Real estate colleagues questioned Justin Palmer’s purchase of a boarded-up, eight-story San Francisco office building for $17.7 million, almost double the price paid for it six years before. Then he told them his plan.
Palmer, co-founder of New York-based builder Synapse Capital, is redeveloping the property into a Yotel, a minimalist hotel brand whose signature feature is tiny rooms, or “cabins,” of about 175 square feet (16 square meters). That means Synapse can fit 202 revenue-producing rooms into a building that would accommodate just 94 were it a standard hotel, he said.
“People in the industry in San Francisco thought we were crazy until they figured out that we were fitting in two times the amount of keys,” said Palmer, who bought the property with Yotel’s largest shareholder in April and expects to open the hotel in 2017.
Yotel is finding that its small rooms are a big selling point as it seeks to expand globally. With land costs soaring in cities such as New York, San Francisco and London, the company is pitching itself to developers as a revenue-maximizing solution for small and odd-sized lots.
“You can unlock the potential from sites in an area where you don’t know what to do,” Chief Executive Officer Hubert Viriot, who’s based in Dubai and took the helm of London-based Yotel in May, said in an interview. “We fit pretty much everywhere.”
Global Expansion
Yotel, whose largest shareholder is Kuwait-based IFA Hotels & Resorts, currently operates four hotels. It plans to quadruple that number in the next four years, opening 12 new properties with more than 3,000 rooms from the U.S. to Asia.
On Singapore’s Orchard Road, an upscale shopping corridor, Yotel is working with Hong Fok Corp. to build on a 24,000- square-foot lot adjacent to the developer’s larger office-and- retail tower, the International Building. Singapore-based Hong Fok is constructing a 609-room Yotel, after initially assuming only a budget hotel would fit on the small site, Viriot said. Yotel also is planning a location at Singapore Changi Airport, set to open at the end of 2018, the company said today.
It also will open an outpost in downtown Miami, where Yotel shareholder Kuwait Real Estate Co. and Aria Development Group are planning a 250-room hotel within a larger residential project, said David Arditi, founding principal of Aria. The company bought the 15,000-square-foot development site on Northeast Second Street last year for $5.5 million.
Aria is looking to do more developments that will include a Yotel, such as in Miami Beach and Washington, D.C., Arditi said.
Williamsburg Trapezoids
In addition to its San Francisco project, Synapse is planning another Yotel in Brooklyn’s Williamsburg neighborhood, on trapezoid-shaped lots it acquired along the Brooklyn-Queens Expressway, Palmer said. Synapse will build a 110-room Brooklyn Yotel with as many as eight condominiums on the top floor, to be completed by the end of 2016, he said.
Synapse, which mainly redevelops apartment buildings and hasn’t built a hotel before, is planning to develop additional Yotels in other U.S. markets, Palmer said.
“Our view is to help build out the brand, which increases the value of our other projects,” he said.
Yotel, inspired by the small-space luxury of first-class airline service, began as an airport hotel in 2007 inside a terminal at London’s Gatwick Airport, offering 100-square-foot cabins for rent in four-hour blocks to travelers seeking a respite between flights, Viriot said. The brand expanded to terminals at London’s Heathrow and Amsterdam’s Schiphol airports the same year.
Manhattan Hotel
The company opened its first hotel in an urban center in 2011, when it bought about 230,000 square feet of space in Manhattan at Related Co.’s MiMA apartment-and-condo project at 42nd Street and 10th Avenue, just outside the Lincoln Tunnel. Yotel paid $315 million for the space, according to property- data provider Real Capital Analytics Inc.
Related executives “thought we were mad people,” when Yotel informed them of its plans for the space, Viriot said. “We told them we really don’t need a reception area, and they said, ‘Well, OK, you’re buying it.’”
At the 669-room Yotel New York, check-in is handled at computer kiosks that issue key cards and a receipt. It’s a space-saving feature that makes a large reception area and concierge staff unnecessary, Viriot said. A floor-to-ceiling robotic arm, called the Yobot, sorts luggage into storage lockers for guests whose rooms aren’t yet available or who have checked out.
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.”
