A reboot on the horizon for Manhattan hotels

After years of declining room revenues, hospitality players set their sights on a long-awaited rebound
By Rich Bockmann | August 01, 2017 11:00AM

The Hyatt Union Square

Manhattan’s hotel market may be nearing the end of its more than six-year struggle to absorb new supply, as the slide in room revenues slows to a trickle and industry insiders forecast growth.

Through the first six months of 2017, the average revenue per available room (RevPAR) — a key metric of the hotel industry’s strength — fell 1.3 percent from the same period a year earlier to just under $210, according to hotel data provider STR. That’s an improvement over the past two years, when Manhattan’s RevPAR dropped 3.8 percent in 2016 and 3.9 percent in 2015 during the same period, as thousands of new hotel rooms were added to the market.

But the pipeline of new supply is dwindling, and industry players say room revenues will level out soon.

“New supply growth is a fraction of what it was in previous years,” said Douglas Hercher, a managing partner at the hospitality investment sales firm RobertDouglas. “You have to think the downward pressure on room rates will certainly diminish once all that new supply is gone.”

Manhattan added 28,842 new rooms between January 2009 and October 2016 — an increase of roughly 92 percent over the inventory level in 2008, according to the hospitality consulting group HVS. In 2010, Manhattan saw RevPAR growth accelerate and turn positive for the first time coming out of the recession, but that was short-lived. The rate of growth decelerated over the next four years and fell into negative territory in 2015.

As the flow of new hotel rooms tapers off, however, owners and operators have new cause for optimism. The supply of inventory, measured as the number of room nights available for booking, grew 4.8 percent in 2016, per STR’s data. But that was outpaced by the growth in demand, or the number of room nights booked, which grew 5.4 percent in the same time frame.

Manhattan’s average occupancy, meanwhile, sat at about 84 percent through the first six months of 2017, and rates have started to show signs of improvement. The average daily rate for a hotel room in the borough was roughly $249 through the first six months of the year — a drop of 2 percent year over year, compared to declines of 3.8 percent in the first half of 2016 and 2.6 percent in the first half of 2015.

“We’re going to see a slight decline in the average daily rate going forward,” said Jan Freitag, a senior vice president at STR. “We’re no longer at the peak [of rate decline].”

The big question for New York’s hotel industry is: When will RevPAR show signs of growth?

Freitag said there are still some 15,000 new rooms in the development pipeline — including the Lightstone Group’s 612-room Moxy hotel, set to open in Times Square in late August — which could prolong softness in the market. But others are more bullish, predicting room rates and RevPAR could turn a corner and see gains within the next year.

Neil Shah of Hersha Hospitality Trust, which owns a dozen hotels in NYC, said on an April earnings call that he sees “ample room for rate growth,” as average daily room rates in the city remain about 12 percent below their last peak in 2008. “We do believe that New York hoteliers can regain pricing power this year,” Shah, the REIT’s president and chief operating officer, told investors.

The consultants at HVS, meanwhile, projected in December that Manhattan RevPAR will stabilize sometime in 2018, ending the year with 0.5 percent growth. HVS forecasts that by November 2020, Manhattan’s RevPAR will climb back to the level of its peak in 2008.

And because hotels reset their rates every night, they are much more responsive to changes in the market. Once operators start to see indicators such as travelers booking rooms closer to the time of their trips, they will be able to turn on a dime and start hiking their rates, said Jay Morrow, a director at the investment sales brokerage Hodges Ward Elliott.

“I think that when they see more compression nights shorten the booking window, they will be able to push rates incredibly quickly,” he said.