether the sharing economy will ultimately reduce the demand in traditional hotels. If it will, what sectors, locations, or strategies are safest to invest and which are most at risk? A well-designed study would isolate the impact by city / market and by market segment (leisure, business, group) within the city. An important focus should also be on the market or

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submarket(s), not individual hotels. Since demand in the hotel industry is partitioned into the three market segments listed above in the STR database, it would significantly facilitate this type of analysis. AirDNA and InsideAirbnb, relatively new entrants that provide data and analytics for Airbnb, are good sources for sharing economy lodging data. Given the evolving nature of this research question, one could start with those cities with a large proportion of sharing economy units and examine the impact on the three metrics most important to hotel investors: revenue per available room, occupancy, and average daily rate. If researchers were to focus on Airbnb only, an event study methodology could investigate the behavior of traditional hotels as their share of the total transient lodging supply falls over time due to the growth of Airbnb accommodations.

Researchers should also examine how the sharing economy will impact the value and behavior of existing hotels in the short and medium term. It is already clear that Airbnb is negatively affecting hotel room rates during periods of peak demand, which has a large impact on profitability (Lane and Woodworth, 2016). Because hotel / lodging investment is risky, with higher capitalization rates and more volatile cash flows than other real estate, hotels are owned both for their returns and their diversification benefits (Corgel and deRoos, 2003). With it obvious that the sharing economy is likely to change both the returns and the cash flow volatility of hotel / lodging investments, researchers need to investigate how this will impact hotel / lodging property valuations. While many already believe the sharing economy will hurt the owners of traditional hotel / lodging properties due to reduced occupancy and/ or average daily rates, researchers have not yet attempted to measure it, or confirm it. Future research should also investigate the change in hotel cash flow volatility, and thus diversification benefits, from owning hotels that will now occur because of the rapidly expanding sharing economy. Given the dearth of long-term data so far, a simulation could shed light on this research question using the NCREIF database and Moody’s / RCA CPPI that have hotel sub-indexes that provide a historical record of hotel returns. Using a simulation, these series could be extended using a set of reasonable assumptions to examine the impact on series return levels and behavior of the series over the market cycle.

NEW FORMS OF BOUTIQUE / LIFESTYLE HOTEL / LODGING

ACCOMMODATION

A second fertile area to target future hotel / lodging research collaboration is the new evolving forms of hotels and lodging that are more likely to capture the next generation of consumer imagination and preferences. The many interesting areas for researchers to investigate should include:

n Strategies to repurpose underperforming assets and / or convert multi- family buildings into ‘‘hotels’’ using alternative accommodations operators such as Airbnb as the distribution engine. Such strategies could eliminate friction in the market related to franchise licensing and brand

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standards but need to take into consideration any political obstacles (e.g., zoning requirements, safety and security standards, tax collections, etc.)

n Transform part of a building into a lifestyle-oriented hostel, with a key being that the host is connected to the guest’s lifestyle, putting guests in the center of the action upon arrival.

n Combine disparate parts of the sharing economy into new products such as a service that ‘‘bundles’’ a traveler’s related requirements—handling the Uber, the GrubHub, the dance club, the cultural visit, the bespoke retail experience—all the customer / traveler has to do is chose the location, dates, and desires.

HOTEL SERVICE AND RESORT FEES

As indicated previously, the ‘‘unbundling’’ of certain hotel / lodging services to increase ADR (through pricing some services separately) is occurring at a time when the hospitality sector is facing more competition from alternative housing models, specifically the shared lodging economy. Because of this, an interesting and useful research investigation would be to trace the pricing pressure on established hospitality brands from the new shared lodging economy offerings. A related research inquiry would be to investigate the degree to which those brands that have been most successful in implementing partitioned pricing offer services that are more differentiated, rather than less differentiated from the lodging alternatives available through the shared lodging economy.

The authors of the National Economic Council 2016 report recommend ‘‘further economic research is needed to determine the broader, systemic impact of fees-driven pricing on consumers and the competitive process, as the effect of the rise of fees on the economy is far from fully understood. In particular, the extent to which fees tend to dampen competition or promote tacit coordination is unclear. Researchers should further seek to quantify the extent and impact of hidden fee pricing schemes, and develop recommended policy solutions where called for.’’

In summary, innovation is a healthy part of industry renewal, offering opportunities as well as significant challenges to hotel / lodging real estate investors and professionals. For academics, the innovations and trends described in this article offer new research opportunities while providing valuable understanding and insight to hotel / lodging real estate industry investors and professionals seeking to uncover the new opportunities.

ENDNOTES

1. In the Oxford English Dictionary, the shared economy is defined as ‘‘an economic system in which assets or services are shared between private individuals, either for free or for a fee, typically by means of the Internet.’’

2. Soft brands are affiliated with major hotel chains whose properties are more variable than the properties within most large traditional brands. Most soft brand properties are unique

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and have the appeal of independent hotels, often have their own name and identity, but are still included within the hotel chain’s global distribution system (e.g., Marriott’s Autograph and Hilton’s Curio).

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HOTEL / LODGING REAL ESTATE INDUSTRY TRENDS AND INNOVATIONS 41

Chris Manning, Loyola Marymount University, Los Angeles, CA 90045 or

[email protected].

Jan deRoos, Cornell University, Ithaca, NY 14853 or email: [email protected].

John W. O’Neill, Pennsylvania State University, University Park, PA 16802 or jwo3@

psu.edu.

Barry A.N. Bloom, Xenia Hotels & Resorts, Inc., Orlando, FL 32801 or bbloom@

aol.com.

Anjali Agarwal, EVP Asset Management, The Chartres Lodging Group, LLC, San

Francisco, CA 94111 or [email protected].

Stephen Roulac, Roulac Global, LLC and University of Ulster, San Rafael, CA 94901

or [email protected].

Reproduced with permission of copyright owner. Further reproduction prohibited without permission.