Economy hotels no bargain for developers

Developers are checking out of the economy hotel business.

Though the hotel market is hot, with land and construction costs as high as they are, some hoteliers say budget hotels are not worth investing in at this point, at least in Manhattan.

In a sign of the shift, one developer, Texas-based Highgate Holdings, which owns more than 6,000 hotel rooms in Manhattan, reportedly plans to convert a Holiday Inn at 138 Lafayette Street into a boutique property. The developer bought the 14-story, 230-room property two years ago for $42.5 million.

“I don’t think anyone can afford to build economy hotels in Manhattan,” said hotel developer Sam Chang, CEO of McSam Hotel. Chang has built about 25 hotels in the city, six of them in the economy class, including a Howard Johnson at 135 East Houston Street on the Lower East Side and a Days Inn in Long Island City, slated to open this month.

The costs of economy hotels are too high to turn a profit, Chang said. The Days Inn “will be my last economy hotel.”

Developer John Lam of Lam’s Group concurred with Chang’s assessment. Lam finished an economy hotel, a Howard Johnson at 449 West 36th Street, in January. He sold the hotel the same month for $11.7 million, he said.

But while most hotel developers may think economy hotels in Manhattan are about as compelling as used towels, a few others are pushing forward with economy projects by shrinking room sizes, shifting their focus to the outer boroughs, or trying stylish versions of budget lodgings.

In order to justify building any new project in Manhattan, Lam said, rooms have to be at least $200 a night. In the outer boroughs, he said, economy hotels can still thrive, assuming room rates start at $150 a night.

Many hotel real estate pros blur the line between “economy” and “budget” hotels.

“The terms ‘economy’ and ‘budget’ can be used interchangeably,” said Eric Lewis, a managing director and industry leader in the hospitality and gaming group at Cushman & Wakefield. “Generally, they represent the bottom-rate tier for traditional hotel products.”

But according to Smith Travel Research, which tracks hotel performance, economy and budget hotels differ.

Hotels in metro markets can be divided into five price categories: luxury is the top 15 percent; upscale is the next 15 percent; mid-price is the middle 30 percent; economy is the next 20 percent; and budget is the lowest 20 percent, according to data from Smith Travel Research. The company does not track hostels or dormitories.

In the New York City metro area luxury segment, there are 56 hotels with an average nightly room rate of $333.62, as of March 1, Smith Travel data shows. The upscale sector comprises 64 hotels with an average room rate of $207.51. The 119 mid-price hotels have an average room rate of $155.67. The economy group includes 84 hotels with an average room rate of $119.12, but the data is not that reliable because less than 40 percent of the 84 hotels provided data for the study. The data for the budget market, where the room rate is $113.38, is even less reliable, because only 6 percent of the 73 hotels so categorized participated in the survey.

New York City’s hotels are significantly pricier than those in the rest of the country. In the two bottom classes nationwide, there are 9,163 hotels with an average room rate of $58.66. The budget hotels have an average room rate of $47.49.

Some developers say the key to having a successful budget hotel in New York City is using upscale branding or offering a few in-demand amenities.

InterContinental Hotels is expected to open a New York City version of the boutique budget Hotel Indigo chain on 127 West 28th Street by the first quarter of 2009, according to the New York Post.

Vijay Dandapani, the chief operating officer of Apple Core Hotels, considers his five budget hotels to be part of a “limited-service segment.”

The five Manhattan Apple Core Hotels budget hotels offer a business center, complimentary continental breakfast in a breakfast room and, in some hotels, a fitness center. The rooms have free wireless Internet connections, a limited selection of cable TV channels, a telephone and a hair dryer. A number of the hotels will have flat-screen TVs by the end of the summer, Dandapani said.

Room rates in all five of the hotels average $170 a night per room but can dip as low as $99.

The room rates in Apple Core hotels are low, Dandapani said, because when his company developed its hotels, the “entry cost was lower” than it would be today.

Most recently Apple Core opened Red Roof at 6 West 32nd Street between Broadway and Fifth Avenue in 2000.

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If a developer were to build a budget hotel in Manhattan in today’s market, “because of the entry point, it’s flat-out impossible to do a budget hotel,” Dandapani said.

Hotel Carter at 250 West 43rd Street asks for up to $100 a night for its renovated rooms, according to its Web site. “These types of properties are typically not included in discussions on traditional hotels — be they economy, budget or any other rate tier — because the product offered and the typical customer are so drastically different,” said Lewis, whose appraises budget hotels and hostels.

One prominent hotel developer is even attempting to create a new economy hotel segment.

BD Hotels developed what its calling a “cheap chic” hotel at the site of the former Pickwick Arms at 230 East 51st Street. The Pod Hotel, which opened in January, offers 347 guest rooms — a number of which have bunk beds and shared bathrooms — with iPod docking stations, free WiFi and LCD-screen TVs. Nightly room rates start at $89 per night and are averaging $160, according to Richard Born, principal of BD Hotels.

It may be an economy hotel, but “it is still kind of a cool hotel,” said Lewis, meaning it differs from the bare-bones chain budget hotel.

The Pod Hotel could spur a new trend.

Lewis speculated that “it could conceivably be a recognized sort of subcategory. Whether the market can support 10 of these properties, I don’t think anybody knows at this point.”

But Born said the Pod Hotel is definitely profitable.

“We’re selling rooms like crazy, faster than we ever expected. We are 90 percent occupied now,” Born said in early April.

The secret to the Pod Hotel’s success: truncating the size of the rooms to 125 square feet, one-third the size of a standard hotel room.

“We build micro-rooms,” Born said.

The proof is in the pudding. “On a per-square-foot basis, I’m charging 30 percent more,” he noted.

Hank Freid, founder and CEO of the Impulsive Group, a hospitality company, also caters to the tourist looking for trendy-but-cheap accommodations in Manhattan.

Last summer he opened the Moroccan-themed Marrakech Hotel NYC at 2688 Broadway at 103rd Street, and now he is upgrading his Broadway Hotel & Hostel at 230 West 101st Street at Broadway, where room rates start at $30 a night.

A rung below economy hotels are hostels, and there are at least a few dozen in New York City, most of them in Manhattan. Hostels typically offer a dormitory-style setting with multiple beds per room and shared bathrooms. They have the cheapest rates, although there can be great disparity in what they charge.

Cushman & Wakefield’s Lewis said that hostels are generally converted apartment buildings because the owners felt they could make more money operating them as youth hostels, which in some cases can be true.

Chelsea International Hostel, at 251 West 20th Street, has dormitory-style rooms without bathrooms for $30 including tax per night and charges $34 for those rooms with bathrooms.

Some budget hotels can make it if their property is in an off-beat location that is not conducive to a more upscale development, Lewis said.

Realizing that they can sell their property for more than they can bring in, some operators are selling out.

Such is the case with a slightly different kind of accommodation. For example, the Salvation Army has shuttered what it calls its two Manhattan “residence programs,” for transient and “working women of moderate means.” In January, the Salvation Army served the last of its eviction notices to residents in the organization’s two Manhattan facilities, Parkside and Ten Eyck.

The bottom line is, “it’s a question of whether the current use of them is supplanted by another higher and better use,” Lewis said.