On our New Miami blog we often talk about Miami’s role as a trendsetting market for the hospitality industry. Over the last few years, Miami has been a popular launching point for luxury brands, such as The Thompson Miami Beach, Ian Schrager’s EDITION  Hotel South Beach, SIXTY Hotel’s Nautilus South Beach, AC Hotel by Marriott  and fashion designer Tommy Hilfiger’s revitalization of The Raleigh Hotel as a hotel and private club. Each of these brands is competing in an luxury arms race to appeal to affluent travelers. However, Miami’s best kept secret, and potentially most lucrative, may just be a high-end hostel appealing to the elusive millennial market and its estimated $220 billion in annual spending power.

Hostels, long the lodging of choice with the international backpacking set rather than the international jet set, have long been a mainstay in Europe, but have struggled to take off in America. However, since opening in 2012 in the shell of an old motel to the north of South Beach, Freehand has quickly become a popular destination for both locals and tourists. For locals, it’s a popular hangout known for its food, drinks and entertainment. Tourists are attracted to its appeal to locals, trendy reputation and low rates. Unashamedly casual and low-key, Freehand is reminiscent of old Miami Beach and offers an affordable escape from the glitz and glamour of its more luxurious neighbors.

The economics behind Freehand’s success with the millennial market are pretty straightforward:

Minimize startup and fixed costs by staying off the beaten path and renovating an existing building, decrease overhead by eliminating traditional luxuries and amenities and increase occupancy, all while making up for the loss of traditional revenue drivers by putting greater emphasis on food and beverage sales, which also appeals to locals. While the average room in Miami Beach goes for $242 per night, Freehand charges an average of $42 per night for a spot in an eight-bed room. Freehand also offers private rooms for an increased cost, but for those traveling in groups and looking to spend minimal time at the hotel, a multiple bed room is an ideal substitute for booking a block of rooms at a traditional hotel.

The Wall Street Journal  recently highlighted Freehand’s success and the ensuing interest from major investors, such as Ronald Burkle’s Yucaipa Cos., AllianceBernstein and Invesco Ltd., who believe the formula that made Freehand such a hit in Miami can be replicated in other markets across the country with just a few tweaks. Freehand recently opened a second location in Chicago, and European hostel chain, Generator Hostels, is reportedly close to buying property for its first U.S. location in Miami Beach, down the street from Freehand.

A major factor fueling investor interest is the hope that hostels may be a way for the institutional hospitality industry to fill the gap between itself and sharing economy poster child, Airbnb, by appealing to a broader demographic of travelers not yet ready to take the leap to being hosted in a stranger’s house. This gap in the hospitality market which hostels look to fill is immense, and millennials are the key drivers. Consider that in only seven years millennials fueled the growth of Airbnb to become the world’s third largest hospitality brand, valued at an estimated $20 billion, placing it comfortably ahead of Starwood and Wyndham and only a few billion in market cap behind Hilton and Marriott. However, despite Airbnb’s success in disrupting the hospitality market, according to a recent survey of millennials, only 3.9% of millennials used Airbnb to book their most recent leisure trip, as opposed to 5.4% who stayed at a hostel, 17.9% who stayed with friends or family and 38.2% who stayed at a hotel. While these statistics only paint a part of the picture, they show that given the size of the millennial hospitality market, a small market share can reap huge returns and indicate an untapped market with growth potential in what many consider to be a saturated market for traditional hospitality.

Like Airbnb, hostels appeal to millennials because they offer something different, not just a room, but an experience that is unique, local and worth sharing with others. To put it in other words, millennials are more likely to post a picture of their experience at Freehand than their stay at a name brand hotel down the street. While it may take time for hostels to win over other genres of travelers not willing to give up on luxury and amenities, hostels manage to bridge the gap between the uniformity offered by the major flags and the extreme opposite end of the spectrum dominated by Airbnb.

In the next post in this series, we’re going to dive in to what you need to know about millennials, Miami and how the two come together to create an ideal hostel market.