Europe's Generator takes alternative accommodations mainstream

LOS ANGELES—The Americas Lodging Investment Summit is an annual gathering of the hotel industry's power players, suited up and ready to make deals. There are the multi-branded hotel companies, promoting their products; the investment community, sourcing their next big acquisition; the management companies seeking their next management contract; and an assortment of others connected to the hospitality industry, all in search of a piece of the big pie.

Then there is Generator Hostels. And you do a double-take: What is a hostel company doing at a power conference like ALIS? After all, aren't hostels the province of untidy backpackers seeking to find themselves by traveling the world on a dime? Hostels conjure spartan, cheap accommodations with bunk beds, shared bathrooms and one-eye-open sleep with your wallet clutched tightly at your side.

London-based Generator has changed that perception, one hip, upscale hostel at a time. Generator's accommodations are more boutique, lifestyle hotel than hostel. Think rooftop bars and restaurants with speciality cocktails and trendy communcal spaces for socializing.  

It's the vibe exuded by Generator's CEO, Fredrik Korallus, who in a sea of dark suits stood out in jeans—not to mention he's reaches well over 6-feet tall. Korallus became CEO of Generator in 2015 and before that was chief commercial officer at Carlson Rezidor.

Generator's current portfolio numbers 12 hostels in many European gateway markets, including Paris, London and Rome, and in those cities' edgier, hipper, up-and-coming neighborhoods, such as Paris' 10th arrondissement. "We don’t want to be in the city-center tourist areas," Korallus said.

This year, Generator will make its debut in the U.S. with a hostel in Miami, a conversion of a condo building. (Another will open in Q3 in Madrid.) And while Korallus understands the U.S. perception of hostels, he has no fear that the product won't work. "It will succeed in the U.S.—I have no doubt," he said.

He uses a city like New York to illustrate his point. "A mediocre room will cost you close to $200. I can give you a bed for $50-$100, and it brings a new demographic and access to New York."

It's curious that Korallus brings New York up. He'd love to have a Generator there, but city ordinance's currently prohibit the operation of hostels. Korallus said they are lobbying to fix and update the law. 

The Model

Generator's hostels are design led, but run on a budget hotel model, Korallus said. Most guestrooms are communal (four to a room)—though private accommodations can also be purchased—and, above all, beds, not rooms, are purchased. The average hostel typically has around 100 beds, but, for instance, Generator's London property has some 900 beds.

But, according to Korallus, the bed is the least important thing. "The beds are there for them to crash out," Korallus said about his millennial clientele. "Scale drives the economics and the cultural vibe," Korallus added.

And while safety and security can be a concern in dealing with a hostel product, Generator also offers what are called "female-only dorms." (CCTV coverage is omnipresent, too.) Safety, however, is rarely an issue. Generator caters to what Korallus calls the "nomadic traveler," who carry with them a "code of conduct."

And while Generator does fall into the alternative accommodations bucket, do not get it mixed up with the likes of Airbnb, which Korallus said is not the same product. "We don’t compete with Airbnb. They are an individualist product. At Generator, you come to meet people," he said.

Korallus recognizes that alternative-type accommodations are becoming more prevalent in the hospitality industry. He cites AccorHotels' Jo&Joe brand, for one, a brand, as AccorHotels refers to it, "that blends the best of private-rental, hostel and hotel formats."  

Korallus believes other large hotel companies will look at the model. "It’s new, virgin territory, but brands will go there. The customer we have is the future of hospitality," he said.

Generator Hostels skew European, but Korallus is adamant to grow the brand further. He ticks off a slew of cities, including Budapest, Prague, Tel Aviv and New Orleans, Boston and Washington, D.C, in the U.S. He said there is also room for second properties in the likes of Copenhagen, London, Paris and Amsterdam.

Future Sale

Korallus is leading Generator during a time of flux. Generator, whose parent company Patron Capital, which owns the bulk of the assets in the portfolio, is up for sale via auction. According to The Wall Street Journal, the top bidders are Brookfield Asset Management, TPG and an unknown London investment firm. 

Korallus didn't have further to say on the sale, other than it fits into Patron's cycle-out strategy. (Patron has owned Generator for eight years.) "The process is underway," he said. "They are accessing the right price and the right time. Generator could reportedly sell for $500 million.