How YOTEL Turned to Conversions to Grow

(Conviction of Conversion: How YOTEL Turned to conversions to Grow)

 

Hotels take time to build. A lengthy amount of time. As much or more than three years. Within that time, many things can happen to derail the project or add a layer of complication—affecting construction budgets and giving developers fits.

Time-to-market is of the essence in any real estate project. The quicker it comes to fruition, the sooner it can start generating cash. In order to speed up the clock, developers have looked beyond traditional ground-up projects to conversions—taking over an existing piece of commercial real estate (multifamily, office, retail, as examples), renovating the guts, then reopening it as a hotel.

Like developers, hotel brands are fast to board the conversion train as a faster, efficient way to bring their flags to market. One such is YOTEL, the smart-design, tech-centric brand that grew up in airport destinations before landing in major global cities with a fan base that appreciates value and technologies above fuss. YOTEL now operates 16 hotels (over 4,000 keys) across six countries with another 13 hotels confirmed (over 3,500 keys) across an additional seven countries by 2024 under its three brands, YOTELAIR, YOTEL and YOTELPAD.

The London-based brand already has completed five conversions, in Edinburgh, Glasgow, Porto, San Francisco and Washington, D.C, the majority of which were adaptive reuse projects of office spaces. And it’s serious about more. So earnest, in fact, that it’s committed £50 million toward key money, guarantees and leases, primarily focused on hotel conversions.

In YOTEL’s case, the time was right to pursue conversion projects after having established the brand through more typical new-build developments, according to YOTEL CEO Hubert Viriot. “Most cities have great pieces of real estate, sometimes occupied by the wrong asset class,” he said.

Its first adaptive reuse project in San Francisco, was a complex redevelopment of a graded office building, which had stood the test of time—and of disaster, literally. It was one of the rare buildings still standing after the earthquake of 1906, which destroyed more than 80 percent of the city. “Converting a building like that is always complicated,” Viriot said.

Older office buildings are prime targets for conversions because they often employ an interior design that is antithetical to today’s more coveted large, open spaces “These are all older buildings that are challenging for owners, so we started looking at it,” Viriot said.

Subsequent to San Francisco were three more office conversion projects in Edinburgh (opened in 2019),Glasgow and Porto, both due to open imminently. Last October, YOTEL completed its first hotel conversion with the opening of the 377-room YOTEL Washington DC, formerly the Liaison Capitol Hill Hotel, nearby the U.S. Capitol Building. YOTEL is known for its compact cabin-type room design, giving it the ability to pack more rooms onto a footprint, resulting in more rooms to sell, which is ideal in a high-demand market like Washington, D.C..

Viriot, who joined YOTEL in 2014, never envisaged YOTEL as a one-trick brand pony. His perspicacity has helped evolve YOTEL into a flexible brand that can adapt to many sorts of real estate plays and work with investors and developers on a vision that at the end of the day creates profit. “I wanted to make sure that our brand could address all the real estate issues that our investors may have,” Viriot said.

YOTEL is one of a handful of brands that pioneered the “micro-room” concept, which, though compact, packs a punch and maximizes every inch of available space. The approach was born out of the idea that customers wanted a well-designed, comfy room, but didn’t necessarily need added space because, first, they weren’t staying for an extended period of time and, second, wanted to enjoy the hotel’s activated public spaces and destination.

Moreover, the design became a hit for investors who wanted to maximize their investment, realizing that beyond an exit strategy, there, too, is a cash-flow advantage. “The objective is to operate hotels efficiently by ensuring that you've got the right number of rooms on as little real estate as possible,” Viriot said. “Most investors are driven by yield, which is where we come in, because our concept unlocks value. What we've seen, even before COVID-19, is that most equity investors find greenfield projects significantly more risky than operational brownfield investments and therefore seek creative solution to reposition existing assets.”

The overall concept sounds easy, but there is a science, an engineering behind it. YOTEL is a premium product, which means the overall FF&E package may be pricier than other down-segment brands. But while the upfront costs are slightly higher, they are typically offset by the greater room count and the average daily rate premium vs more traditional brands.

There is no discounting the impact the pandemic has had on the hotel industry. But out of crisis comes opportunity, and YOTEL is poised to make gains based off a framework laid out a year ago. “We have a solution and are in a position where we can proactively look at opportunities when they arise,” Viriot said. “It's been a long journey and today we are ready.”

 

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