The Shah Brothers Would Like You to Sleep With Them

Thirty-two years ago, Jay and Neil Shah’s immigrant parents bought a tiny motel outside Harrisburg. Today, the Philly-based duo is running a $1.6 billion hotel empire, and changing everything from the New York tourism biz to your local Hampton Inn

THREE WEEKS BEFORE their posh new Hyatt at Lexington and 48th is due to open, I’m with Philadelphia’s biggest hotel tycoons, Jay and Neil Shah, shopping for furniture in Lower Manhattan. The chauffeured town car that whisked us this morning from the curb outside the Hersha Hospitality office at 5th and Walnut in Philly pulls up at an unmarked brick warehouse in Tribeca. Three guys in suits are coming out the front door.

“Those guys aren’t here to buy furniture,” Jay Shah says quietly after the suits are down the block a little. “They’re here to buy the building.”

Let’s just say Jay and his brother Neil know about buying buildings. According to industry consultants—there’s no official list for this—no one owns more hotels in New York City than Hersha Hospitality Trust, which was most recently valued at about $1.6 billion. That’s pretty good for a business that started when the Shahs’ parents bought an 11-room motel near Harrisburg in January 1979—two months before the Three Mile Island disaster. The Shahs have spent recent years proving that an Indian-American-immigrant-built family business can compete with the heaviest hitters in city real estate, an industry in which old wealth has a centuries-long head start. They’ve also shown that a Philadelphia company not named Comcast can swagger into New York and just start buying up the place.

But what we’re doing in Tribeca today is examining two items at a designer showroom. The pieces are meant to be the finishing touches in the lobby of the Hyatt48Lex, the Shahs’ first venture into four-star hospitality, competing for midtown clientele who might otherwise stay at the Waldorf Astoria.

It’s a $100 million project, “Our largest, most significant, most innovative—” Neil says. “Most design-forward … ” Jay interjects, which as the big brother he’s entitled to do. “Hotel so far,” Neil finishes. “We’ve been working on it for six years.”

We take a freight elevator to the showroom. It’s two floors of chunky teak tables, hand-carved chairs, and sculptures made out of wizened tree trunks from Bali. The small lobby at 48Lex has been designed around a modern concept: no check-in desk. Greeters carrying iPads will welcome guests. The only place to sit will be a sleek bench that the company’s design team has recommended, and which Jay and Neil are here to see if they like—a -ninja-black carved-teak plank. It’s $7,500. Neil likes it. Jay gives it a hmm sort of look: “We don’t want it to be too comfortable.” They want to discourage lingering in the minimalist lobby.

Next we surround a lamp. It has a white stone cube as a base, with a delicate linen shade forming a second cube. It’s gorgeous, and $3,000. The designers think it will look nice on a table in the 48Lex lobby, alongside the house phone. The Shahs circle it, hands rubbing their chins. Both brothers are wearing gray pinstripe suits and bright white shirts without ties. Both incessantly chew little white pieces of gum. They wonder about a fragile $3,000 item in a public area.

“People wouldn’t be touching it,” Neil says. Jay half-nods in agreement, then says, “Well, maybe they would.”

Exactly why the CEO (Jay, 43) and president (Neil, 37) of a business whose interconnected enterprises, all told, own about 95 hotels are picking out a lamp and bench for one lobby isn’t 100 percent clear to me. But I think this visit is making a point, one that the Shahs are proving with their financial success: that an eye for style can be valuable even in a potentially mundane business; that being urban and urbane can be profitable; that guys whose main job is to secure financing, finagle acquisitions, and boost numbers like EBITDA (earnings before interest, tax, depreciation and amortization) can have artsy souls (when it makes fiscal sense).

Hersha became a player pioneering a concept called “urban-core select-service.” That means taking middlebrow suburban chains—Hampton Inns, Holiday Inn Expresses, Courtyard by Marriotts—into big cities. “Select-service” is a euphemism for guests’ not being able to select some services, like a full restaurant or a fancy spa. You may remember the Clarion Hotel in Philly’s Chinatown in the late 1990s. That was the Shahs’. In 2003, they dropped a Hampton Inn into New York’s hip Chelsea district, which might seem like putting an Applebee’s on Central Park East. But it filled a gap. What often was passing for a three-star hotel in New York was an old, faded five-star. What if you created new, downtown versions of the suburban brands everyone trusted?

