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How’s Business?: Small hotels

By Joe Palumbo

In the remake of the movie of “Godzilla,” the slogan “size does matter” is highlighted. And while that may be the rule for the giant thunder lizards of the past, it is quite contrary to the present rule of hotels.

When one thinks of hotels one visualizes large structures mainly in the elite areas of Manhattan. An ever-rising stock market in the ’90s enabled hotels to thrive, as people (especially in yuppie land) conducted their business and spent big bucks on items such as Broadway shows and extravagant restaurants.

Room rates continued on the rise and peaked out in 2000. Then came the tragedy of Sept. 11, 2001. It’s been nearly two-and-a-half years since that horrific day, and hotels are struggling to get back into the saddle. So how do we stand in 2004?

For what could be quite some time, luxury hotel building no longer appears economically feasible. Major corporations have learned quite well the importance of keeping costs down — and you can add the hotel industry to the ranks.

This has been recognized by developers who want to get into the hotel game in an atmosphere where one can take advantage of low interest rates and in which the economy and tourism are on the mend. We have reached a change in the hotel paradigm where it’s the small scale that matters.

Now enters our fabulous borough of Queens.

Queens is growing and with it an ever-increasing demand for accommodations that are moderately priced in neighborhoods that could be considered notably underserved. Present hotel construction costs vary with ranges of $200,000 a room and higher. That’s pretty steep, even with a small 35- to 50-room project.

But there are detours that can cut these costs and perhaps quite substantially, namely the conversion through acquisition of existing structures. The renovation of an existing structure is not only less costly than the combination of demolition and building from scratch but also entails a lot less headaches and time. Also to be noted is that costs should be lower with the transforming from both ambiance and flair to convenience and comfort.

So how’s business in small hotel development? It really should be considered a roll of the dice. Barring future terrorist activity and a sound continued recovery in the economy, the potential appears quite lucrative; however, should an opposing position occur without an adequate cash flow and a proper existing financial foundation, the future could be quite devastating.

Joe Palumbo is the fund manager of The Palco Group Inc., an investment company, and can be reached at palcogroup@aol.com or 718-461-8317.

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