One morning in December 2009, Thomas Mathes went looking for a place in New York's Chelsea neighborhood where he could plug in his laptop. He visited at least eight Starbucks (SBUX), only to discover that other people with computers had claimed all the electrical outlets. "It was the craziest thing," he says.
Mathes wasn't looking to pass idle hours browsing the Web. A month earlier he had been named general manager of the Eventi, a new 292-room luxury hotel run by Kimpton Hotels and Restaurants being built several blocks north on Sixth Avenue in Manhattan. The Eventi was scheduled to open in May, but the windows in the building didn't have any glass yet. It was freezing in there. Mathes had a temporary office elsewhere, but he didn't have a key.
That wasn't the only thing vexing him. This was also a terrible time to be opening a luxury hotel. The lodging trade is accustomed to periodic bad times, like the months after September 11 when travel ground to a halt. Nothing compares, however, with what the industry experienced in the wake of the financial crisis, as companies slashed travel budgets to conserve cash and leisure travelers put off vacation plans.
Mathes would be pitting both his management skills and his understanding of the upscale traveler against the still-fragile economy. The fate of a $600 million project in the heart of Manhattan was at stake. And he was hardly the only hotelier faced with such a challenge. The story of the Eventi is a window into the post-financial-crisis travails of the entire lodging trade.
The downturn ravaged hotels. Inns of all stars reduced their rates by an average of 9 percent in 2009, according to Smith Travel Research. Total occupancy fell to 55 percent, seven points below the long-term average. The only way hoteliers kept "heads in beds" was by rampant rate-shaving, hardly a promising sign for a luxury entrant like the Eventi. The guests who did show up were wary of pay-per-view and the minibar. Revenue per room plummeted 17 percent.
It was worse at high-end hotels, which suffered a 24 percent revenue decline. Starwood Hotels and Resorts Worldwide (HOT), the nation's third-largest hotel company, saw its net income drop by 77 percent in 2009. Marriott International (MAR) and Host Hotels & Resorts (HST), the first- and second-largest chains, respectively, ended the year losing money. All told, it was "the worst fundamental decline in the modern lodging era," say Paul Morgan and Ryan Meliker, analysts at Morgan Stanley (MS).
Hotel analysts were predicting more agony in 2010, and with good reason. Before the financial crisis, the business had been on a roll. Room rates were rising. The prices of hotels themselves were climbing quickly as well. Banks didn't see this ending anytime soon. They bet heavily on America's wanderlust: At the end of 2007 they held $38 billion worth of construction loans for new hotel projects, according to Foresight Analytics.
Many of those projects were never built. Lodging Econometrics says 1,229 hotels have been abandoned in the U.S. since Lehman Brothers blew up two years ago. But thanks to the 18- to 24-month lag between groundbreaking and ribbon-cutting, shiny new hotels have been rising around the country despite the sour economy. In the past two years, 785 hotels have opened, dumping 91,378 new rooms into a battered market. The Eventi was one of them, and, once he found an outlet to plug in his computer, it would be Mathes' job to fill rooms at a time when the last thing the public demanded was another luxury hotel.
The only child of a single mother who worked two jobs, Mathes, 34, grew up in Memphis. He fell in love with the hotel business as a young boy, staying up past his bedtime to watch Hotel, an Aaron Spelling soap opera starring James Brolin as Peter McDermott, the hunky general manager of the fictitious St. Gregory Hotel in San Francisco. "I thought it was so wonderful," says Mathes. "The men were all dressed in their tuxedos. The ladies were in their sequin gowns. They were all standing in front of the fountain in the lobby, drinking champagne. I thought, 'This is exactly what I want to do when I grow up.' "
He started working in hotels as soon as he graduated from high school and ended up at Kimpton's Hotel Allegro Chicago in 1999, where he enlivened the cavernous lobby with a portable DJ booth. He moved to New York in 2006 to oversee the renovation of The Muse Hotel, a 200-room Kimpton property in Times Square. Before long he was lobbying for the top job at the larger Eventi.
When he got the assignment, he and Shannon Spillett, the Eventi's marketing director, started with some espionage. They dropped by the lobbies of newer hotels below Times Square, claiming to be the founders of an "emerging fragrance company." No, they didn't have business cards yet, but could they have a tour? The spies learned which investment banks and fashion designers were booking meeting space. As soon as workmen had installed glass in the Eventi's windows and turned on the heat, Mathes called those customers and offered them a rate far below the competition. "We knew that if the W Hotel in Union Square had a group, we could steal it at the right price," says Mathes. "So that's what we did."
When potential guests arrived at the Eventi, they discovered a luxe retreat with hand-carved Indian paneling and whimsical pieces by artist Barbara Nessim scattered throughout the premises. It was warm and comfy, as Kimpton founder Bill Kimpton liked his boutique hotels to be. Mathes personally tried out every chair in the building. His favorite: a red leather number in the three-room, fifth-floor Veranda Suite, which rents for $5,000 a night. He interviewed every candidate for a job, meeting them six at a time. If prospective employees struck him as even slightly rude, he crossed them off the list. He couldn't risk offending a single customer at such a critical time.
As anybody who has checked into a luxury hotel and recoiled at the prices on the room service menu might suspect, a place like the Eventi can be a cash machine. Hotels generally make a profit of more than 75 percent on room rates, says Bjorn Hanson, dean of New York University's Preston Robert Tisch Center for Hospitality, Tourism and Sports Management. They don't do badly on food and beverages, either: Hanson says they make a 25 percent margin on those $6 glasses of orange juice and $8 bowls of oatmeal. "It's a pretty good gig," he says. The catch is that the business is extremely cyclical. When the economy tanks, most people realize they can get by without a $5,000 suite.