Hersha did. Of course, to make it work, you have to give those downscale brands a downtown feel. Every mega-brand has standards for what its places ought to look like, but “if there’s something we can do to make our room rate $300 instead of $200, it’s in the franchise’s interest to be flexible,” says Jay. “The secret sauce is, you can’t charge those urban rates at a select–service brand unless you’re thoughtful about the design.” Which explains why the Shahs sweat the $3,000 table lamps.

Hersha Hospitality Trust now has 15 hotels in New York City, and eight in Washington. In Philly, the Shahs have the unexpectedly lovely Hampton Inn behind the Convention Center, and the Independent Hotel at 13th and Locust—one of the few flagships in their newest project: their own brand of boutique hotels. Between them, the brothers own about five percent of their publicly traded company. That sounds like a small share of what began as a family business. But think about the $1.6 billion.

HASU SHAH, JAY AND NEIL’S father, came to America at 19, in 1964, from a middle-class family. He intended to earn a degree in chemical engineering, get a job, and bring cash back to Mumbai to invest in a small generic-drug factory back home. The last part didn’t happen. While Hasu was studying at Tennessee Technical University, his girlfriend Hersha from across the street in India wrote that if he wanted to marry her he’d better hurry, because her parents were starting to arrange a marriage, and he wasn’t on their list.

“We were different castes, even though our families were neighbors,” Hasu Shah says. “We spoke the same language. Same religion. They were in business, we were in business. But I never could be on their list.”

Ultimately, the two did marry. Both got jobs with the police at a crime lab in Trenton (Hersha had studied microbiology in India), doing CSI-style forensics for narcotics, rape and homicide cases.

When Hasu got a state job in Pennsylvania, they moved to Harrisburg and stayed with an Indian co-worker while Hersha, wearing a sari and toting infant son Jay, roamed town trying to find an apartment.

“Harrisburg did not see much brown skin then,” Hasu says. “I could understand the feeling of some of the landlords. It took us about 20 days—she must have gone to maybe 40, 50 apartments.” (Now, they’ve been in Harrisburg for 42 years; the mayor named a street Hersha Drive.)

To supplement his income, Hasu began buying foreclosed homes, fixing and flipping them. The family helped. “I was in third grade,” Jay remembers, “and I got to be on a roof swinging a hammer.” When the plan to buy a drug factory in India fell through, the Shahs took the money they’d saved and bought that first motel, just before the nuclear meltdown. “No one could go near there for three weeks,” Hasu recalls. “But then the motel started doing very well, because a lot of maintenance people were around.”

They used the cash flow to buy another motel, and onward and upward it went. Hasu would make deals. Hersha would manage the properties. Hasu named the company to honor his wife in 1984, after they bought their first real hotel in Harrisburg, ejected the drug dealers and hookers, and changed its name to the Riverfront Inn.

There’s a statistic that’s kind of astonishing: According to the Asian American Hotel Owners Association, at least 40 percent of the hotels and motels in the United States are owned by Indian-Americans—even though they make up less than one percent of the American population. One explanation holds that established Indian hoteliers assist newcomers with small loans and expertise. Hersha Shah offers this: “Hospitality is a big thing in India culturally. Our parents taught us that guests are God-sent.” Hindu scripture, she says, has a proverb: Athiti devo bhava, “The guest is God.”

JAY AND NEIL weren’t predestined to join the company. Jay studied hotel administration at Cornell and got MBA and law degrees at Temple, then went to Washington to work for Senator John Heinz. Neil studied at Wharton, got a Harvard MBA, and worked for a consultant. They had options. But as Jay says: “When something has your mother’s name, you’re vested in it.”

Philadelphia seemed an ideal base for their ambitions, triangulated amid New York, D.C. and Harrisburg (where the company remains headquartered) and poised for growth during the 1990s Rendell Renaissance. They took the buying-and-selling part of their business public in 1999 as Hersha Hospitality Trust. It’s a real-estate investment trust, a REIT, like a mutual fund for real estate. The cash from the IPO funded major expansion.

“We bought maybe 60 hotels,” Neil Shah explains, “really clustered in the four cities we knew well, where Jay and I really felt local: Boston, New York, Philadelphia and D.C. They’re four markets we’ve really lived in, not just bought groceries in, but we’ve, like, met girls there.”

Today, the Hersha corporate structure is its own sort of ecosystem. Three Hersha companies own hotels in some capacity, but each has its own focus. The REIT buys and sells hotels.

