Big hotels go boutique, better hedge against crunch?

Small projects have less trouble with financing, but may fall further in a recession

Jun.June 30, 2008 03:45 PM

An eclectic crop of boutique hotels is emerging in New York, and although they’re all new brands, they are offshoots of well-established mainstays such as Hyatt, Marriott and the W Hotels.

The big hotel chains have launched the new boutique hotel brands in an effort to appeal to a market that is as interested in earning frequent traveler points as it is in experiencing edgy, urban design and a hip bar in the lobby.

Three offshoots of larger chains are scheduled to be built or already exist in New York — Hyatt’s Andaz opening at 75 Wall Street next year, W’s Aloft brand, opening in Downtown Brooklyn next year, and Hersha Hospitality’s Duane Street Hotel, which opened in January at 130 Duane Street. Others, such as Marriott’s Edition brand, being developed in partnership with boutique hotel pioneer Ian Schrager, are in the pipeline.

Schrager is widely credited with introducing the boutique hotel 24 years ago when he opened Morgans Hotel at 237 Madison Avenue. Commercial real estate advisor Andrew Calvo defines a boutique hotel as “unique,” with each location looking different and an emphasis on customer service.

But the “unique” part of the definition has changed. In the past, these boutiques were typically single stand-alone establishments. Now they’re often part of a chain with no loss of cachet to hotel guests. That’s thanks in large part to the success of the chic W Hotel brand, part of the Starwood Hotels and Resorts company, which was the first to make a string of boutiques into a major chain.

“When you walk into a W Hotel, it’s clear that you’re in a boutique hotel,” Calvo said.

The success of the W brand helped change the way large hotel chains looked at the possibilities for their own boutique hotel lines.

“Barry Sternlicht [former Starwood CEO] was ahead of the curve with W; he took the Ian Schrager model and developed a similar hotel product type as part of an offering for a multi-branded chain,” noted Daniel Lesser, senior managing director of the Hospitality and Gaming Group at CB Richard Ellis.

Now, boutique hotel brands fall neatly into a niche that many in the hotel industry are striving to fill.

“All of the chains are really offering varying products at varying price points to try to serve the traveling public,” said John Fox, senior vice president at PKF Consulting. “Folks who want the different price points and different products are willing to pay. And some of that niche market is also a validation of the boutique product; chains have come to realize that they need to be in that market segment.”

Building boutique hotels — both those that are part of existing brands as well as independently owned hotels — is a mixed bag in terms of cost. “Cost differences are not substantially different [between building a large hotel and smaller one], but boutique hotels are marginally high-cost to build,” said Neil Shah, president and CEO of Hersha Hospitality. “The fixtures and finishes of boutique hotels can be 20 to 30 percent higher cost than more traditional brands.”

However, financing them may be easier. “In today’s environment, with credit so tight, large loans are unavailable, so smaller boutique hotels may have less of a handicap than usual,” said Shah.

There’s a worry that boutiques may be the first to suffer in the event of economic turmoil. “Boutique hotels generally fall further in recessions. Only the deepest markets and the most compelling locations can acquire new customers in periods of low demand,” said Shah.

Still, some view the building of branded boutiques by large chains as a necessity in order for them to remain profitable. “There’s no choice anymore; a certain percentage of the traveling public is demanding a boutique product,” said Mark Gordon, head of the U.S. Hotel Group at Cushman & Wakefield. “Brands are not doing it because they view it as an option.”

Competition from successful boutique hotel chains is also pushing the big chains into this segment. “Smaller boutique hotel chains — Kimpton, Thompson, Morgans — are making huge inroads with travelers,” said Calvo. “Simply, people are bored of staying in a regular hotel. By the major chains building a boutique hotel brand, they are able to start from the ground up and charge lots for it, and people will gladly pay it. You go to a boutique hotel for the experience, because when you leave, you’ll never look at a hotel the same again.”

For its part, New York has its own economic climate as far the hotel business is concerned. “Manhattan occupancies are at 86 percent compared to a national average in the low 60s,” said Fox. “And in the first three months of this year, occupancies continued to increase in New York despite the economy, though they may have dropped a bit in April.”

And with the high demand, room rates are much higher here. “It is not uncommon to see a hotel such as a Hampton Inn, which would normally cost around $100 to $150 a night in a suburb or other metro area, cost upward of $300 or $400 a night in Manhattan,” said Calvo. “And the same goes for the larger New York hotels — Marriott Marquis, Hilton — an average night can cost anywhere from $350 to $500 for a basic room.”

