Sofa Bed

A standard New York room houses a queen-size bed that rolls up into a sofa with the push of a button. A nightstand anchors a rod for hanging clothes. Bathrooms, with monsoon showers and heated towel racks, are in the inner part of the room, against the windows, which eliminates wasted hallway space most hotel rooms have by their entries, Viriot said during a tour of the New York property last month.

“These kind of hotels do really well in city centers, where room rates tend to be typically higher and labor costs are higher,” said Nikhil Bhalla, an analyst at FBR & Co. in Arlington, Virginia. “Their formula is correct. You can squeeze more rooms into a small structure, you don’t have much labor force. That means your costs are lower and that means you can charge a lower price, and that makes you more competitive.”

Rising Prices

Manhattan development sites sold for a record $657 a square foot on average in the third quarter, up 29 percent from a year earlier, according to New York-based Massey Knakal Realty Services. Three purchases were for more than $1,000 a square foot.

In San Francisco, investor demand for commercial real estate has pushed returns to all-time lows. For all properties that traded in the 12 months through Sept. 30, including hotels, apartments and development sites, the average capitalization rate -- a measure of investment yield that falls as prices rise -- was 4.9 percent, the lowest in records dating back to 2001, according to Real Capital Analytics.

New York’s Yotel had an average occupancy of 87 percent in 2013, according to loan documents filed this year in connection with the property’s refinancing. Its room rates averaged $213 a night, and revenue per available room -- a measure of rates and occupancy used by hotel operators -- averaged $184.

By comparison, the nearby Fairfield Inn Times Square had a 93 percent occupancy and an average nightly rate of $261, according to the documents. New York’s average occupancy this year through October was 85 percent, and nightly rates stood at $258.87, the highest among the top 25 U.S. markets, according to Hendersonville, Tennessee-based research firm STR Inc.

This week, a typical, 175-square-foot room at Yotel New York is $289 a night, according to the hotel’s website.

Boutique Boom

Yotel is part of a growing class of midscale boutique lodging that has sprouted since the global recession fueled demand for affordable-yet-fashionable hotels. InterContinental Hotels Group Plc created Hotel Indigo, where each of the 61 properties feature works by local artists and food offerings and music in their lobbies change throughout the year. Starwood Hotels & Resorts Worldwide Inc. has a brand called Aloft, which intends to offer a boutique-hotel experience at a lower cost than the company’s luxury W Hotels Worldwide chain.

Canopy, Tommie

In October, Hilton Worldwide Holdings Inc. said it too is planning “a more-accessible lifestyle brand” called Canopy. Billionaire John Pritzker’s Commune Hotels & Resorts created a budget boutique brand called Tommie, with small rooms, self check-in and “grab-and-go” food instead of a restaurant, with the first two properties slated to open in Manhattan next year. This year Marriott International Inc. and the parent of the Ikea furniture chain started a European boutique budget hotel chain called Moxy.

“That’s the biggest challenge: how to market your story, make your brand known and stand out from this sea of boutique brands that all try to be different and unique,” said Patrick Scholes, an analyst at SunTrust Robinson Humphrey Inc. “I am a hotel analyst who can name 50 brands, and I even can’t keep up. There’s a new name every day.”

The micro-hotel concept has some competition too. The Pod Hotel, which offers “single pod” rooms with twin-size beds, has two Manhattan locations and may be planning a Williamsburg hotel, according to Curbed NY and The Real Deal. Vanessa Guilford, design director for BD Hotels, which designed both Pods, declined to comment.

Viriot, who was hired to lead an expansion of Yotel’s brand, said the company plans to have 50 hotels open or under construction by 2020.

“This segment creates the best growth opportunity in the hospitality sector,” he said. “We meet consumer requirements of the 21st century while, at the same time, we don’t have the capital requirements of a five-star hotel. It’s a very unique niche we’re in.”
 

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