Can NYC’s aging hotel boom find new life?: Q&A, part III

New York /
Dec.December 23, 2016 07:30 AM

From the December issue: Even as tourists and business travelers flock to New York City in growing numbers, hotel operators face two looming threats — the dollar’s strength and a wave of new industry capacity. There are, however, signs of hope: the industry recently logged what some hail as an important victory in Albany over Airbnb. As per a law signed in October, people who advertise rentals for less than 30 days in multi-unit buildings could face fines of up to $7,500. Michael Barnello, chief executive of LaSalle Hotel Properties, told investors he sees the move as “a big [shot] in the arm for the hotel business, certainly in terms of the pricing.” Others are more dismissive of Airbnb. “It’s like a pimple on an elephant’s behind,” said Allen Gross, chief executive of GFI Capital Resources Group, owners of hotels including the Ace in Chelsea and the Beekman downtown.

For the third web installment of our Q&A, we turn to Jared Kelso of Cushman & Wakefield, and Bradley Burwell of CBRE.

Jared Kelso
Senior managing director, Cushman & Wakefield’s Global Hospitality Group

Will the new Airbnb law give hotels a boost in terms of pricing power?
Demand for New York City hotels has seen tremendous growth over the past 7 years, even more so when considering shadow inventory like Airbnb. I do believe that Airbnb competes with the traditional hotel sector in some areas, particularly for the cost-sensitive guest who has a length of stay over five days and for family/leisure travelers. Better monitoring of users who are abusing the system will result in some demand shifting back to the traditional hotel sector.

Which segment of the city’s hotel sector will be the most likely to benefit from the new law?

Lower-rated extended stay and corporate housing.

Is New York’s hotel industry at the tail end of a decade-long boom?
As long as the city continues to grow and diversify, guests will continue to come. The city remains at occupancy levels in the mid-80 percent range. These are unbelievable numbers that any other city in America would be thrilled with. There has been some rate weakness in pockets of the city as revenue managers display uncertainty about how new supply will affect them. But as time passes and occupancy rates remain relatively flat, you may see significant rate growth following a sharp drop-off in supply deliveries in late 2017.

Where do you see New York City’s hotel occupancy rates heading in 2017?

New York occupancy levels have remained relatively flat since the early 2000s. I don’t see this changing materially.

Some NYC hotel developers are going micro with their room sizes. Does the trend have legs?

Simply put, yes. I believe the trend in New York was started due to the cost of land. That being said, this is a segment that is here to stay, driven by changing guest preferences. Many of these hotels, like the citizenM in Times Square, are exceptionally well done and offer a unique guest experience.
According to the state Comptroller, the number of hotels in Brooklyn has tripled since 2006 and doubled in Queens. Where do you see hotels sprouting in coming years?
There was not a tremendous amount of supply in those submarkets to begin with, so there was substantial unaccommodated demand there, which the new supply is absorbing. I believe you will continue to see small projects get developed in outlying neighborhoods like Bushwick and Gowanus, in addition to lower Manhattan.

Bradley Burwell
Vice president, CBRE’s Hotel Group

Which segment of New York City’s hotel sector will be the most likely to benefit from the new short-term rental law?

The city’s hotel market will benefit, as this law eliminates 20,000 to 30,000 non-hotel bedrooms that hotels have to compete with for customers. Hotels have been competing with Airbnb for leisure demand, which spikes on the weekends. During the weekdays, the vast majority of visitors staying in hotels are corporate travelers who have expense accounts, long-term negotiated rates and are focused on convenience. This law will allow hotels to have greater pricing power on the weekends, which is where we’ve seen the greatest decline in average daily rates. I could even see the NYC hotel market return to positive revenue-per-available-room (RevPAR) growth quickly because of this law. The real question is, how will this impact tourism to the city and the other businesses those visitors benefit? Airbnb offered competition for tourists who may not have been able to afford coming to the city otherwise.

STR reported the market’s year-to-date RevPAR in September dropped 2.9 percent from a year earlier. Are we at the tail end of a decade-long boom?

We are at the tail end of a great growth period for lodging supply in the city. From 2012 to 2018, New York City will have seen more than 30,000 hotel rooms added.
Meanwhile, Airbnb added nearly 30,000 rooms, creating a perfect storm of new competition and essentially halting average daily rate (ADR) growth. However, we have seen occupancy continue to rise, meaning that there is plenty of demand. But all of this is about to reverse. Over the last 30 months, RevPAR growth has flattened, and some new projects are not starting. Additionally, the new Airbnb law removes the vast majority of the units added through that system. So today, compared to a month ago, we already have 20,000 to 30,000 fewer rooms available. That means more pricing power. What’s more, we are about to see some hotels converted to alternative uses. I suspect that, like the years between 2002 and 2005, we are entering a period where we’ll see a net loss of rooms. It will result in a return to very strong RevPAR growth.

Brooklyn and Queens have seen a surge of hotel supply, albeit from a low base. Where do you see new hotel supply heading in coming years?

You’ve nailed the two spots, Brooklyn and Long Island City in Queens. There are nearly 40 hotels under development or recently opened in those areas. Despite the new supply, the areas still offer such lower room rates than Manhattan that they have room to grow. Both Brooklyn and Long Island City also have their own attractions, corporations and other lodging-demand generators that are bringing visitors there, where historically the hotels there were just the low-cost alternative to Manhattan. The next spot for growth is going to be Flushing.

What kind of investors are you seeing in the NYC hotel market these days?

The New York City hotel market attracts every type of investor, but the most successful are those who either have a strategic purpose for investing in hotels in New York or are looking at them as a high-yield alternative to other NYC real estate. Foreign investors, high-net-worth individuals, hotel brands looking for a flagship asset are all the top buyers. Historically, real estate investment trusts were the prime acquirers of less strategic but well-performing assets offering consistent returns. Today, analysts are pounding REITs that have high portfolio allocations in New York, which has not seen the same performance growth levels as other U.S. markets. This has resulted in REITs’ not making additional investments in NYC, but they will come back.

What do you think about the convergence of retailers, such as home furnishing companies, and hotels?

The entire lodging sector is shifting to lifestyle brands, providing guests with not just a room but a way of living. This trend has been evolving for 25 years. Nearly a decade ago, Baccarat and Armani started hotel brands to show off their product. Many other luxury names have attempted to start hotel brands too, some successfully, some not so.

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