When the Going Gets Tough, Hoteliers Go Residential

Meet the latest real-estate victim of the post–Sept. 11 downturn: the proposed Ian Schrager hotel at 32-40 Bond Street in

Meet the latest real-estate victim of the post–Sept. 11 downturn: the proposed Ian Schrager hotel at 32-40 Bond Street in Noho. The $60 million project, funded by Bond Street Hotel L.L.C.-a partnership between Mr. Schrager’s company, Ian Schrager Hotels, and hotel power players Richard Born and Ira Drucker-has been scrapped in favor of a 14-story, 100,000-square-foot residential building designed by architect Gary Handel, which will house 65 loft-style units and 5,000 square feet of street-level retail on the site of what currently is a 100-space parking lot between Lafayette Street and the Bowery. The building will be Mr. Schrager’s first signature residential development.

The project is a significant departure for Mr. Born and Mr. Schrager and represents the sober realities of Manhattan’s boutique-hotel market, still struggling to recover from the 90’s bubble and a downtown economy that, by many measures, continues to reel from the Sept. 11 terrorist attack.

One of the biggest losers in the economic downturn following the attacks has been New York’s $4 billion hotel industry. The significant drop in tourist travel over the past two years has hurt Manhattan’s hotel developers, who count on the influx of more than 35 million visitors a year to fill their rooms and finance new projects. During the 1990’s boom, boutique-hotel developers played host to “new economy” media moguls and Wall Street bankers flush with cash and eager to mix in the dimly lit lobby lounges and minimalist suites. But times have changed: Average hotel-room rates in Manhattan are down 15 to 20 percent of their pre–Sept. 11 levels, according to hospitality adviser PKF Consulting, and the continued slump in domestic business travel-down an additional 7 percent in 2002-has left developers scrambling for ways to raise occupancy rates in an already competitive downtown boutique-hotel market that makes new construction an eminently risky proposition.

“The economic climate to build a new project is not viable in this market today,” Mr. Born told The Observer . “It’s a new reality. In today’s market, I can’t build a new project from the ground up successfully.”

New hotel developments require serious financial commitments. In 1993, the Four Seasons invested a reported $1 million per room during construction of its 367-room, I.M. Pei–designed hotel on East 57th Street. On smaller projects, like the proposed Bond Street property, costs typically run approximately $500,000 per room when the developers commission a star designer such as David Rockwell, Philippe Starck or Rem Koolhaas to work on a ground-up project.

Mr. Born, a developer responsible for putting more than 5,000 hotel beds in the city, said that most boutique hotels completed since Sept. 11 have been renovations of existing structures, such as the 125-room Maritime on Ninth Avenue-in which Mr. Born is a partner-and the 24-room hotel at Soho House, which took over space in a former electronics warehouse at 29-35 Ninth Avenue. In September, Mr. Born paid a reported $23.1 million to take over the 120-room Gorham Hotel on West 55th Street. He said he purchased the Gorham because the dour economic climate precluded new construction. An exception, the 13-story, $60 million Gansevoort on 13th Street and Ninth Avenue in the meatpacking district, is a ground-up project set to open in January. Mr. Born said it’s still uncertain how the 187-room hotel will fare.

“The Gansevoort is in a hot neighborhood. It will do well. But the question is, will it do well relative to its cost?” he asked.

Mr. Schrager-with nine hotels under his belt, from New York to London and Miami to San Francisco-has been hit especially hard by the soft hotel market. In 2001, he announced that he would develop a 20-story hotel on Fourth Avenue and Astor Place, on a lot owned by Cooper Union. He commissioned architects Rem Koolhaas (the Dutch designer of the Prada flagship store in Soho and the new $165 million Seattle Library) and Jacques Herzog (of Herzog de Meuron, the Swiss firm behind the 1997 construction of London’s Tate Modern Museum) to design the Astor Place Hotel. By 2002, Mr. Schrager scuttled the hotel project, and the land is now being developed as a residential project by the Related Companies (the developer of the $1.7 billion Time Warner Center at Columbus Circle), along with a $5 million investment by Mr. Schrager. More recently, in August, the 375-room Clift Hotel, Mr. Schrager’s first San Francisco property (which he purchased in 1999 for $80 million and renovated at the cost of approximately $20 million in 2001), filed for Chapter 11. In June and September, Moody’s investment-ratings agency downgraded some of Mr. Schrager’s bonds to junk status.

“The cost of building from the ground up in New York is very high. It’s very risky given the current state of affairs,” Mr. Schrager said. But he stressed that boutique hotels that offer guests a lifestyle experience are still solid investments in this difficult tourist economy. “When you’re in a tough market, I’d rather go to market with a distinct project than with a generic project. You’re that much more competitive,” he said.

The difficult downtown market has forced entrepreneurs like Mr. Schrager and Mr. Born to reassess their development options and reconsider residential projects. Mr. Born, who has had a hand in developing numerous Manhattan hotels with his partner, Ira Drucker-including the 77-room Chambers on West 56th Street, and Soho’s 75-room Mercer-has recently diversified into residential projects. In 2000, he developed the Richard Meier condominium towers that rise above Perry Street, and he’s currently in the early stages of planning a $40 million building on Greenwich Street in Tribeca.

“When you talk about building new,” said Mr. Schrager, “you have to be very sure about the market, or it’s a very risky investment.”

