The networked upheaval

"Think radical!" – that's the drastic challenge to established business models. Digitisation will not pass any industry by and is forcing hotel operators to rethink their approach, just like their real estate partners. But how does that fit with the hotel industry’s DNA?

Radical thinking is the strategy of the hour – as captured more bluntly in slogans like "Disrupt your own company!" The man with the radical statement is Klaus Dederichs, Associate Partner with the international project consulting firm Drees & Sommer. His office is located at RWTH Aachen University in the midst of 40 technology companies that do nothing other than research across all industries. Disruptive thinking is his daily routine.

Radically turning their own company upside down is difficult for leaders who have (successfully) spent decades operating within rigid structures. But the wake-up call is here. Every day, millions of disruptors are rattling at the hotel doors: the guests. Young people in particular have become rebellious. They don't just want a room anymore; they want a room with an "experience". And they want it right away, transparent and in real time. They select everything online and anyone who doesn't offer them the experience they demand gets swiped off their smartphone – out of sight, out of mind. It’s a major drama.

Hotel operators are left there alone to face these demanding guests without the support of their real estate partner. Erik Florvaag, Head of Hotel Acquisitions at Art-Invest in Cologne, freely acknowledges: "As the end investor and developer, we had never had a conversation about the property management system (PMS) with our operator". For decades, PMSs have handled all the reservations for a hotel and managed guest data. They ultimately ensure that the house is always full and therefore add value to the property. Yet these old, rigid systems cannot meet the many new demands by guests for real-time answers and for personalised offerings – an additional burden for digitally advanced hoteliers. Why? Because hotel operators are encountering go-getting and progressive companies more and more often. Art-Invest is one of them. A subsidiary of the Bremen-based Zech Group, Art-Invest has discovered the added value of mixed-use districts in particular – and has found plenty of contradictions and at the same time opportunities in its research which require teamwork between the property owner and operator to resolve the problems and take advantage of the opportunities.

Everything has to be bookable from the hotel! You will always be selling a room with a service.
Klaus Dederichs, Associate Partner at Drees & Sommer

Completely rethinking monetisation

Know-how and concept sharing are the order of the day, because digitisation is both forcing and enabling new monetisation models. This new thinking begins with walls and surfaces – and what you do with them when guests are sleeping or out of the building. "It's important to develop properties from the user’s perspective taking a usability point of view into account", says Klaus Dederichs from Drees & Sommer, and encourages hotel owners and investors: "Anyone who wants to make money in the future should think about their real estate platform." The new business model is called Real-Estate-as-a-Service.

Here's a simple example: the carpark next to the hotel is generally full only from 7 am to 7 pm. But every space costs money and thus needs to be refinanced. So it gets rented out overnight, too. A professional takes over the operations and the carpark owner earns a commission as well. Artificial intelligence gleans from hotel data the knowledge of when and potentially how many empty parking spaces will be available. The prerequisite: all the partners must be networked. And take a more complex example: a mixed-use district with housing, offices/co-working, supermarket, gastronomy, hotel, serviced apartments or co-living. Investors have sovereignty over the logistics in their district, cleverly building carparks with charging stations for e-vehicles and a mobility hub next to that – from e-bikes to car sharing, and shuttles to the train station or the shopping mall. The residents pay for each service, and are happy to do so because it's so convenient and perhaps exclusive.

E-mobility offers guests a different attitude towards life. It is the new reservation trigger for the Arborea Hotels and Resorts brand.
Christoph Schöch/Arborea Hotels und Resorts

The investors also earn money from the diverse rents or leases. The more lively the mix in the quarter, the more interaction there will be with the surrounding area. That drives up demand, which in turn drives up prices. Hotels can become magnets here. Whether for residential tenants or hotel guests, a networked district enables customised services for all: Anyone can use an app to order pizza or sushi, reserve a table at the osteria, place supermarket orders online and have them delivered to their door, check with the cleaners whether their shirts are done yet, book a massage at the day spa across the street or reserve a meeting room in the co-working space next door. 

New little autonomous lifeworlds emerge in the digital world, proper small cities. In these kinds of quarters, investors and operators work together as a team and the line between property and operator disappears, as does the line between asset classes. Klaus Dederichs’ advice to hotel operators: "Everything has to be bookable from the hotel! In the future you will be selling a room with service." In other words, a room with an "experience".

Maximum possible synergies

This is what the future looks like. That’s something that Tobias Köhler, who is responsible for Systems & Commerce at Ruby Hotels, can get excited about. He doesn't have reservations or concerns about boundaries, either: "As a lean-luxury hotel group, it would be very handy for us if an investor wanted to operate or offer a restaurant. We don't want a restaurant ourselves." He would also like to see an e-scooter rental near a Ruby Hotel or could imagine a cooperative agreement with a Tesla rental service in the building complex.

