NYLO Hotels' Russell

GlobeSt.com: Are you concerned to be rolling out a new chain of hotels during an economy like this?

Russell: There is always concern. The capital markets are tight and getting debt for new hotel developers is a little more difficult, but that being said, there are still hotel developments going on and projects being developed. It's not going to stop, it's just going to slow down a little bit. This idea is over four years old, and our second hotel has just opened. We've always said we are going to do the first five or six hotels ourselves along with our partner Lehman Brothers. Then our whole growth strategy was to have a franchise program where other people that like the brand develop the hotels and put our brand name and reservation system with the property. Is it ideal? Probably not, but where we like to place these properties are in secondary and tertiary markets, places that are not necessarily gateway cities. These cities do have opportunities and don't have products like this. It's a little more opportunistic for our type of property.

And we're not building $100-million properties. NYLO hotels cost between $22 million and $28 million to build, including land, for 176 rooms. Our sister brand, XP by NYLO, we can build for about $11.5 million. It's the combination of the type of product and the cost of building and the availability of debt for that type of project.

GlobeSt.com: What is the franchise response so far?

Russell: We've got over 52 prospects in the pipeline, so it's been very heartfelt so far. The interesting thing about it so far is that some of the developers coming to us have land and sites in downtown gateway cities like Chicago, San Francisco and Phoenix that they've owned for a while and they like this type of product because it fits in redevelopment areas. That's been a nice surprise.

GlobeSt.com: So you weren't counting out downtowns?

Russell: Absolutely not. But this is not us developing them ourselves and owning them. It's someone else who wants to own and develop them.

GlobeSt.com: Why did you decide to go the franchise route?

Russell: Since there's only so much money to go around, it's kind of like using other people's money. In other words, the first five we did, our five partners along with Lehman Brothers was the equity. Then we seek out debt for those projects. On the franchise side, people are already coming to you who have land, a debt source and equity. What they're looking for is a brand name and a project that they think will be leading edge and has a good support system. In the two years it could take me to develop a property, I could have 10 people developing properties, and I have no money in, and they're helping to grow the brand.

GlobeSt.com: Do you allow franchisees to redevelop buildings or do you require ground-up hotels?

Russell: It's very difficult for our type of product. Our whole strategy has been new construction. But that being said, in some of the gateway cities, there are some buildings that could be gutted, and you could retrofit. But that's few and far between. The real growth is about 98% new construction.

GlobeSt.com: How are you able to keep construction costs down?

Russell: There are two big factors. One is the price of land because that can really drive your costs up. We look and spend a lot of time looking over 100 markets for sites that fit our profile. They need to have 1.5 million sf of office space or are in a lifestyle community that has high-end residential or a high-end mall near a major thoroughfare. So we spend a lot of time and effort to identify those areas and 4.5-acre sites that are cost effective. Plano, TX, for instance, cost about $11,000 per key. If we can keep our price between $10,000 and $22,000 per room in a market, that's a pretty good land price. Where you start to get into a little bit of difficulty is if you start to get into the $30,000-per-key-range. That really drives your price up.

We also have a very unique construction process called tunnel-form construction. It's poured concrete in tunnel forms that we can actually do on site and reduces the cost of the property. Then we have a brick panel masonry process as well, where we make huge brick panels with the windows already in at a location off site. Then they flatbed the brick panels in and put them on the structure with a crane. That whole process is less expensive than a traditional hotel and helps you build them more quickly.

Another thing is the furniture, fixtures and equipment, which are coming from China, is high quality and very cost effective.

GlobeSt.com: Is it a tough balance finding a tertiary market that has demand for boutique hotels?

Russell: We are built for business. Eight-five percent of our business is the business traveler and 15% are the leisure. So we look for the office space and lifestyle communities. There are a number of places that want this type of product and don't have it. Business travelers today want something new, they've been there and done that. There is nothing wrong with the Marriott Courtyards and the Hilton Garden Inns. But I can blindfold you, put you in 10 hotel rooms, take the marketing materials out, take the blindfold off, and you could not tell me where you were. You could almost do it on the outside of the hotel if you took the signage off. People are looking for something different that reminds them of home. This is a trend that we have copied from Starbucks, Jet Blue, Mini Coopers, this is the whole lifestyle trend that is here to stay, and we didn't have it in hotels.

GlobeSt.com: How are you marketing the brand?

Russell: A lot of people come to us because there are a lot of multi-use developers with malls, for example, looking for a hotel as an anchor tenant. We either go out and seek them, or they seek us. That whole community development is a demand generated for us, and we provide a service for them because they need hotel rooms, and it's something that fits that kind of development.

GlobeSt.com: What do you plan to roll out more aggressively, your full service or XP-brand hotel?

Russell: I see more units for XP because it's quicker to build and less expensive to build. It all gets back to capital, and it's a lot easier to finance $11.5 million than it is $23 million. And you can put XP's just about anywhere. But the price point for a consumer to stay at an XP is $90 to $115, whereas a price point for a NYLO is about $120 to $140 a night. For the government traveling employee, an entrepreneur or for small-business employees, the XP is more attractive because it fits their budget.

GlobeSt.com: How are you combating the downturn in business travel?

Russell: Clearly business travel is down a little bit. Some of the smaller business meetings were down from 5% to 15% depending on where you are. The airlines have cut their capacity 10% to 15%. Those are all negative things, but they're not life threatening. What you do is operate more efficiently on costs. You spend a little more time and effort on targeting marketing. We spend a lot of time on our Web site and search-engine optimization to drive business through the Internet. We dedicate a lot of time in public relations and promotions. All of those things try to give you a point of difference against your competition. And people are just a little mentally downtrodden, so we're trying to put the fun back into the equation.