A new high-end hotel in Manhattan’s Union Square will have either an art gallery, doctor’s office or yoga center, part of a plan to generate more than 10 percent of the property’s revenue through sources beyond its 175 rooms.
“We’ve done as much as we could on the cost-cutting side,” said Neil Shah, president and chief operating officer of Hersha Hospitality Trust (HT), which will own and manage the hotel.“Now it’s time to use our real estate and our position to help create profits.”
As development of new properties climbs, hotel companies are building spaces that will bring in new streams of revenue. Lodging owners such as Hersha and Hyatt Hotels Corp. (H) are building meeting rooms that can be repurposed for nighttime cooking parties, locating lobbies on higher levels to accommodate ground-floor retail and flooding lawns to create ice rinks that charge for skate rentals.
Growth in lodging construction is expected to outpace building in other commercial real estate sectors through the end of next year. Hotel development is likely to increase 10 percent this year and almost 20 percent in 2013, the American Institute of Architects said earlier this year. The group will publish an updated report later this month.
While hotels have long been home to bars and conference space, milking every inch of real estate to increase earnings at new projects is increasingly important as owners move away from the expense-slashing of the last three years to focus on revenue not directly dependent upon room rentals, according to David Loeb, a Robert W. Baird & Co. analyst in Milwaukee.
Hersha, based in Harrisburg, Pennsylvania, has about a half dozen hotels under development. Non-room revenue at hotels the real estate investment trust owns, including such New York properties as Hotel 373 Fifth Avenue and Duane Street Hotel Tribeca, has risen to about 7 percent of total revenue from about 2 percent three years ago, according to Shah. That will probably climb to about 10 percent when Hersha’s hotels under construction open — and an even “more significant” increase in profits, he said.
Hersha agreed a year ago to buy the Hyatt Union Square, being built at 13th Street and Fourth Avenue, for $104.1 million, or $595,000 a key. The REIT expects to complete the purchase of the hotel, with three dining venues and a rooftop lounge, when construction is finished later this year. It plans to choose retail tenants closer to the opening, basing its decisions on rental income and neighborhood demands, Shah said.
In Washington, Hersha is completing the redevelopment of Capitol Hill Hotel, including the addition of 6,000 square feet (560 square meters) of salon and club space for guests as well as local residents, businesses and government officials, according to Shah. The hotel also rents space in the property’s salon to a local artist.
In March, Hersha completed the purchase of Philadelphia’s Rittenhouse Hotel, where the company plans to convert the“underperforming” bar into a venue that locals will be able to rent for special events, Shah said.