Where It's Chic To Sleep

By Daniel Eisenberg

For a shy guy who never advertises and doesn't hang a sign on the door, Ian Schrager sure knows how to draw a crowd. At the recent opening bash for St. Martins Lane, his first London hotel, there were enough celebrities milling about, from Brad Pitt to Kate Moss, to pack a Hollywood premiere.

In the minimalist lobby, designer Philippe Starck's trademark, absurdist touch was at full volume: painted white with touches of fluorescent yellow, it featured an oversize, 8-ft.-tall vase filled with hydrangeas; gold-leaf stools shaped like molars; and a collection of giant chess pieces straight out of Alice in Wonderland. Upstairs in the spartan $200- to 300-a-night bedrooms, guests could "paint" the room according to their moods, using a colored light panel.

The VIPs in attendance were, as usual, wowed by what Schrager, 53, calls "hotel as theater." But these days the Brooklyn-born co-founder of New York's legendary Studio 54 nightclub and the man behind such chic cribs as New York City's Royalton and Los Angeles' Mondrian hotels, is looking for a broader audience--people willing to pay up to be put up in his brand of hotel hipness. Trying to stay ahead of the curve he started, Schrager is adding 10 hostelries to the five he had been running. "It's a very capital-intensive business, which doesn't encourage many new ideas," says Schrager, sitting in his new, whitewashed loft offices on Manhattan's West Side, wearing (what else?) white pants and shirt. "But hotels are not just places to sleep. You're supposed to have fun there."

"You either love them or hate them," says Bill Kimpton of Schrager's work. He's a former investment banker whose $400 million-a-year, 28-property boutique chain is one of a host of competitors, large and small, who are out to spoil Schrager's good time. Kimpton caters to less image-conscious business travelers who still prize a little personality, including free tarot-card readings, back rubs or goldfish. The San Francisco-based dynamo is establishing a growing national presence, converting bank buildings and department stores in places like Denver and Portland into small, Euro-style hotels.

Fashion families Versace and Ferragamo have hit upon hotels as brand extensions, while Island Records founder Chris Blackwell's laid-back Island Outpost retreats in the Caribbean have become destinations in their own right. With help from pals Leonardo DiCaprio and Cameron Diaz, Andre Balazs, the owner of Los Angeles' fabled Chateau Marmont, recently added the Standard, a retro-kitsch palace for young, hard-partying hipsters, complete with inflatable sofas and an AstroTurf pool deck. Balazs hopes to create a chain of anti-Best Westerns.

With occupancy rates falling and the room supply outpacing demand in the $93 billion U.S. hotel industry, the big powers are thinking small. Even though boutiques still account for just a fraction of the total market, the chains "don't really have a choice," says Chekitan Dev, marketing professor at the Cornell School of Hotel Administration. "For all practical purposes, the traditional hotel is obsolete. There's too much wasted space, it doesn't look inviting, and there's an erosion of brand loyalty." Starwood Hotels & Resorts chairman Barry Sternlicht tried in vain to lure Schrager to his camp. The company, which owns the Westin and Sheraton chains, is currently busy rolling out the self-consciously hip W line of hotels in 16 cities, including Seattle, Atlanta, Chicago and Los Angeles. Hyatt is opening more of its smaller, luxury Park Hyatt brand--boutiques for grownups--while Marriott and Bass hotels are taking notes.

Schrager broke new ground when he decided that a "point of view" is more important than standardization in a hotel. It's been his stock-in-trade since 1984, when he and his late partner Steve Rubell (whose family today runs its own hotels in Miami) opened Morgans in midtown Manhattan. It was both a professional and a personal reclamation project. The two spent slightly more than a year in prison for tax evasion following the collapse of their disco empire; soon after, they ventured into a more respectable branch of the hospitality industry. "People expected to see go-go dancers in the lobby," cracks Schrager, who is married with two young daughters. Yet Morgans was a quiet refuge from the city's hustle and bustle that quickly attracted a following from the high-profile worlds of fashion, media and music. "Ian sees value before anyone else in the industry, including me," notes Schrager's friend Peter Morton, co-founder of the Hard Rock Cafe.

