By Steven Marx

Commercial mortgage brokers are always trying to keep up with the latest trends, risks and developments when it comes to real estate. Hotel lending has historically been a specialty understood and embraced by few.

What other class of real estate relies on leases that may be as short as one night and also sometimes sees a decrease in net operating income (NOI) as more product is sold? What other real estate type includes an operating business that is often at least as important as the real estate itself?

In days gone by, mortgage brokers were most comfortable when their hotel assets were backed by nationally recognized franchises. Much of the time, brokers would only consider “top tier” brands known for distribution, standards and consistency. If the operation of the hotel was not linked to a national brand, the mortgage decision was often a “no-go.” The only exception to this was often tied to the backing of the most experienced operators.

Quest for the different Times are changing, and many hotel owners and operators who previously only considered branded hotels as a viable option are opening their eyes to the nonbranded space. Nonbranded lodging — also known as independent, nonfranchised, lifestyle, soft-brand, boutique and a multitude of other names — is gaining credibility and acceptance by mortgage brokers. Why is this the case? As travelers are seeking more of an “authentic” and “local” travel experience, they are often ditching familiar brands in hopes of experiencing something different.

Owners, operators and mortgage brokers sometimes see better returns in the nonbranded, or soft-branded, hotel space. This way, owners can better target their capitalexpenditure dollars to areas that guests care about and thus provide a stronger return. Owners and operators also realize that strict adherence to brand standards does not make sense in each and every market.

Not long ago, most travelers wanted consistency when away from home: “The best surprise is no surprise!” How many travelers wake up in the middle of the night in a dark hotel room forgetting where they are? Today’s industry buzzwords are “authenticity” and “sense of place.” But what do these words mean and how are they interpreted? Do they represent the same sentiments to the traveling public as operators hope?

One of the national hotel powerhouses placed banners in its hotel lobbies touting local brews on tap, conveying the idea of authenticity. But what good is this promotion if the staff has never tried the offerings or has no knowledge of them? Does affixing reclaimed wood to walls and displaying a map with a red dot indicating, “You are here,” translate as local? How do consumers feel when the front-desk receptionist can only recommend the national-chain coffeehouse down the street? The jury is still out.

The imitation game With the advent of third-party booking engines, nonbranded hotels are easier to find than ever and consumers are interpreting authenticity. National brands don’t always hold the same cache as they once enjoyed. Don’t get this wrong, however: The big brands are continuing to exercise their muscle by growing more rapidly than ever, but they are seeing competition from nonbranded offerings. With the right mix of branding and strategy, nonbrands can steal market share.

National brands are taking note and trying to think of ways to make their hotels more relevant and appealing to today’s finicky travelers. Many are rolling out their own solution to the “nonbrand,” called the “soft brand.” Autograph by Marriott, Curio by Hilton, Unbound by Hyatt and Ascend by Choice are just a few examples.

Many travelers as reaping the benefits of loyalty points, recognition and standards while staying somewhere they perceive as somewhat unique. Some consumers and hotel owners are experiencing “brand creep” with soft brands and are not loyal. Many travelers are embracing “one-off” hotels that have become mini-chains, such as Standard, Viceroy, Ace and Freehand. These are becoming household names to many as they expand into multiple markets.

What is going on in the minds of travelers is not easy to decipher. Something that is cutting edge to one consumer is passé to another. What do travelers really desire when they are on the road? At times, they want consistency and reliability and, at other times, a sense of adventure. Do travelers, whether they are millennials (or of a so-called millennial mindset), want to be forced into communal lobby tables because guestroom desks are no longer provided?

Add to these questions the confusing mix of differing expectations for business and leisure travel, city versus country, kids or no kids, and different psychographics. These ideas are being tested in branded and nonbranded hotels alike. It is difficult for the same hotel to appeal to brand loyalists and the independent-minded traveler at the same time. Being noticed by hoteliers, Airbnb is providing an overnight experience, often in a “local” neighborhood, but with a sense of solitude. One size definitely does not fit all.

Mortgage brokers need not be afraid of the nonbranded hotel sector. The most respected and experienced hotel owners and operators have embraced this space and are seeing strong financial results, as operating margins are often superior. Brokers need to approach their underwriting in a similarly thorough way as they would with branded hotels. Looking at location, the operator’s credentials, the business plan’s soundness and how competitive the environment is remains of importance in underwriting. Understanding and appreciating the nonbranded hotel space will allow mortgage brokers to make informed business decisions and embrace this expanding segment within the hotel industry.

Reprinted from Scotsman Guide Commercial Edition