West Elm Hotel Plans Stall With Lawsuit Involving Development Partner

Some of Retailer’s Hotel Development Sites Were Replaced With New Operators

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The proposed West Elm Hotel in Oakland, California, is now on track to be replaced with another boutique operator. (Signature Development Group)
The proposed West Elm Hotel in Oakland, California, is now on track to be replaced with another boutique operator. (Signature Development Group)

 

 

Home furnishings retailer West Elm’s plans to enter the hospitality industry by building at least six hotels across the country appear to have hit a snag amid delays and legal battles, threatening its attempt to follow other chains in developing commercial property beyond stores.

The retailer, known for its upscale, midcentury-modern styles, had been working with developers nationwide in recent years on sites that were initially set to be future West Elm Hotels. However, those planned in Oakland, California; Detroit and Indianapolis have been replaced with another boutique hotel operator, according to the developers. And West Elm’s projects in Portland, Maine; Savannah, Georgia; and Minneapolis have not materialized, though initial announcements outlined openings beginning this year.

Neither New York City-based West Elm nor its parent company, Williams-Sonoma Inc. of San Francisco, responded to requests for comment from CoStar News. Rampant competition in the sector among corporate stalwarts such as Marriott, Hilton and the InterContinental Hotels Group made it challenging for newcomers to build their brand, even before the coronavirus pandemic disrupted the global hospitality industry.

“It is very difficult to build a hotel company from scratch that can compete in today’s market,” said Alan Reay, president of hotel consultancy firm Atlas Hospitality Group, who was not involved in the projects. “It will take a huge bankroll and a lot of time.”

The company was part of a growing number of retailers diving into the hotel business in recent years in an effort to expand their footprint beyond the typical brick-and-mortar space to gain more exposure for their brand and products. Equinox, an upscale gym operator owned by developer The Related Companies, opened its first luxury hotel in New York City’s Hudson Yards development last year. Furniture retailer Restoration Hardware is planning its real estate expansion with the opening of its Guest House line of hotels, starting with one in New York. Other companies, from Versace to IKEA, have also made the leap.

Through parent Williams-Sonoma, West Elm began a joint venture partnership back in 2016 with New York-based DDK Hotels as its exclusive operator as part of the retailer’s plan to kick off its West Elm-branded hotels. But plans began to stall after DDK sued the retailer several years later in the Eastern District of New York, claiming Williams-Sonoma had breached its contract by secretly negotiating with other hotel operators and planning to pursue “a materially different direction than was initially contemplated by the joint venture partners,” according to the lawsuit.

In a ruling issued this week, a New York judge ruled in favor of DDK on the claim that Williams-Sonoma breached a contract. However, the judge dismissed the other allegations against the retailer, including breaching a covenant of good faith and fair dealing.

While the West Elm Hotel website is still active, the joint venture between West Elm and DDK appears to have dissolved, as well as its role with local developers’ projects.

Kimberly Phoebus and David Wasserman, former DDK Hotels managers, did not respond to requests for a comment. Phoebus’ LinkedIn page now says she is the vice president of finance for the Trump Organization’s hotel division, and Wasserman’s lists him as the principal for Wasserman Real Estate Capital.

Other Developments

Even though the retailer is no longer preparing to raise its flag at a handful of planned or soon-to-be-completed hotel developments, developers are moving forward with replacements.

In Oakland, local developer Signature Development Group broke ground in mid-2017 and is working toward a late 2021 completion for its mixed-use development at 2401 Broadway Ave. Once completed, the project is expected to include a 168-room boutique hotel; 72 apartments; indoor and outdoor bar areas; and meeting, retail and restaurant space.

“West Elm is no longer involved in the project,” Signature President Mike Ghielmetti said, adding that the company is negotiating with another operator and will open on schedule under a different boutique brand. He declined to comment on the timing or reasoning behind the decision, but pointed to the lawsuit between DDK and West Elm.

In a similar situation, a $46 million AC Hotel by Marriott has filled West Elm’s place for a development in Detroit. Local developer The Roxbury Group signed a deal with San Diego-based Azul Hospitality Group earlier this year to replace what was initially set to be a $50 million, 10-story West Elm Hotel. Neither Roxbury nor Azul responded to requests for comment, but Roxbury confirmed the news in a statement it issued earlier this year.

The same situation has unfolded at the $300 million Bottleworks redevelopment project in Indianapolis, where developer Hendricks Commercial Properties has enlisted affiliate Geronimo Hospitality Group to take over the management of a hotel set to open next year after West Elm dropped out last year.

The “Bottleworks Phase One development continues to make great progress, including construction on the former Coca-Cola building, which will bring an incredible new boutique hotel to the heart of downtown Indy,” said Jeff Whiteman, chief operating officer at Geronimo Hospitality Group, which will own and operate the hotel upon completion late next year.

He did not mention West Elm’s previous role in the mixed-use development.

West Elm hasn’t specified its plans. In an investor presentation earlier this year, the retailer said it is pursuing growth in the hospitality industry, but didn’t include further details.

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