Like many frugal hotel entrepreneurs today, Schrager's formula is to "reinvent" dilapidated structures instead of building from scratch. He has made an art form of saving money with style--making industrial-quality fixtures look fashionable. He never skimps on attitude, though--ask anyone who has been chided for trying to move the carefully arranged pool chairs at Los Angeles' Mondrian. Schrager stages casting calls and hires aspiring actor-models to play the help; the snooty service can be unimpressive to customers who lack agents.

But Schrager, a pop-culture junkie who combs through 50 magazines a week, is proving style and attitude are profitable. He has consistently enjoyed 80% to 90% occupancy rates at his properties; the industry average is about 65%. This year, with only six hotels now going at full speed, he expects to turn an operating profit of $120 million, and in a few years his company could be worth $2 billion.

"It's not just design and marketing. He's a very efficient operator," says Edward Scheetz, a partner at real estate investment firm Northstar Capital, which, with help from financier George Soros, has shelled out a few hundred million dollars for a majority stake of the newly incorporated Ian Schrager Hotels. For instance, nearly everything in your room, from sheets and towels to toilet brushes, is for sale. Schrager's even giving thought to opening stores to sell these wares. And he leases in-house restaurants and bars, which can typically be a major drag on hotel earnings.

Armed with that infusion of capital, Schrager is embarking on an ambitious expansion. Earlier this year he announced plans for a $100 million face-lift on the landmark 600-plus-room St. Moritz Hotel, overlooking Central Park, a prized piece of real estate he wrestled from developer Donald Trump. The Donald, no fan of Schrager's, has quipped, "He puts linoleum in the bathrooms and gets people to pay a high price. I've always liked marble."

One of Schrager's biggest fans is Starwood's Sternlicht, the hard-charging real estate mogul who outfought Hilton to buy ITT's hotels in 1997. Though Starwood takes pains to make clear that W isn't a Schrager knockoff, it can seem like a cheap copy. The rooms have been criticized for being too cramped, and the decor ridiculed for its achingly "cool" aesthetics. In the San Francisco location, black-and-tan-carpeted hallways are illuminated by blue lights. The phones have a button that reads, WHATEVER, WHENEVER. W prefers the Queen's English. The elevator is the "lift," the toilet the "w.c."

A chain of boutique hotels seems a contradiction in terms; how can a corporation that specializes in mass marketing build a line of handcrafted, distinctive properties? Starwood insists its combination of "style with substance" is unique. "Other boutiques have a 'don't ask, don't tell' approach to customer service," says Ted Darnall, president of North American hotel operations at Starwood. But, notes Anwar Elgonemy of PKF Consulting, "the targets are no fools. They know an original from a wannabe."

In that respect, few boutique hotels are as genuine as those run by Joie de Vivre Hospitality, an eccentric San Francisco start-up that will generate about $40 million in revenue and $15 million in profits this year. Founder Chip Conley currently has 16 properties in the Bay Area, each modeled on the look and feel of a magazine--"the ultimate, niche marketing," as Conley puts it. So the Phoenix, once a rundown, hot-sheet motel, is a Rolling Stone home away from home for bands and groupies, while his latest creation, Costanoa, is a luxury camping ground on the Northern California coast where Outside meets Vanity Fair.

Of course, there are always dangers in trying to make the alternative mainstream. "It is underserved now," says Dr. Bjorn Hanson, hospitality industry chairman at PricewaterhouseCoopers. "But there will be a shakeout from the attempt to commoditize boutique hotels." To Schrager, though, there is virtually no limit to the demand for innovation: "This market has so much depth. It's like saying, 'Do we need another record or movie?'" Well, sure. But then again, most movies don't turn a profit.

--With reporting by Laird Harrison/San Francisco, Aisha Labi/London and Jeffrey Ressner/Los Angeles

With reporting by Laird Harrison/San Francisco, Aisha Labi/London and Jeffrey Ressner/Los Angeles