The rise of hybrid hospitality

    The blending of traditional hotel services with retail, co-working, co-living and even student housing aligns with the shifting demands of travelers, and provides resilience to investors.

    The lobby at TSH’s hybrid property in Madrid. Source: The Social Hub

    In a post-coronavirus world, a rising number of hospitality properties are going beyond their traditional offering and dedicating more space to retail, co-working and other forms of accommodation such as co-living or student housing. Though the adoption of this innovative approach – dubbed hybrid hospitality – was accelerated by the pandemic, some private equity and real estate investors actively involved in the hospitality real estate space have been capitalizing on this trend for some time now.

    Brookfield Asset Management is one of them. In 2018, the Toronto-based asset manager bought serviced apartment operator SACO, now rebranded Edyn. Since then, the platform has rapidly expanded from the UK, and currently owns and operates 29 trading properties and around 3,000 trading keys across five European markets. The firm has also evolved its extended-stay legacy into a broader hybrid offering to keep pace with changing demands.

    “The rising demand for amenities and services in places like hotels has created an opportunity,” says Elena Ladisova, vice-president at Brookfield. “We have invested in platforms such as Edyn and Appart’city, which are used for extended stays and have added hospitality and workspaces for guests. We expect that this trend will continue.”

    There has been a shift towards quality and experiences over the past few years and trips are now longer, with travelers often mixing business and leisure, Ladisova explains. “Consumers across most segments are no longer looking for just a place to stay – they are looking for multi-purpose spaces that can meet the demands of their changing lifestyles, and extended-stay brands have been a beneficiary of this trend.”

    Along with extended-stay brands, more traditional hotels are implementing hybrid concepts and adding co-working in their lobbies, for instance. One of the firms embracing hybrid hospitality not just as a concept but as a model is The Social Hub (TSH). The brand – formerly known as The Student Hotel – offers spaces that combine student accommodation, hotel, extended-stay rooms, co-working facilities, meeting and event spaces, restaurants, bars and gyms – all under one roof.

    Charlie MacGregor, chief executive officer of the firm, recalls that 10 years ago there weren’t many firms willing to back the hybrid model. But in 2014, two years after the opening of the first The Student Hotel in Amsterdam, London-based asset manager Aermont Capital provided the funding that allowed for the firm’s expansion.

    With recent commitments from APG, the investment arm of the Dutch pension giant ABP, and Singapore’s GIC, one of the biggest sovereign wealth funds in the world, TSH is hoping to grow its presence from 25 to 50 hotels across key European cities. “When we stepped over last year from private equity, it was a big moment for TSH. Our investors are some of the largest investors in the world,” says MacGregor. 

    “They are institutional. They are long-term. They valued the company at €2.1 billion, which is a big testament to the team, the model and the market. We saw, especially with covid, that the model really proved itself.”

    MacGregor explains that, in the midst of the pandemic, the hybrid model allowed the company to stay open and remain cashflow positive, outperforming some of the big hotel brands.

    “We have students, co-living, co-working and a hotel [under one roof]. During covid, the hotel market fell away, but we were able to lean on the other three markets very strongly and they were very resilient,” says MacGregor.

    New demand for co-working space from locals “looking for a place to work that wasn’t their living room” was particularly noticeable during covid when regulation allowed, he notes.

    Flexibility is key

    Bettina Graef-Parker, managing director of special property finance at Aareal Bank, one of the largest lenders of debt financing for hotels globally, says that one of the key benefits for hotel players adopting the hybrid model is the possibility to adapt the use of the asset to changing demands, which can boost profitability.

    “During covid, if you had a hybrid model, you could reallocate more rooms to student housing and fill your property better than if you had kept it as a hotel,” says Graef-Parker. “And in the summer, for example, where you don’t have any students, you simply reallocate your rooms from student usage to transient travel usage. This flexibility allows you to target different client groups at different periods of time and peak demand, and therefore generate better prices.”

    This adaptability also means hybrid hospitality is better positioned to seize on trends such as ‘workcations,’ extended stays and a demand for features that provide travelers with autonomy and flexibility – all of them accelerated by the pandemic. According to a 2022 study carried out by the Centre for Economics and Business Research and sponsored by Edyn, facilities for remote working space/equipment have become 24 percent more important to the average consumer since 2019, after no change in importance observed from 2012-19. In addition, average surveyed workers expect to increase their number of ‘workcations’ by 15 percent in 2023 compared to 2019.

    The study also reveals growing demand for flexibility and extended-stay offerings, which is matched by investor interest in serviced apartments and aparthotels due to their strong growth prospects. For example, the proportion of seven-to-14-night stays doubled between 2019 and 2021, with over half of extended-stay operators surveyed in 2021 planning to open in new locations.

    Meanwhile, the younger travelers – Generation Z and millennials – increasingly demand remote-working facilities and longer stays, and are willing to pay 17 percent more for extended-stay options, compared to a general average of 10 percent, the study shows.

    “The industry and investors are really waking up to the power of the millennials and Generation Z when it comes to their travel preferences,” MacGregor says. “They are looking for hotels that are much more experience-oriented. They want to be connected to the locals, feeling part of a community, feeling this warm vibe that we have thanks to our fixed-student community.”

    What is best to add?

    Determining the best addition to a hybrid hotel – whether it be retail, co-living or co-working space – depends on various factors, including profitability, synergy with the hotel concept, operational feasibility and occupiers’ demand. To lenders like Aareal, the addition of extended-stay concepts to a traditional hotel model offers the opportunity to capture a wider range of customer segments and revenue streams, which can generate attractive – and more stable – returns for investors.

    “Pure hospitality is the most complex to underwrite because occupancy literally fluctuates daily,” Graef-Parker says. “But the minute you add a bit of student housing or a bit of co-living it gives more stability as you will have tenants with one month or one-year lease agreements.”

    In the assessment of how each addition complements the overall concept of the hotel, the retail component can be crucial. In some cases, it is even necessary to first decide on the retail tenant to then define what is the right hotel concept, argues Heidi Schmidtke, JLL’s head of operator selection, EMEA. “We are discussing a project in a prime location of a European capital, for instance, where the choice of the right hotel concept is also dependent on the retail tenant because in that particular location retail is the driving force when it comes to the value of the property.”

    One of the main strategies hoteliers are currently focusing on and implementing more strongly again is the addition of gastronomic concepts to enhance the overall experience from guests. “This shall also attract locals to the hotel’s restaurant, which can make the asset location much more attractive,” Schmidtke says.

    From a conversion perspective, analyzing the operational feasibility of each addition is also important. In this sense, “the easiest addition is certainly co-living,” Schmidtke notes. “If you add co-living, that means that you change the concept, but you don’t need to change the layout. With bathrooms for each room already in the building, you have everything already arranged in a way that it could work both for co-living or residential and for hotel use.”

    Understanding customers and their specific needs and preferences will also determine what is best to add to the hybrid hotel. For example, if the target audience consists of remote workers, digital nomads or business travelers, co-working spaces may be a valuable addition.

    A major component of co-working in markets where the office sector is struggling can be risky, though. “One thing that I find difficult is to include significant co-working where it is more dependent on the office market as, in some cities, it is undergoing quite a transformation as well as huge vacancy,” Graef-Parker says.

    While the best addition for a hybrid hotel may vary depending on the specific circumstances and goals of the property, industry sources agree that this model has emerged as a significant trend in the hotel industry. Its flexibility and adaptability to the changing travel landscape – led by younger generations – holds considerable potential for the future, with ever more hotels moving in this direction.