U.S. Hostels With a Luxe Touch

Billionaire Ronald Burkle, a private-equity investor and big Democratic fund raiser, is appealing to a new constituency: scruffy, 20-something backpack travelers who would rather not stay in a hotel.

His Yucaipa Cos. and the Sydell Group, a New York hotel developer and operator, have formed a partnership to roll out premium youth hostels in major U.S. cities.

The venture is looking to spend $250 million to acquire and renovate as many as 10 low-cost hotels over the next two years. It plans to reposition them as high-end youth hostels in places such as New York, San Francisco, Washington and Los Angeles.

The partners say amenities—including bars, restaurants, swimming pools and stylized lobbies—will distinguish their properties from other youth hostels, although they will pale in comparison with luxury hotels. Roman & Williams, the firm behind interiors at New York’s Ace Hotel and Standard Hotel, will be the designer.

Most rooms will include four to six beds, a signature of youth hostels that appeals to guests looking to meet fellow travelers. Prices will top by 30% or more those for bare-bones hostels in the same cities.

At a time when many operators are crowding into the luxury segment of the industry, the new venture is a bet that there is a sizable foreign and domestic youth market the major hotel companies have ignored. While youth hostels are found in most major American cities, they have never caught on as they have in Europe, where sharing rooms with strangers is much more common.

Youth travelers are responsible for an estimated $136 billion a year, or about 18%, of world-wide international travel receipts, according to the World Tourism Organization.

Poor job growth in the U.S. and Europe could also mean many people under 30 years old will be spending more time in school and thus more time as student travelers, says Andrew Zobler, Sydell’s chief executive. “The model for youth hostels in the U.S. is in its infancy compared to Europe,” Mr. Zobler says. “We plan to deliver a premium product with better design and a common area but with the culture of a hostel.”

Mr. Burkle was unavailable for comment. “We see a significant demand for premium hostels in the U.S. which is not being met,” his spokesman said.

A friend of former president Bill Clinton and other prominent Democrats, Mr. Burkle got his start buying and selling grocery-store chains. He invested in the clothing line of rapper and producer Sean Combs (a.k.a. Diddy). He made headlines last year by accumulating Barnes & Noble Inc. shares and lobbying the board to put the company up for sale.

In recent years, Mr. Burkle has invested more heavily in the hotel industry. Yucaipa, named after a town in California where he once lived, also has about a 5% stake in Morgans Hotel Group, which operates the Mondrian SoHo and the Hudson in New York. The company has additional warrants and preferred shares, while Mr. Burkle has a seat on the board.

His new venture is launching its first hostel in Miami Beach, where it is spending about $20 million to acquire and convert an Art Deco-style South Beach hotel for a fall 2012 opening. The hostel will offer its 350 beds for about $40 a night. That compares with about $30 a night, on average, for existing Miami hostels and about $100 a night for low-cost hotels, Mr. Zobler says.

It isn’t clear why the U.S. has never developed a European-style youth hostel culture. Bjorn Hanson, dean of New York University’s Preston Robert Tisch Center for Hospitality, Tourism and Sports Management, says it may be in part because the U.S. has a greater number of budget hotels, from Comfort Inn to Econo Lodge. Few of these brands, however, offer much to attract youth travelers beyond discounted prices.

“Younger people old enough to travel by themselves tend to do things in groups,” says Mr. Hanson. “The shared-room experience is offered nowhere else.”

Still, he sees some drawbacks. Youth hostels in U.S. cities have sometimes been associated with underage drinking, illegal substance use and petty crime. “Those are issues, based on experience, that will have to be addressed,” he says.

Mr. Zobler says rooms will have lockers to store backpacks and luggage, and he wants to offer a “clean and safe product.”

He also says the hostel market in the U.S. is fragmented by nature, with most properties owned as mom-and-pop operations or nonprofit businesses. He believes using more-professional hotel-management techniques to gauge daily rate demand can increase profits.

Yucaipa and Sydell have teamed up before. The firms have a separate partnership investing in boutique hotels they believe could use rebranding or repositioning. The partnership is looking to invest in a group of hotels with a total value between $600 million and $1 billion. The venture has opened hotels recently in Scottsdale, Ariz., and Los Angeles and expects to launch another soon in Palm Springs, Calif.

The venture’s first investment was a stake in New York’s NoMad Hotel, a 168-room project expected to open early next year and operated by Sydell.



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