Wall Street Journal: New Breed of Hostels Heads to U.S.

Guests at the Generator in Barcelona sip mojitos in the lounge, dine on tapas at the café, and take in the Spanish sun from personal balconies. It may sound like a fashionable boutique hotel, but visitors here are actually shacking up at a youth hostel.

Modern hostels with rooftop yoga, dance lessons, and specialty cocktails are popping up in London, Paris, Berlin, Venice and other large European cities.

MK-CF379_HOSTEL_DV_20130807182324These lodgings are a far cry from what traveling college students on a shoestring budget may recall years ago, when youth hostels meant sharing bare, cramped quarters with a communal bathroom down the hall.

Now, some of Europe’s biggest hostel owners and operators are trying to replicate their success across the Atlantic.

They are aiming to transform the disparate U.S. hostel scene from a collection of mom-and-pop operations to a business run more like a hotel chain.

“Hostels in the U.S. have been typically under-invested, unsafe and lacking any type of service culture,” says Josh Wyatt, director of hotels for Patron Capital Partners, the London-based private-equity firm that owns Generator.

The firm has raised €150 million ($200 million) to develop the business in the U.S. “What has emerged over the past several years is that funds like ours have come in and brought creative people to change the experience.”

Beds & Bars, a U.K.-based company that operates 20 hostels in eight European countries, is also scouting locations in five major U.S. cities, including New York, Washington, D.C. and San Francisco, for its St Christopher’s Inns brand.

Beds and Bars spokesman Robert Savage said its European hostels have counted one million customers over the past 12 months.

U.S. hotel operators are getting into the act, too. Freehand, a venture between New York-based hotel developer Sydell Group and billionaire private-equity investor Ronald Burkle, opened an upscale Miami youth hostel in November with 350 beds. Freehand has hired Roman & Williams to design interiors for its hostels.

The popular Miami Beach bar, the Broken Shaker, opened a lounge at the Freehand Miami hostel featuring hand-crafted cocktails. A casual dining restaurant is slated to open in the fall.

Freehand plans to spend $250 million on as many as 10 U.S. locations for hostels, where a bed can be had for as little as $22 a night and private rooms start at $125.

The company recently bought a parcel of land in Williamsburg, Brooklyn, and a vintage hotel in Chicago, which it plans to convert. It is already working on a hostel in Los Angeles.

“We plan to deliver a premium product with better design and a common area but with a culture of a hostel,” says Andrew Zobler, Sydell’s chief executive.

The profit model, says Mr. Wyatt of Patron, relies on low costs, high occupancy and robust food and beverage sales at the hostels’ bars and cafes.

Throw in sales of items like T-shirts, padlocks, swimwear, and toiletries, he adds, and a $25-a-night guest produces $40 to $45 a night in revenue.

These companies are betting that there is a sizeable foreign and domestic youth market that major hotel operators have ignored.

Youth travelers are responsible for about $136 billion a year in international travel receipts, according to the World Tourism Organization.

Some hospitality analysts say figuring out this fickle demographic may not be easy. While youth hostels exist to some degree in most major U.S. cities, they have never caught on as they have in Europe, where sharing rooms with strangers is more common.

Hostelworld, a popular hostel-booking website, shows 275 active hostels in the U.S., compared with 3,570 in Europe.

“I think there’s a stigma attached to word hostel in America,” says Mr. Savage of Beds & Bars.

Hotel analysts say these operators could face competition from budget hotels like Holiday Inn Express, stylish but cheap accommodations like Yotel and New York’s Pod Hotel, or even Airbnb Inc., a website that enables travelers to rent directly from individuals living in a city.

Yotel in midtown Manhattan, for example, offers rooms as small as 170 square foot, which include flat-screen TVs, free Wi-Fi and large public amenities can be had for $169 a night.

The new hostels “don’t have the same brand awareness as hotels,” says Bjorn Hanson, dean of New York University’s Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management.

There could be legal considerations, too. In New York, local laws prohibit more than four people who aren’t traveling together from staying in a room at the same time, or putting more than two bunk beds in a room.

These regulations could undermine hostels’ business model—which calls for up to eight people bunking in a single room—in the most coveted U.S. market.

Patron’s Mr. Wyatt says the New York laws present some challenges but that Generator is still looking at locations in New York and believes he can apply “slight modifications,” like using twin beds in rooms, to make the business work.

Generator and other hostel companies say they have also been working with local legislators who are trying to change the law.

The company plans to acquire empty spaces—bankrupt hotels, deserted office buildings, neglected industrial properties—and convert them into hip lodging spots that will charge as little as $35 a night for a bed in a major American city.