The operators want to focus on their core competencies again, but at the same time are looking for appropriate technology to generate maximum synergies from their partnership with investors or owners. Martin Schaller, Head of Asset Management Hospitality at Union Investment, is already seeing some positive examples in the industry: "Many operational systems are already connected with building management systems, for instance, so that the temperature in a guest room is set exactly to the guest’s preference prior to arrival, which also saves energy."

Hotels need to be digital ready. We are currently working on standard specifications for innovative buildings.
Erik Florvaag, Head of Hotel Acquisitions at Art-Invest in Cologne

And the developments are progressing at a rapid pace. As an investor and developer, for example, Art-Invest has in the meantime installed its own testing lab, reports Erik Florvaag. Employees can test for themselves what makes sense in a building across all asset classes. This is how the Cologne-based investment firm found an illuminator that sends electricity through the LAN cable and integrates presence detectors in its lights. A digital heat map gives the investor or operator information on room occupancy as well as data for housekeeping and building maintenance. This should send a message weeks in advance when a light is close to burning out. "In the end, a broken pump should write its own bill", says Klaus Dederichs, as a digital goal for the future.

But the road to get to that point is a long one. “For that to work, hotels need to be digital ready", comments Florvaag. "We’re currently working on standard specifications for innovative buildings", he says. They should be completed by the end of 2019. His list of digital building blocks primarily contains functions that have to do with access control, building security and energy consumption monitoring, but also has a few booking modules for meeting rooms and co-working spaces. What Art-Invest considers innovative often meets with opposition quickly in negotiations with hotel operators: US chains in particular like to see their own specifications implemented. If Art-Invest wants to have more room automation, for instance, the hotel giant says no. Conversely, when a global chain wants to introduce an app for online check-in, Art-Invest wants to move away from apps. "Guests are no longer loyal to brands. Why should they download a new app every time they stay with a different group?" asks Florvaag, a frequent traveller who knows this from experience. Martin Schaller from Union Investment emphasises: "Major hotel groups like Marriott sometimes have more than 100 million participants in their customer loyalty programmes, giving them enormous potential for collecting user-specific data and offering customised services. In order to remain competitive and not lose more market share in direct sales, the industry needs to treat this data like gold."

Ruby Hotels rely on lean-luxury concepts and are open to services provided by partners.
Gregor Hofbauer/Ruby Coco Hotel & Bar Düsseldorf

Extra costs and added value

"There's a lot of hotel (service) thinking in mixed use", notes Erik Florvaag. Hotels are often much further along than offices, both conceptually and in reality. In the real world, the process of developing buildings based on BIM (building information modelling) through to networking with the right hotel and its guests can be a very slow one, “but it will trigger a snowball effect!" Klaus Dederichs from Drees & Sommer estimates the added costs for a digital building at "3 to 6 percent of the building cost based on the usual (hotel) standards."

Digital engagement in 2019 is not likely to convert into an ROI in the short term, but it certainly has a chance over the medium-term. Anyone who offers something innovative – and it’s even on demand – will increase the property’s value and gain a more affluent clientele. The experts mentioned above are not the only ones who agree on this. "We still have difficulty with selling this added value the right way", concurs Florvaag from personal experience. One reason: Everyone in Germany is struggling with high construction costs, so most investors refuse to accept extra costs due to innovation. Moreover, many of them are still doing (very) well financially because they were able to sell their projects right from the drawing board. Why should they call into question the old, successful models for working, thinking and profit?

Progressive hotel industry

The developers and builders of the QO Hotel in Amsterdam (part of the Intercontinental Hotels Group) questioned everything. The new, smart hotel networks material, resources and hotel guests with the neighbourhood. Sustainability is also part of the networked exercise: There are ten charging stations for e-cars in its underground carpark and a café on the ground floor that offers local products as well as some from the greenhouse on the hotel's roof. In total, the building aims for a 65 percent energy savings.

Clever operators like Ruby Hotels know: "In the end, investors are interested only in the efficiency of our processes and the associated cost advantages!" So they continue to design concepts and remain open to everything. The young disruptors motivate operators who alone have enough opportunities for monetisation in their operating terrain, for example, in selling more day rooms, utilising the breakfast room for a secondary purpose, playing up the lobby area with more retail space, and much more. If the partners on the investor side refuse to budge, a flexible "open interface" operator may be able to score again in the future by seeking out investors that are more suitable for the operator’s own innovative concepts. 

The hotel industry earned great praise from the German Property Federation (ZIA). ZIA management board spokesman Klaus-Peter Hesse considers the industry "significantly more progressive" on the road to digitisation than other asset classes, especially in comparison to the "slow-seeming housing market". Hotels have long utilised central and networked management systems in the back of the house, and have been exposed to online travel agencies (OTAs) for many years. "They know how highly competitive their market is", he says – and is pleased that online pressure is forcing retail and logistics to talk about floorspace optimisation, online sales and modified concepts online and offline. 

By Maria Pütz-Willems

Title image: Art-Invest Real Estate/ACCUMULATA Real Estate

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