Capitalizing Boutique Real Estate in a Tough Market

How small-scale developers can get creative to finance deals despite challenging capital markets and investor inertia

Today’s Thesis Driven is a guest letter from Brian Carrico and Collin Bibb, Co-Founders of Byways Hospitality. Byways is a boutique hospitality developer and operator based in Austin, Texas.

Our first ground-up boutique real estate deal was the 83-room Arrive East Austin Hotel, which was originally started in 2016, when East Austin had few institutional projects

The emergence of new technology and business models has made managing small real estate projects more attractive than ever, even in challenging macroeconomic conditions. By targeting smaller sites and opportunities off the radar of larger investors, owners and developers of smaller real estate projects enjoy an advantage over those larger, institutional investors in a new-era market that increasingly requires agility and creativity. 

But for that same reason–each project is unique and sub-scale—boutique real estate projects can be challenging to capitalize. In today’s letter, I’ll share some observations and strategies that my group has picked up over the past 15 years and adapted to the current environment. I suspect these are applicable to just about any flavor of boutique real estate, and can serve those brave few of us who deliberately chose to carve out a living pursuing these small labors of love. Today’s letter will cover:

• Why boutique real estate makes sense today;

• Challenges boutique operators and developers face;

• Capital stack strategies for smaller developers;

• Alternative financing paths like CPACE and tax credit financing;

• Overcoming investors’ current bias toward inertia.

For the purpose of this discussion,“boutique real estate” refers to projects that are unique in size, layout, or location and are therefore off the radar of REITs or other institutional investors other than as part of a larger portfolio. Boutique projects often include a compelling set of characteristics to the potential owner/developer such as design, submarket, or target audience. 

A project could be boutique based on size—think sub-150 unit multifamily, sub-150,000 square foot office, or sub-150 room hotels. Or, it could fall into the bucket of “boutique” based on layout or location; our first boutique hotel development, for example, was in East Austin, which in 2015 was considered very boutique due to few comparable projects in the market at the time.