Smaller cities the primary market for three hotel chains

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21c Museum Hotels, whose properties feature contemporary art galleries that are open to the public, opened a Nashville hotel this spring.
21c Museum Hotels, whose properties feature contemporary art galleries that are open to the public, opened a Nashville hotel this spring.

NEW YORK — Sitting in a conference room here last month, 21c Museum Hotels president Craig Greenberg pointed out one benefit of designing and operating a hotel built where the real estate is a bit more affordable than in midtown Manhattan.

"Right now, the Marriott Marquis would call this a meeting room. At 21c, this would be a true art gallery," Greenberg said.

With the world's largest hotel companies battling to increase their upscale hotel presence throughout the country's gateway cities, three smaller operators — 21c, Graduate Hotels and Aparium Hotel Group — are taking their chainlets inland and to smaller cities, attracting predominantly domestic travelers.

The newest of the trio is Graduate, which debuted in 2014 with properties in Athens, Ga., and Tempe, Ariz. The company has since opened seven more boutique hotels, predominantly in towns with major universities. Since spring, Graduate has added hotels in Berkeley, Calif.; Lincoln, Neb.; and Richmond, Va.

Graduate is following a path similar to that pursued by 21c and Aparium.

Aparium’s Hotel Covington, near Cincinnati, was a department store.
Aparium’s Hotel Covington, near Cincinnati, was a department store.

Founded in 2006 with a single location in Louisville, Ky., 21c differentiates itself by including free, publicly accessible art galleries in each of its hotels. The name is shorthand for "21st century" in a nod to the approximately 3,000 pieces of contemporary art displayed at its properties. The company has seven hotels in cities such as Cincinnati, Oklahoma City and Durham, N.C.

Unlike Graduate and 21c, Aparium is a soft brand for independent properties such as Memphis' Madison Hotel and the Hotel Deco in Omaha, Neb. Additionally, Aparium's specialty is adaptive reuse. Its first property, Milwaukee's Iron Horse Hotel, was redeveloped from a mattress factory, and the Hotel Covington in Covington, Ky., which sits across the river from Cincinnati, formerly housed a department store.

The three companies operate predominantly in the 100-room to 200-room range in the upscale to upper-upscale sector. With real estate values surging in chain-dominated coastal markets such as New York, San Francisco and Los Angeles, all three are targeting more midsize cities and towns where property is cheaper and much of the chain competition comes from select-service properties.

While such markets don't attract the level of international tourism that the coastal cities draw, they bring in regional business via either drive-market leisure travelers or corporate groups looking for a slightly less expensive alternative to the larger cities.

Demand for these second-tier markets has been steady. Last year, revenue per available room at the 26th- through the 50th-largest U.S. hotel markets, which include cities such as Cincinnati, Richmond, Raleigh-Durham and Louisville, rose 4.3%, outpacing the 2.4% growth rate for the 25 largest U.S. markets, according to data from STR.

"We look at places where there are other reasons to be in town," Graduate Hotels president Tim Franzen said. He cited as examples Madison, Wis., with its combination of a Big Ten university and the state government, as well as the leisure attractions in Oxford, Miss.

"A lot of these markets are very popular with statewide associations," he said. "Oftentimes, a place like Athens, Ga., is great because it's a little less expensive than Atlanta, but you still get great entertainment."

Such an approach hasn't gone unnoticed by the larger chains, which have attempted to take advantage of the growing popularity of boutique hotels by launching soft-branded collections of independently operated hotels and expanding them beyond the largest U.S. cities.

For example, Marriott International's Autograph Collection has two properties each in Kansas City, Mo., and Davenport, Iowa, and has four in Spokane, Wash. Hilton's Curio Collection includes hotels in Birmingham, Ala., and Chapel Hill, N.C.

Aparium's executive vice president of sales and revenue management, Joe Aguilera, said his company doesn't fear soft brands, which offer the opportunity for the larger chains' loyalty members to either earn or burn points at the types of smaller properties run by the independents.

"The soft brands offer points and rewards programs, and there's always going to be someone interested in that," Aguilera said. "But there's always going to be strong demand for something that has a strength in a personal approach."

Graduate Hotels largely targets college towns; this spring it opened a hotel in Lincoln, Neb., home to the University of Nebraska. Graduate currently has nine hotels.
Graduate Hotels largely targets college towns; this spring it opened a hotel in Lincoln, Neb., home to the University of Nebraska. Graduate currently has nine hotels.

Even so, 21c, Aparium and Graduate are making moves into larger U.S. cities. Aparium took over New Orleans' Pontchartrain Hotel last year and this spring entered Detroit by opening its Foundation Hotel in the former Detroit Fire Headquarters building.

Meanwhile, 21c this spring debuted in Nashville, which has evolved into one of the country's busiest hotel markets during the past couple of years.

The most aggressive move into the larger markets, however, appears to be by Graduate Hotels, whose parent, AJ Capital Partners, also owns Chicago properties such as the Soho House Chicago as well as Aparium's Pontchartrain Hotel. Earlier this year, Graduate Hotels reached an agreement to develop a 200-room, $130 million hotel on New York's Roosevelt Island that will be part of the Cornell University tech complex being built there. The hotel is slated to open in 2019.

"We set a goal a while back to have 20 hotels operating by 2020," said Franzen, who added that the group is looking at developing a site across the street from Nashville's Vanderbilt University. "We expect it to be a larger number than that."

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