One way hotel companies limit that risk is by shedding much of their real estate. Kimpton owns only 26 percent of the real estate in which it conducts business, preferring to find developers willing to shoulder debt and expenses in exchange for a share of the proceeds. NYU's Hanson, a former lodging industry consultant at PricewaterhouseCoopers, says hotel operators take upwards of 12 cents of every dollar that comes in the door. The developer receives the rest but also pays most of the bills and might not have much left over after paying for upkeep and covering debt service. "It's what you might call a psychic reward," Hanson says. "A lot of trophy hotels aren't very good investments for the property owners."
Kimpton struck such a deal in 2007 with Jules Demchick, the New York developer who built the Eventi. Both parties were expanding at the time. Kimpton already operated two New York hotels and wanted another. Demchick, 71, was known primarily for condominiums, and he planned to build 30 floors of condos above the 23-story Eventi.
A banking consortium including Bank of America (BAC) and HSBC (HBC) loaned Demchick $370 million for the project in early 2008. By then the condo market had collapsed. Four months later, Lehman Brothers went bankrupt. Demchick moved ahead despite the crisis.
On opening day last May, the entire staff gathered in the Eventi's lobby to greet their first guest, who arrived from the airport in a purple sports car provided by Mathes. They all burst into applause as the startled traveler walked through the front door. Mathes and Spillett took him up to his room and showered him with cookies, a picture book about Central Park, and a pair of funny-looking socks. Mathes then handed him two second-row-center seats to a U2 show at the New Meadowlands Stadium across the Hudson River in New Jersey. The hotel had done some sleuthing about the visitor, a frequent guest at Kimpton hotels around the country, and discovered he was a die-hard fan of the Irish rockers.
That first customer, whose name Mathes won't reveal, was so overwhelmed that he started to cry. The next thing Mathes knew, he was sobbing too. "We got emotional," he says. "We were all hugging and crying. Shannon and I were telling him stories about opening the hotel. I was like, how did it get to this point? And it was only the first day."
The hotel business started to show unexpected signs of life early this spring. By May, just as the Eventi was opening, the recovery was under way. That month, occupancy climbed to 59 percent. Revenue per room shot up 7 percent compared with the same month in 2009. Americans were traveling again.
"I think executives realized they may have cut travel back too far in 2009," says Jan Freitag, a Smith Travel Research vice-president. "You need to shake hands and break bread to get deals done. You can't do that over Skype."
If only Mathes had been more prepared. He figured on filling only 60 percent of the Eventi's rooms during the first few months, in line with the historic national average but far below the norm for Manhattan. So he had hired only a skeletal housecleaning staff. If business picked up, he planned to raise prices and bring more employees aboard. Almost from the start, however, 80 percent of the Eventi's rooms were booked. Mathes increased the basic nightly rate from $299 to $450. He scrambled to hire temporary workers to change bedsheets and clean bathrooms while adding to his army of permanent housekeepers. "You don't really expect to open the doors and have that happen," Mathes says.
The only person involved in the project who isn't celebrating—yet—is the developer and owner, Demchick. In an interview in early October in his office on Park Avenue, he said he was still putting the finishing touches on a public plaza outside the Eventi and trying to rent the 300 residential units that he had originally hoped to sell as condominiums before the real estate crash. At the time, he had leased 140 of them. "That's pretty good," he said.
Still, the developer was anxious. While the hotel business is looking healthier than it was a year ago and the Eventi is off to a promising start, Demchick has to service debt with terms negotiated near the height of the national real estate bubble. Room rates around the country are still 27 percent lower than they were before the financial crisis of 2008. Because of that, Hanson estimates, a quarter of the hotel owners in New York City are having trouble paying off their bank loans. Demchick's lenders, Bank of America and HSBC, would not comment for this article. Both banks appear to have taken an interest in the Eventi, sending delegations of executives to look around the hotel, and Demchick said he is on good terms with his lenders. He told Bloomberg Businessweek to check back with him in a year about the project. "I'm always nervous," Demchick said. "I'm nervous we are having this conversation."
On the Tuesday before Thanksgiving, Mathes gives a tour of Bar Basque, the Eventi's science fiction-themed restaurant. The walls are red, the lighting is weird, and there is spooky digital writing everywhere. Mathes, wearing Prada glasses and a dark Hugo Boss suit, pauses at the bar and gazes proudly at his surroundings. The place looks a little like the interior of the Death Star.
Business travel has tapered off this week, and occupancy is around 75 percent. Mathes is using the lull to spiff up the place before the city's busiest season. From early December to New Year's Eve, Manhattan is usually overrun with travelers. Mathes is selling rooms in advance for $600 apiece.
Even so, he will permit the Eventi's occupancy to rise only 5 percent. He says he could easily sell it out, but he would make less money. He would have to trim his rates—or, as he puts it, "drop his pants"—to fill all his rooms. He would have to keep more employees on duty, and there would be more wear and tear. Mathes would much rather charge a premium and bank a healthy profit during the Christmas season. "We're in business to make money," he says.
"It's just like you go to Louis Vuitton for a bag," Mathes explains. "They put it in one of those beautiful boxes and tie a little bow around it. If they just threw it in a plastic sack, you'd say, 'Why am I playing $1,200 for this?' The hotel business is no different. It's all about tying that little bow around everything."