New Hotels' Big Expansion Plans Get Squeezed

Monday, May 11, 2009

When NYLO Hotels unveiled its loft-style hotel brand in 2005, the plan was to have more than 50 properties open by 2010. Ambitions were so high that the company announced another brand, XP by NYLO Hotels, in early 2008.

But so far, just two NYLO hotels have opened their doors to guests in Plano, Tex., and Warwick, R.I. with a third scheduled to open in a community in Irving, Tex., in late June.

NYLO is certainly not the only fledgling hotel brand struggling amidst the recession. Besides the decline in travel, the new brands have been particularly hit by the drying up of credit. NYLO's troubles were compounded when its equity partner, Lehman Brothers, declared bankruptcy last September.

According to Bjorn Hanson, who teaches hospitality at New York University, hotel companies introduced 42 new brands in the last four years, a big surge that has been drastically scaled back.

"Whether they were announced or internal goals like 500 hotels within five years all of those targets have been ignored or so reduced," Mr. Hanson said. "They're just trying to get some properties up and running." NYLO is a good example of that kind of stake-in-the-ground effort.

"Our plan was always to grow by franchising," said John Russell, NYLO's chief executive. "We would do the first three to five hotels ourselves, then have a franchise platform to be able to grow aggressively." Although Mr. Russell said NYLO had more than 40 franchises "in some form of development or negotiation," he acknowledged that the company would be lucky to have 30 hotels open by the end of 2011.

"It's going to be slow because right now debt financing is almost nonexistent," he said, though he was optimistic about the prospects for the XP brand, which is known as a select-service hotel, meaning it lacks some amenities, like a 24-hour restaurant. Mr. Russell estimated that an XP hotel would cost $12 million for a developer to build, versus $23 million for a full-service NYLO Hotel.

The trouble is, many other new brands are competing in that same select-service niche, many hoping to making the boutique hotel concept more affordable. Some of those brands have the advantage of operating under the umbrella of a larger chain an important factor in this stormy weather.

Hotel Indigo, for instance, introduced by the InterContinental Hotels Group in 2004, now has 26 properties, with 60 more in various stages of development.

"We have a large existing base of customers who are familiar with InterContinental," said Janis Cannon, the company's vice president for global brand management, noting that InterContinental's loyalty program had 40 million members.

"It's easy for us to reach out to that membership about a new hotel," she said.

Another advantage she cited was that about half of Hotel Indigo properties were conversions rather than new construction, so further growth could come through independent hotels seeking to be part of a brand, or residential buildings being converted into hotels.

But even brands started by big hotel chains have run up against the realities of tight credit markets and shrinking demand for rooms.

Starwood's midprice Aloft chain, announced with big ambitions in 2005, initially expected to have 500 properties operating worldwide by 2012; there are 25 open so far. Another new Starwood brand, Element Hotels, planned to have more than 15 locations operating by 2009; three have opened their doors.

"Our initial forecasts were aggressive, and they were based on really great times," said Brian McGuinness, Starwood's senior vice president for specialty-select brands. "The good news is we're launching new brands into the select-serve and extended-stay markets, which tend to do very well in a challenging economy." Another potential bright spot for Starwood is that Hilton has suspended work on its new Denizen brand, a competitor to W Hotels that was unveiled earlier this year. Starwood is suing Hilton and two former Starwood employees recruited by Hilton to develop the Denizen brand, alleging that they stole proprietary information from Starwood and used it to expedite plans for Denizen.

That could also be good news for Marriott Hotels and Resorts, which is working on its own brand, Edition, with Ian Schrager, one of the originators of the boutique hotel trend.

According to John Wolf, a Marriott spokesman, the company has signed five management agreements for Edition hotels in Bangkok, Barcelona, Istanbul, Mexico City and Waikiki, Hawaii, one of which will be the first to open in 2010.

Robert Mandelbaum, director of research information services for PKF Hospitality Research, said he did not expect a lot of groundbreaking in the next year or so. But that might bode well for hotel balance sheets in later years.

"One of the things hotels are hopeful about is there should be an actual lack of new supply coming online during a period of economic recovery," Mr. Mandelbaum said.

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