The Hyatt48Lex is owned not by the REIT but by a private division, Hersha Development Corp., which mostly builds hotels to sell but owns a few. Hersha Hospitality Management staffs hotels (for Hersha and other owners), but also owns some. For a few years, the Hersha REIT lent money to Hersha Development, which would build a hotel and sell it to the Hersha REIT. Sometimes, the Hersha management company would get the contract to run the hotel. This is what happens when you send your kids to business school.

Neil hunts for acquisitions, while Jay takes the lead making Hersha’s institutional investors comfortable. “They are different, like me and Hasu,” their mother says. “Hasu is a wheeler and dealer, and I am an operator. Same way, Jay manages everything very well, and Neil can make deals. Neil is very contemporary. Jay is more traditional.”

Jay lives in Wynnewood, Neil in Society Hill. (Both are married, with two children.) Each is connected to Philadelphia in his own way: Jay sits on the boards of Temple University and Episcopal Academy, and was on the property development committee of the Please Touch Museum as it moved to Fairmount Park; Neil is on the corporate council of the Constitution Center.

Lately the pair has led the REIT’s “asset recycling” strategy—selling suburban hotels acquired early in the company’s life to buy urban ones. In August, Hersha announced the sale of 18 non-urban hotels for about $155 million. Neil figures the money should be enough for two or three city hotels, where Hersha is making its biggest, potentially riskiest buys.

BACK IN NEW YORK, after the furniture showroom, Jay and I jump into the town car and head just south of Union Square to where, in June, Hersha’s REIT agreed to buy an under-construction luxury hotel for $104 million. Planned for a mid-2012 opening, it will be called the Hyatt Union.

“It’s a big bite,” says David Katz, an industry analyst who follows the Hersha REIT for Jefferies & Co.

Union’s design will blend earthy with modern—a century-old two-story facade wrapped around a glass tower. At the moment, it’s a gutted construction site. Jay waves his hand across the right side of the vast lobby.

“Because we’re so close to Union Square Park, the design intent is to bring an interpretation of the organic elements of the park into the hotel,” he says. “The ceiling treatment is a large oval of fabric over the bar that’s going to have twinkling LED lights, like a nighttime sky. And the chandelier is really an installation of twigs, lit from above so each of them will glow.” As always, though, he soon loops back to the money: “You’re optimizing square footage to create as much revenue in the space as can reasonably be done.” A week later, Jay and Neil give me a tour of the Independent in Philly’s Midtown Village, which we all know as the Gayborhood. The Independent is part of the first brand that Hersha is creating for itself, the Independent Collection—currently six small hotels around the country that aren’t Hyatts or Marriotts or Hiltons. They also include the NU Hotel in Brooklyn, the rustic Minnewaska Lodge in New York’s Hudson- Valley, and the “shabby chic” Postcard Inn at St. Pete Beach, Florida.

Neil, spearheading the project, calls the indies “hotels where you really feel the soul of the neighborhood.” In the Independent’s lobby are piles of the Philadelphia Weeklyand the Philadelphia Gay News and, in a sunlit atrium, a giant multicolored painting- of Independence Hall.

We get a key to the lounge on the first floor, below the hotel. It’s previously been a succession of gay bars—in fact, until a few weeks prior, it was the Q Lounge. We gather chairs and sit. There must have been a final bash; partly consumed bottles of booze and a pair of white high-top sneakers are on the bar. The Shahs have just finished conducting a “beauty contest” to select a new restaurant for the space, and they reveal to me it’s going to be Mike Stollenwerk’s Fish.

“So you’ll have this wonderful brasserie setting downstairs, and a quiet inn upstairs,” Neil says.

I wonder why they haven’t done more hotel development in Philly.

“Philadelphia’s a very challenging market to develop real estate,” Neil says. During an earlier talk, we stood at the window of the Walnut Street office, overlooking Independence Hall, and Neil pointed to the Hotel Monaco that’s going up at 5th and Chestnut. It’ll probably succeed, he said, “but you needed an out-of-towner to get it done. Because you needed to think it was gonna be cheaper to get done than it is.”

Still, he rattles off a few local projects in search of development: “There’s a lot flying around, from the Philadelphia Inquirer building to the waterfront, the YMCA, the Benjamin Franklin Parkway, the education building. I think we’ll find an opportunity or two,” he says.

There is pensive silence for a moment. Then I remember to ask: Whatever happened with the $7,500 bench and the $3,000 lamp?

“We did get the bench,” Neil says. Motioning toward his brother, he adds: “He’s not happy about it.”

“We did not get the lamp,” Jay says. “Got a different lamp. Different lamp that will hopefully have a similar impact—at one-third the budget.”

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