Targeting millennials, investors flock to hostel market

Photo of AO Frankfurt copyright A&O HOTELS and HOSTELS Holding AG

As "home-sharing" services like Airbnb keep growing, hotels are finding new ways to capture the millennial demographic that seeks affordability and—perhaps just as importantly—communal experiences. Hilton's Tru brand and Marriott's Moxy brand both emphasize low prices, small guestrooms and large lobbies with opportunities to socialize, while AccorHotels' nascent Jo&Joe brand is designed to “blend the best of private-rental, hostel and hotel formats.”

Investors are also seeking to cash in on the growing hostel trend. This week, TPG Real Estate, the real estate platform of San Francisco-based private investment firm TPG, completed the purchase of Germany's A&O Hotels and Hostels. 

Under the agreed terms, TPG Real Estate will acquire 31 leased and owned properties with more than 20,000 beds located primarily in Germany. Financial terms of the transaction were not disclosed.

In a statement, Anand Tejani, partner at TPG Real Estate, said that the hostel company was “well-positioned“ to capitalize on both global and European travel trends. “Over the last number of years, the sector has experienced rapid growth, particularly due to an increase in travelers in search of affordable, reliable, lodging options,” Tejani said.

“Partnering with A&O presents the unique opportunity to invest in one of Germany’s few leading, privately-owned lodging platforms,“ Michael Abel, managing director at TPG Real Estate, said. “We see an opportunity to create a pan-European company of scale in a fragmented market that continues to experience robust growth.”

The Value of Hostels

Investment in hostels is not new, but the growing appeal of the millennial demographic (which makes up more than 70 percent of hostel guests) has made it increasingly appealing. 

In last year's first-ever Hostel Trend Report, Phocuswright and Hostelworld found that the hostel industry is projected to grow by 7 to 8 percent year-over-year, and as of the time of the report's release, the industry was valued at $5.2 billion in bed revenue. 

The highest hostel revenue growth areas are in markets that appeal to millennial travelers, including South and Southeast Asia (13 percent), followed by the Middle East (11 percent), Eastern Europe (11 percent) and Northern Asia with China in the lead (10 percent). 

RELATED: Investment in and development of the hostel market will be covered at the International Hotel Investment Forum (IHIF), March 6-8 at the InterContinental Berlin. For more information, visit www.ihif.com.

Who's Investing? 

TPG is hardly the first company to see the value in hostels. Back in 2011, billionaire Ron Burkle raised $250 million to open up hostels in the U.S., and his “Freehand” properties have a presence in major gateway cities like Miami, Chicago, and Los Angeles. 

More recently, Invesco Real Estate purchased 23 percent of Generator Hostels in November 2014 from London's Patron Capital for nearly $63 million in capital. With 12 properties currently open, the group is aiming to have 20 hostels in its portfolio by 2018, including in several European cities and at least three U.S. locations.

These investors, Forbes claims, are bringing credibility to the market and opening the gateway for future growth. 

Top Hostel Markets

Around the same time that the Hostel Trend Report was released, Savills conducted a study examining what cities had the most branded hostel beds for "youth travelers," identified for the report as those aged 16 to 34. 

Thanks to A&O and its competitor Meininger, Germany's hostel market leads the continent's hostel availability. Berlin, in particular, has 11.2 beds per 1,000 youth travelers. Barcelona came in second with 5.3 beds per 1,000 youth travelers.

Other cities in Europe still have room to grow. London has only 2.8 beds per 1,000 youth travelers while Paris has 1.4. Dublin, Rome and Copenhagen all have fewer than 2.4 beds.

And then there's the U.S. market, where hostels are much rarer. As millennial travelers make their demands known, more American cities may boost their branded hostel supply. In late 2015, Generator acquired the Atlantic Princess Condominium in Miami Beach as part of a $200-million plan to expand its presence in major cities.