With the hotel business in New York City continuing to boom, a market niche is widening for select-service hotels in mid-block locations. These properties – think of brand offshoots such as Hilton Garden Inn or Holiday Inn Express – fall between the “budget” and “luxury” categories, offering mid-priced beds, decent coffee and wi-fi access.
Hotel developers such as the McSam Hotel Group, the Lam Group and Hersha Hospitality are piling on to build them, encouraged by a real estate market that is favorable to smaller, hotel buildings tucked away on side streets, especially in areas like Midtown South, Midtown West and Chelsea.
Gary Wisinski, chief operating officer of McSam Hotel Group, said that his company has plans for several new select-service mid-block hotels, including three on West 39th Street between Eighth and Ninth avenues (to be branded as a Hampton Inn, a Holiday Inn Express and a Candlewood Suites), all to open in summer 2008, and another Holiday Inn Express on West 43rd Street between 10th and 11th avenues expected to open in 2010.
One primary driver behind the select-service boom is cost. Martin Levine, chairman of Metropolitan Valuation Services, said that in the Plaza District in Midtown, hotel developers face prices of around $800 per square foot, but in Midtown South,
Midtown West and Chelsea, areas where there is available land, $300 per square foot is the norm.
Levine said that in those areas, a small hotel may be a more profitable venture than certain other commercial projects.
“A small office building is going to need rents that are far from achievable because of construction costs,” he said. “If you’re putting up a small office building, you can’t pre-lease it, so it’s built on spec – and then the economics don’t look very good, since the rents have not yet been proven high enough to sustain.
“But a hotel’s rate structure,” he continued, “supports a reasonable return on investments.”
Greater demand, less risk
The strength of the current hotel market has also made opening smaller hotels in non-prime locations less of a risk. “Smaller hotels started opening three or four years ago,” said Roland de Milleret, senior vice president of HVS Global Hospitality Services. “Until then, the numbers for the value of the hotel compared to construction costs didn’t work, but now, because the performance of hotels is so strong, the value is higher than construction cost.”
For one thing, demand for rooms in New York City is currently exceeding supply and has been for some time – even despite the recent boom in hotel construction. As Daniel Lesser, senior managing director of the hospitality and gaming group at CB Richard Ellis, pointed out, “earlier this decade, several thousand hotel rooms converted to residential use. Even with 10,000 new rooms in New York, the needle doesn’t really move.”
According to Smith Travel Research, the average daily rate for New York City hotels (which encompasses everything with 20 or more rooms) through October 2007 was $257.14, an 11.6 percent jump over the year-ago period.
Another draw for hotel developers is that both Chelsea and Midtown West are zoned for commercial use [M zoning], making it more difficult for residential developers to obtain spaces there unless they acquire variances. “Up until two years ago, residential development was the hottest ticket in the market,” says Matthew Slonim, head of investment analysis at Besen and Associates. “On every property, residential developers were outbidding others. But with M zoning, residential developers are not able to bid.”
There is also the simple availability of more vacant land in Chelsea and Midtown South and West that makes those areas ideal for hotels. “It’s almost impossible to find vacant land in Midtown,” says de Milleret. “On the Upper East Side, almost nothing is zoned for commercial use.
“But in Chelsea, the availability of land is relatively easy at the moment, and those hotels can provide a more affordable alternative and get the overflow from Midtown. They have occupancy rates in the high 80s to low 90s.”
This equation has opened the door for brand-name hotels to build their select-service offshoots in Manhattan – such as Hilton Garden Inn, Holiday Inn Express and Comfort Inn, which are among a substantial group already under construction in Midtown West.
“Brands have been looking to find economically viable ways to get into New York over the past few years,” says Mark Gordon, head of the U.S. Hotel Group for Cushman Wakefield Sonnenblick Goldman. “Average daily rates have grown to a level that is allowing the development of select service in the city.”
Mark Owens, managing director of Ackman Ziff Real Estate Group, notes that “there is tons of full-service product, but there has never been a huge supply of limited-service product in New York City.”
He adds, “the mid-price traveler has not been well accommodated historically, so the small hotels are filling a void.”
Growth in new locations
The Chelsea and Midtown South and West areas have the benefit of being close to subways and major traffic areas like 42nd Street, but they’re also well situated to serve future developments, such as increased office space, the High Line project, the expansion of the Jacob Javits Center and the redevelopment of the Hudson Yards.
“Midtown South has lots of new office space. There’s the new New York Times building, and 11 Times Square is under development,” says Owens. “There will be 5 or 6 million square feet of office space opening in the next three or four years. The New York market is continually changing, and hotels fit on smaller footprints can do phenomenally.”
Though the far west locations of the Hudson Yards and the High Line projects may seem remote now, hotel developers seeking space nearby know that will change. “With the High Line and whole West Side Yards redevelopment, in the next 10 years it will be a whole new area,” says Lesser.
The Hotel Gansevoort in the Meatpacking District was cited by several hotel experts as an example of a pioneering hotel in a neighborhood that previously had seemed a highly unlikely location for a hotel. “There are no bad areas left in New York City,” adds Lesser. “We’re seeing a lot of hotels go into submarkets in Manhattan.”
Horizen Global, for example, will open the VU, one of the first Midtown hotels built far to the west of Times Square, in April. (See Taking a Zen approach to building).
Responding to obstacles
There are some challenges for developers who build hotels on crammed side streets. Wisinski of McSam, which was behind the development of both the 150-room Sheraton Four Points on West 25th Street, which opened in December 2003, and the 230-room Holiday Inn Express on West 29th, said that one primary issue is being a good neighbor in a cheek-by-jowl site.
“In many cases, our neighbors want to know what type of neighbor we’re going to be,” Wisinski said. “But we explain to them that we’ll be a great neighbor because we sell a sleep experience, and we’re quiet and well-lit.”
The process of putting up a hotel in Manhattan is also more protracted than putting up the same hotel in the suburbs. “From when we buy the land to the day the hotel opens, it takes twice the amount of time it would in a suburban location,” says Wisinski. “And the overall cost of building takes a much stronger capitalized developer.
The locations for both the Sheraton Four Points and the Holiday Inn Express were chosen for their proximity to Times Square and the Jacob Javits Center, as well as the ability to obtain air rights on both properties and do ground-up construction, Wisinski said.
Because development costs are still substantial, the general trend toward building smaller rooms to maximize space is especially true for smaller-scale projects. “Development prices are so high right now. Small hotels are trying to have smaller rooms to justify how much they’re paying. They’re getting higher rates now, so why not scale back and have more rooms and less square footage?” says Slonim.
Though there is no dispute about the need for additional rooms in Manhattan, opinions differ as to how smaller hotels might be affected in the event that the currently strong tourist market experiences a downturn. “When things slow, it’ll be the hotel operators with marketing expertise and amenities who do better,” says Slonim. Larger hotels may also have an advantage in that they have more to room to be creative – literally. “If you have a larger hotel, you can do different pricing for rooms and spread out your costs during rougher times with lower occupancies,” Slonim notes.
But the glass could potentially be half full for smaller, select-service hotels during a slowdown. “One benefit of having a smaller hotel is that you have fewer rooms to fill, so it’s easier,” says Owens. And those travelers who are used to a more luxe hotel experience would have alternative – and affordable – lodgings in tighter times.
“A higher-paying client could still turn to a smaller hotel if travel budgets are cut,” Owens adds.