NYC Developers Start Micro-Hotel Brand in Search of Big Returns

  • First Arlo hotel to open Sept. 6 in Hudson Square neighborhood
  • Agreement to team up with Pritzker’s Commune broken off

Developers Oleg Pavlov and Seth Schumer just finished construction on two buildings in Manhattan. Now comes the hard part, as they try to get a new hotel brand off the ground.

Arlo Hudson Square
Arlo Hudson Square
Source: Avroko

The duo, executives at London-based Quadrum Global, initially planned to team up with John Pritzker’s Commune Hotels & Resorts to open properties at the sites under its micro-unit Tommie brand. Instead, they parted ways with Commune -- and its name recognition -- and are starting their own hospitality firm, Arlo.

The partners are squeezing 575 rooms, each no more than 165 square feet (15 square meters), into the two buildings in an effort to maximize profits in a market where high land costs and a surge in room supply are eroding operators’ pricing power and eating into developers’ returns. This year through June, average nightly room rates in New York City fell 3.3 percent from the same period in 2015 to $237.93, and revenue per available room -- a performance metric used by the hotel industry -- dropped 3.2 percent, according to lodging-data firm STR.

“To make a project viable, one has to either charge significantly more money for the same room by positioning it as luxury, or one has to fit more rooms on the same land plot,” Pavlov, Quadrum’s founder and chief executive officer, said in an interview. “Our guests, we hope, will appreciate that the room is small but that it has everything they need. We essentially replicate a boutique hotel in a much smaller package.”

Hudson Square

The first Arlo, in the Hudson Square neighborhood, near the mouth of the Holland Tunnel, will open Sept. 6, in time to host guests for New York Fashion Week. The second, at 11 E. 31st St., will follow about a month later. Quadrum has joint-venture partners on both properties.

“We’re delivering a very high-quality product and we don’t have to charge what someone else may have to,” said Matthew Baron, president of Simon Baron Development, one of the partners on the 31st Street Arlo. The site was acquired before a recent run-up in land prices and the development isn’t highly leveraged, he said.

Arlo Hudson Square
Arlo Hudson Square
Source: Avroko

New York is leading the country in new hotel supply, with 7,100 rooms being added this year and 6,700 more coming in 2017, said Patrick Scholes, a hospitality analyst at SunTrust Robinson Humphrey Inc., citing data from Lodging Econometrics. In 2018, an additional 7,100 rooms are projected to come to the market, he said.

Demand hasn’t kept pace as companies scale back on corporate travel and the stronger dollar makes New York more expensive for international tourists, he said. Short-term rental sites such as Airbnb Inc. are piling even more choices onto the market.

‘Big Headwind’

“That’s a big headwind,” Scholes said. “If you have any hope of raising your rates, you’d better hope and pray there’s a demand uptick.”

For its opening night, a room with twin bunk beds at the Hudson Square Arlo rents for $199 and a room with a queen bed and terrace is listed for $339, according to Hotels.com. All the units have 47-inch LED television screens, and bunk rooms have one for each bed.

Space is tight: A king-size bed touches the walls at both ends, mini refrigerators are tucked inside night stands and wall-mounted peg boards are used for hanging clothing. The desk is a shelf that pulls down from the wall.

“The idea is you’re not hanging out in your room,” Schumer, head of U.S. investments for Quadrum, said on a tour of the Hudson Square site last week.

Bourbon Bar

Areas for socializing include a rooftop bar, ground-floor indoor and outdoor lounges, and another bar that specializes in bourbon, said Javier Egipciaco, the managing director of both Arlo properties. A game room doubles as a place where guests and local residents can tap into the hotel’s free wi-fi or sip a latte from the 24-hour coffee counter. Grab-and-go food will be sold on the ground floor, where a full-service restaurant will eventually be added, Schumer said.

Arlo Hudson Square
Arlo Hudson Square
Source: Avroko

Quadrum terminated its contract with Commune in February, ending plans to open Commune’s first two micro-unit hotels, under the name Tommie. Previous projects such as the Nautilus in Miami Beach, Florida, and the Godfrey Hotel Chicago gave Schumer and Pavlov the confidence that they could create and manage their own brand and eventually expand it, they said.

Commune said the decision to end its management agreement with the developers was mutual. The company is still pursuing its Tommie brand globally, with hotels slated for cities including Los Angeles, New Orleans and Miami, according to an e-mailed statement. The first will be in Los Angeles’s Hollywood area.

Micro Competitors

Arlo and it’s micro-hotel concept already have some established competition. The Pod Hotel, which offers single rooms with twin-size beds, has two Manhattan locations. Yotel, a brand inspired by the small-space luxury of first-class airline service, has a 669-room hotel in Midtown and announced in 2014 that it plans to open in Brooklyn’s Williamsburg neighborhood as part of a global expansion.

Starting a brand that’s not affiliated with a larger chain has risks in that the upstart won’t be able to benefit from a parent company’s marketing and global reservations system, said Jan Freitag, senior vice president at STR. Arlo’s founders say that advantage is overstated, and that the hotels are listed on multiple websites such as Hotels.com and Expedia, where travelers are finding them and booking rooms.

“Twenty years ago, it was imperative to work with a larger hotel group because of the distribution that went along with it,” Pavlov said. “In today’s world, everyone can go online.”

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