A Long Struggle

According to Mr. Born, the current economic climate dictates that the Bond Street property must be residential-if, that is, he gets to break ground at all.

On Oct. 8, the city’s Board of Standards and Appeals will hold a hearing to determine whether Mr. Born and Mr. Schrager receive a variance to construct their residential tower in Noho, a commercially zoned neighborhood. Since the hotel project was first introduced in 2001, Noho community groups have fought Mr. Born and his partners over the size of the building. Neighborhood activists and local residents are now bracing for a contentious campaign to block the intrusion of high-rise development, which has migrated from neighboring downtown neighborhoods. They cite examples like the 20-story, 111-room, $32 million Surface Hotel that’s going up on Rivington Street on the Lower East Side. Noho activists have taken inspiration from the recent victory by neighborhood groups in the meatpacking district: On Sept. 9, at the urging of those groups, the Landmarks Preservation Commission designated a part of the district as an official landmark.

At Community Board 2’s Sept. 18 meeting, members aired their strong opposition to the latest Bond Street proposal before unanimously voting against the $60 million project. Members objected vociferously to the size and bulk of the building, which they declared out of scale and context with the surrounding six-story, early 20th-century structures.

“They want a lot more bulk. It’s a lot more building than what we’re prepared to accept. The size of the building is not justified,” David Reck, an architect and the chairman of Board 2’s zoning committee, told The Observer .

According to Bond Street Hotel L.L.C., the development will sit on a modestly sized 14,000-square-foot lot, which necessitates the building’s height to secure a healthy profit on their investment.

“Clearly, there’s an issue of density,” Mr. Born said. “But I need a certain critical mass to make the project profitable. At 70,000 square feet, I can’t do it.”

Community groups remain skeptical.

“It’s not uncommon for developers to claim hardship, saying they need to develop on a massive scale to make a profit,” Andrew Berman, the executive director of the Greenwich Village Society for Historic Preservation, said. “When you scratch below the surface, a modest scale would be profitable.”

Shortly after proposing the 140-room hotel in 2001, Bond Street Hotel L.L.C. shifted gears. In 2002, the architecture firm Gary Edward Handel and Associates-whose projects include the $175 million Ritz Carlton Downtown and the $279 million Lincoln West development at West 67th Street (home to the 10-screen Sony Theaters and the Reebok Club)-redesigned Bond Street Hotel L.L.C.’s proposal as a residential building, with 65 units ranging in price from $500,000 to $1.8 million. With the project still awaiting its variance approval, the details have yet to be finalized, but the current plan calls for loft-style units averaging 1,300 square feet, with 11-foot ceilings and open floor plans; the largest units will top out at 2,500 square feet. At street level, the architects have designed 5,000 square feet of retail space, which the developers hope to fill with chic boutique, gallery or restaurant tenants-the kind of niche retailers that populate the streets in neighboring Nolita.

Not surprisingly, Noho community activists see the Bond Street project as a harbinger of the glitz and glam that would be incongruous with the bohemian streetscape.

“It would, without a doubt, introduce a different scale into the area,” Mr. Berman said. “These neighborhoods have been revitalized by the sweat equity of artists who have made the area livable. This kind of development would be just the first step in rising rents that would force out the artistic community. If the artists go, it’s killing the goose that lays the golden egg.”

At the Sept. 18 meeting, community members also aired concerns that building luxury housing in an area with commercial zoning could pose a safety risk by placing residents in close proximity to commercial activity.

Mr. Born flatly dismissed the notion.

“Who do you think would be impacted negatively, the residents or the trucks making deliveries? The district is more residential than commercial. There are more trucks on the corner of 82nd and Lexington than in Noho. I seriously doubt if a single commercial user objected to our plans.”

Peter Hoffman, the chef and owner of the Savoy restaurant on Prince Street, as well as a neighborhood resident and an outspoken critic of the Bond Street development, told The Observer that Mr. Born and his partners were exploiting the scale of the proposed building in a neighborhood with low-rise development.

“It’s an outrageous proposal,” Mr. Hoffman said. “This building violates the sky plane. People appreciate this neighborhood for its light and air, and to propose a building that will stand on top of everyone just to make a boatload is clearly ridiculous.”

But with development pressures increasing on the as-yet-undeveloped blocks in Noho, Mr. Schrager sees the Bond Street residential project as a way to shape the neighborhood positively.

“Development is happening down there-that’s a fact,” he said. “I think it’s a design issue, and I think our building will be contextual, and I want to make a contribution to the community. I want to do the right thing, for the neighborhood and for myself.”

If Mr. Born and Mr. Schrager fail to secure the zoning variance following the Oct. 8 B.S.A. hearing, the community will have won a temporary victory in their efforts to stave off high-rise development. But Mr. Born said that either way, Bond Street Hotel L.L.C. will develop the property to best maximize its investment in spite of the difficult hotel market.

“I think the community would be best served by working with me, by being involved in the process to get aspects they want into the project,” he said. If the B.S.A. approves the variance, Mr. Born went on, “[the community] gets nothing and I get my building.” If the B.S.A. rejects the variance, Mr. Born is prepared to wait rather than reduce the scale of the project.

“For me, I can sit with the land and, in two years, when the hotel market rebounds, I can do something else,” he said. “I’d rather sit on the parking lot now and build something in the future.”

When the Going Gets Tough, Hoteliers Go Residential