With room rates already so high here, the price jump to stay in a boutique hotel room versus a regular nonboutique hotel room is much smaller in New York than it is in other areas. That narrow margin makes the choice of staying at a boutique hotel an appealing one for many travelers. “There may be a $50 to $100 price difference, but if you’re paying $400 for a room to start with, spending an extra $50 to stay at a boutique hotel is very worth it to a lot of travelers,” said Calvo.

What travelers experience at boutique brands varies, but most aim to provide the surroundings, service and lifestyle-oriented approach that makes up the boutique hotel success formula. According to Aloft spokesperson Angela Bliss, W’s Aloft hotels — often built in tertiary markets, such as near airports or slightly outside of major cities — were developed with the idea of filling a void in the Starwood portfolio. “Aloft grew out of interest from the development community. We had many developers interested in building W Hotels in areas that probably couldn’t support that model in the long run,” said Bliss.

Although Aloft hotels do not have certain boutique elements, such as their own restaurants — its bars serve appetizers and snacks — Bliss stressed that Aloft, which calls its rooms “guest lofts” and features sleek design, should still be considered a boutique brand. Its 176-room Brooklyn location, at 228 Duffield Street, set to open in 2009, was chosen in part for its proximity to Downtown Brooklyn to appeal to business and other travelers. Aloft’s rooms, meanwhile, are on the lower end of the boutique price scale; the average room rate is $150 a night.

While the Starwood Web site states there will be an Aloft opening in Long Island
City in December 2010 and one in Harlem in June 2010, Bliss would not confirm
those locations.

Hyatt’s Andaz hotels — the location at 75 Wall Street will be the first in the U.S. when it opens in early 2009, followed by another location at 485 Fifth Avenue — are at what Lesser calls “the highest end of the boutique spectrum.” They come with personalized service in the form of “hosts” armed with handheld check-in devices rather than a check-in desk and programs like “Reader in Residence” at the London location, in which writer Damian Barr reads to guests from a list of books he’s chosen or from a book requested by the guest.

The 42-story property, bought by the Hakimian Organization in 2005, was shopped around to several chains before Hyatt
proposed the Andaz. Because the property was deemed too big for a hotel, the 18th through 41st floors were turned into condominiums.

The combination of hotel and housing can be an attractive one for larger chains looking to add a boutique brand.

“Historically, boutique hotels were conversions,” said Cushman & Wakefield’s Gordon. “If you had a building that wouldn’t work for a large branded hotel, boutiques were a way to solve that issue because they’re more flexible in their design.” Now, Gordon added, “we’re also seeing new ground-up hotel development, as boutiques become more dominant within the industry, and more with branded residential above.”

“People are very much into the services you get with boutique hotels, and one of the top selling points that we have for the condos is having the hotel downstairs,” said Larry Kruysman, managing director for Corcoran Sunshine Marketing Group, which is doing the sales and marketing for 75 Wall Street. “People living in the apartments can take advantage of the hotel services such as room service and laundry, but if they’re not interested, they don’t have to use or pay for them.”

Shah of Hersha Hospitality admitted that opening the stylish six-story, 45-room Duane Street Hotel, where rooms start at $350 a night, was “kind of new for us. Our background is in operating the national chains; we own and operate over 50 Marriott, Starwood, Hilton and Hyatt hotels.” But when the property became available from mega-hotel developer McSam, which had originally planned to turn it into a
budget hotel, the Hersha group decided to
buy it and transform it into a boutique
hotel as part of its independently branded hotel group.

Hersha has plans for another independent property, the 93-unit Nu Hotel (formerly the Smith) at the corner of Smith Street and Atlantic Avenue in Brooklyn, which will open this summer. “There are an increasing number of people who are drawn to the lifestyle segment of the market, who appreciate design but would still like to get their rewards points,” said Shah. “They all have a place.”

Perhaps the most dramatic entry in the list of big hotels venturing into boutique territory is the 81-year-old, family-run Marriott chain’s collaboration with Ian Schrager. According to John Wolf, senior director of public relations for Marriott, when chairman and CEO Bill Marriott saw Schrager’s revamp of the Gramercy Park Hotel a few years ago, he was so impressed that he felt Schrager would be the ideal partner to help bring Marriott into the boutique realm with a new brand called Edition.

No Edition hotels are open yet; the first will probably open in early 2011. There are 10 development deals so far in several cities, including Paris, Chicago, Los Angeles and Madrid, with a New York location to be added eventually. Unlike a traditional Marriott, each hotel will be created by different architects and designers. The emphasis will be on the boutique mantra of personalized service and unique surroundings.

“Marriott teaming up with Ian Schrager is the ultimate validation that there has been a fundamental shift and that boutiques are part of the hotel industry,” said Gordon.

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