Hotel chain with tiny rooms plans big growth in 4 years

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. 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. “We fit pretty much everywhere.”

Yotel, whose largest shareholder is Kuwait-based IFA Hotels & Resorts, 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.

Inspired by the small-space luxury of first-class airline service, Yotel 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. The brand expanded to terminals at London’s Heathrow and Amsterdam’s Schiphol airports the same year.

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 spacesaving 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.

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, Va. “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.”

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.

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, Tenn.-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.