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New York

Investors bullish on Manhattan hotel market

The hospitality industry, which has been a favorite asset class for the past few years, has been experiencing hurdles over the past six months. Recent data from Smith Travel Research show that during the first three months of this year, the average daily rate for a hotel room in New York City was down by 20 percent to 30 percent, while the occupancy level dropped from an average of 84 percent to as low as 50 percent.

In February alone, the U.S. hotel industry posted declines in three key performance measurements, according to the hotel research company. Year-over-year, hotel occupancy fell 10.1 percent to 53.2 percent, while the average daily rate dropped 7.8 percent to $100.41. Revenue per room, or revpar, meanwhile, decreased 17.1 percent to $53.42.

Among four- and five-star hotels, the luxury segment reported the largest declines in all three areas: occupancy dropped 16.7 percent to 58.9 percent; average daily rates dipped 14.2 percent to $261.52; and revpar fell 28.6 percent to $153.94. The economy hotel segment reported the smallest decline in occupancy — a drop of 8.4 percent to 47.5 percent — and revpar declined 12.4 percent to $123.90.

In the year-over-year measurements for the week of March 21, the New York City hotel statistics were the worst in the country, with a 25.5 percent drop in average daily rate and a 36.3 percent decline in revpar to $151.05, according to Smith Travel Research.

Even with the declines in room rates and occupancy, real estate investors are confident about the strength of the New York City market, remaining bullish based upon recent sales of hotel properties.

Since the beginning of the year, three hotels have traded in Manhattan. In March, Brack Capital sold the newly-opened Hilton Garden Inn at 63 West 35th Street. The 298-room hotel, located on the site of the former Icon parking garage, welcomed its first guests March 1, at the same time as the sale, for $121.2 million — or $407,000 per room — to RLJ Development.

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In February, hotel developer Lam Group, one of the most active developers of economy hotels, sold the recently-completed 33-story Fairfield Inn New York Manhattan/ Times Square. The 244-room hotel located at 330 West 40th Street between Eighth and Ninth avenues was purchased by Gehr Development, a division of Gehr Enterprises. The property sold for $99.5 million or $407,787 per room.

Earlier in the year, another recently-completed 146-room Hotel On West 36th Street sold for $46.4 million, or $317,000 per room.

A report issued by Lodging Development Group notes that the Manhattan hotel supply increased by just 1,732 rooms in 2008, and could increase by 11,000 between 2009 and late 2010.

There are 51 hotels now under construction in Manhattan, according to Lodging Development Group. Of these, 38 properties, with a total of 7,842 rooms, are expected to open in 2009, while an additional 13 hotels, encompassing 3,334 rooms, are expected to open in 2010 or early 2011.

The global credit crisis has resulted in a number of financial institutions declining to provide construction or permanent financing for hotels, but New York City continues to have more than 41 million travelers each and every year requiring more hotel rooms, according to NYC & Company, the city’s official marketing, tourism and partnership organization.

Average hotel room rates and occupancy may decline, but prudent investors will continue to seek opportunities in the ownership of hotels, while well-capitalized lenders remain committed to financing the deals at higher debt service levels and under stricter terms and conditions.

Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” and “Building New York” on CUNY TV and on WEGTV in East Hampton. His radio show, “The Michael Stoler Real Estate Report,” airs on 1010 WINS on Saturdays and Sundays. Stoler is a director at Madison Realty Capital as well as an adjunct professor at NYU Real Estate Institute, and a former contributing editor and columnist for the New York Sun.