In 2017, boutique hotels saw higher occupancy and ADR than hotels in other segments, according to CBRE Hotels’ Americas Research.

BOUTIQUE HOTELS ARE increasingly popular with hotel developers in the U.S. due to the unique experience they offer travelers, the creativity they allow the developers to express and the fact that they achieve high levels of occupancy and ADR, according to CBRE Hotels’ Americas Research. However, they are costlier to run and therefore produce lower profits than other types of hotels.

Boutique hotels made up 17.8 percent of the rooms in the U.S. development pipeline as of June 2018, according to CBRE Director of Research Information Services Robert Mandelbaum in reference to a joint study between CBRE and the Boutique and Lifestyle Leaders Association.

There were 1,281 properties in the U.S. in 2017, Mandelbaum said, and together they had 70.5 percent occupancy with ADR around $208.52. That was 6.9 percent higher occupancy than the overall U.S. lodging industry and 64.7 percent higher ADR. Boutique lifestyle and upper-upscale properties saw the highest occupancy rates, 79.6 percent, while non-branded boutiques earned the highest ADR of $253.14.

The sector maintained similar levels through the first half of this year, with RevPAR up 5 percent over the previous year. The forecast of 2019 is also high, but slower than the previous two years as the entire hotel industry is expected to see similar slowing. Still, luxury boutiques are expected to see a 3.1 percent gain in RevPAR while other categories are expected to see less than 2 percent.

This leveling off in the market may especially uncomfortable for the boutique market, where Mandelbaum said profit margins are thin.

“Because of the comparatively high levels of personal service and food and beverage offerings, boutique hotels do achieve relatively low profit margins compared to industry-wide benchmarks,” he said. “Using data from CBRE’s Trends in the Hotel Industry survey, properties that meet the BLLA/CBRE definition of a boutique hotel achieved an average gross operating profit margin of 33.8 percent in 2017. This is less than the 38.3 percent average for all hotels in the Trends sample.”

Boutiques’ total operated departmental expenses reflect the higher labor and F&B costs. They cost an average of 41 percent of the specialized hotels’ total operating revenue while the average cost for the entire Trends sample was 37.5 percent.

“Boutique hotels that have restaurants and lounges achieved a GOP margin of 33.3 percent in 2017,” Mandelbaum said. “Concurrently, boutique properties that do not offer food and beverage service averaged 47.1 percent.”

Still, Mandelbaum said developers investing in boutiques will not be disappointed if they look at it as “an investment in hospitality.”

“Historically, this segment has been at the forefront of new and creative facilities, services, and amenities all aimed at providing a more personal level of service and a unique experience,” he said. “Yes, this puts a strain on operating expenses, and therefore limits the flow through to the bottom-line. Fortunately, the premium occupancy and ADRs achieved by these hotels provide the opportunity to achieve profit levels that deliver the desired return on investment.”