Investors, developers drawn to membership clubs

Pax pandemic, we are continuing to define our habits and relationships to others, all of which is influencing hospitality concepts and investments. In particular, what has become a chasm between working at home and the traditional corporate office is helping bring people together in new ways, reinvigorating that seemingly staid preserve of clubs. We might call it urban cocooning with style; and there are plenty of interesting options.

Contributed by Evan Hurd, principal and managing director, RobertDouglas, Nashville, Tennessee

Sure, standalone private clubs for high-net-worth professionals and others have always been an important fixture of the social and culture fabric of cities worldwide. Well-known exclusive member’s clubs include The Core Club, Ten Trinity Square or the Union Club of the City of New York. Now, spurred in part by the working away from the office phenomenon, where the executive type may want to combine exclusivity, networking, bespoke surroundings and a place to work away from the office, private clubs are attracting serious development and investment interest as a hospitality-like real estate play.

Many of these club concepts are further expanding the lexicon of hospitality platforms, sharing many of the features, amenities and unique atmospheres that draw guests to independent and branded boutique hotels, outdoor experiential lodging and resorts and, to a certain extent, timeshare properties.

Thus, when it comes to clubs, members can explore interesting architecture and furnishings and there is no need to rent an office for occasional use. One can take advantage of a fitness center, wellness activities, lounge, fine dining or library, the list goes on, while enjoying great networking opportunities, hanging out with interesting people. Membership has its privileges. Creativity and comfort reign.

Development models and markets

So far, we have identified two approaches to building up properties in this space. Soho House, the current standard-bearer, has more than 35 luxury scale multi-continent locations at present, focusing on major, albeit high-cost cities in North America like New York, Chicago, Los Angeles, Toronto and Miami. It also has some smaller yet high-profile cities like an Austin, Texas, or just opened Nashville, Tennessee.

Soho House in Berlin

Part of the publicly traded company Membership Collective Group (NYSE: MCG), the Soho House development strategy has been to commission purpose-built properties in their selected markets and then lease them from their developers. In this model, Soho House likely contributes some up-front percentage of capital and development costs.

Another development model is for independent investors, local developers and other high-end worth individuals to fund their own club buildings and operate them under a management-provided brand. There is excellent potential for this development model in leading secondary and even tertiary cities across America given the exciting things happening in many of these cities and the lower barriers to entry and development costs.

Yet these projects, often developed by local leaders who would like to highlight their communities – and have a hip place at which to hang out – holds the same revenue potential as an entity like Soho House. One pioneer in this arena is Common House, which has locations in Charlottesville and Richmond, Virginia, and Chattanooga, Tennessee, while exploring similar markets.

Promising club concepts include Gravity Haus, “a community for the modern adventurer,” with locations in Breckenridge, Denver, Vail and Winter Park in Colorado. The Breckenridge property has 60 guest rooms. Others include Denver’s 63-room Clayton Hotel and Clayton Members Club, part of the Aparium Group, a boutique hotel group with 10 properties and two on the way; The Fitler Club, “an urban social club for socially conscious, forward-thinking Philadelphians,” which features 14 guest rooms; and The Britely, on West Hollywood’s Sunset Boulevard featuring two Wolfgang Puck restaurants.

Revenue on steroids

Cell phone contracts, software from Microsoft or Adobe, even old-fashioned magazine subscriptions renew automatically unless we finally find the circulation department to cancel our subscription. What business doesn’t like receiving ongoing subscription revenue?

In addition to guest rooms, the beauty of clubs is that they have recurring membership revenue that reduces the volatility of the net cash flows and, theoretically, enables investors to apply lower capitalization rates to club investments than, for example, a lifestyle boutique hotel.

Then, like resort or big box luxury hotels, there are multiple potential revenue generators that can include fine dining, lounges and other food and beverage services; rental of meeting space; or spas and wellness activities. Bowling lanes, screening rooms, ski lessons, yoga classes, book clubs – just use your imagination.

While the properties discussed are purpose-built as member clubs, the prospective operating revenues just discussed make them attractive over the life of a given investment and the core properties should hold strong resale value for use by new club operators or for conversions to similar uses like boutique hotels sans membership programs. Clearly, these clubs fit in well with historic preservation and urban revitalization efforts. For example, the Common House in Chattanooga is housed in an historic YMCA. Club concepts, especially in urban environments, also have excellent potential to activate surrounding retail, dining, office properties, multifamily housing and services, which can make them attractive to economic development officials and mixed-use developers.

Overall, the private club space has excellent potential for growth and aggregation as society and culture evolve post-pandemic. Clearly, there is ample room for new platforms, approaches and locations, just as we have seen with outdoors lodging. We expect that institutional equity looking to diversify their portfolios and explore growth opportunities will have a strong interest in filling out membership applications.

  1. Yvette Jong
    Yvette Jong
    April 1, 2022 at 4:35 pm

    Hey Evan! Thanks for kicking off the discussion on hospitality’s latest hot topic and the clear precis on the financial benefits of membership clubs. We’ve been working with clubs like Soho House since 2003 and agree that the model has huge potential. We’ve also helped a number of private clubs including some you mention here – like Common House and The Britely – to show how that potential can be made real and sustainable. But for every club we’ve helped develop or refine, there was another that was never born because we helped developers understand the pitfalls. It’s critical for developers to understand that the key to success in private clubs isn’t about member acquisition, but about member retention. And the secret to retention is long-term relevance, community-building, creative content curation, and a host of other intangibles which require thought, attention AND ongoing investment over the long term that not every developer is prepared or able to give. But with that commitment, one can certainly unlock the “revenue of steroids” you describe!

    • KelKoh
      April 24, 2022 at 2:46 pm

      Awesome article Evan and response Yvette, totally agree regarding the need to understand how best to retain members. Been noticing other interesting trends too as we also consult such as the increasing expectations from certain demographics such as millenials and gen Z of how ‘experience’ trumps ‘goods and good service’ as we are in the experience economy Era.