Airport hotel demand takes off, pushes new construction

Oct.October 23, 2007 11:06 AM

Demand for New York City hotel space has reached the airports on the city’s periphery, where developers say they are seeing new construction activity that could blossom into a full-scale building boom. Much of the spike in development activity is driven by higher passenger traffic at area airports.

The Port Authority’s three airports — John F. Kennedy International, Newark Liberty International and LaGuardia Airport — set a passenger record last year, handling nearly 104 million passengers, up from 99.8 million in 2005, and 81.8 million in 2001.

In 2006, JFK had about 42 million passengers, up from 29.4 million in 2001, an increase of 43 percent. Newark served about 35.5 million, up from 30.5 million in 2001, an increase of 16 percent, and La Guardia had about 26 million, up from 22 million, an increase of 18 percent over 2001.

The airports are projected to reach a combined 125 million passengers annually by 2015, and 150 million by 2025, with both the airports and their airspace at maximum capacity.

All those passengers need places to stay. But hotels near the airports are also hitting capacity. Occupancy at JFK hotels hit a six-year high of almost 91 percent in September, according to one industry report, higher than at Manhattan hotels, which were running at about 85 percent occupancy last year. Manhattan hotels sold out many nights and pushed potential customers into the boroughs or New Jersey. The boom has led to a spike in average hotel rates, and has raised demand for premium properties.

Currently, there are about 2,815 hotel rooms within three miles of JFK, about 3,125 hotel rooms within three miles of LaGuardia and 5,082 rooms within three miles of Newark, according to Smith Travel Research, which tracks hotel performance.

“We’re noticing some interesting development we haven’t seen for awhile,” says John Fox, senior vice president at PKF Consulting, which tracks the hospitality industry. “It’s spread out to the airports, as it has to the outer boroughs.”

Fox said demand is even boosting growth at lesser-known airports outside the city, like Stewart Airport in Newburgh, New York. The Port Authority plans to make the former Air Force base its fourth principal airport in an attempt to ease pressure on the other three.

Recent months have seen several significant purchases of hotel properties by owners who intend to upgrade them and capitalize on booming demand.

Meanwhile, there are at least four new developments under way at airports in Queens. Near LaGuardia, an 87-room Fairfield Inn on Astoria Boulevard is slated to open this year, and a 60-room Comfort Inn on 83rd Street in Queens will open in 2008.

Near JFK, developers have a 150-room Sheraton scheduled to open in the fall, and a 70-room hotel on Rockaway Boulevard is slated for late 2008.

Generally these new projects will be small, limited-resource hotels, in keeping with a growing citywide trend toward economy hotels. But that could change if the boom continues, demand keeps growing, and the opportunity to buy existing full-service properties disappears.

“The cost to develop is cheaper if you forgo all the common areas, like meeting space and restaurants,” says Eric Lewis, managing director of Cushman & Wakefield’s hospitality and gaming group. “At some point, if the market continues to improve, new higher-end development becomes feasible.”

The average daily room rate at hotels around JFK, for example, is $125.64. At LaGuardia, it is $128.19. However, quality covers a wide range. The Doubletree JFK, for instance, is an upscale property, while the Crossbay Motor Inn is a budget hotel. The average rate for hotel rooms throughout the city is $217 a night.

Hotels are also proving to be a good investment. Ron Gershoni, vice president of CRG Realty Capital said hotels have gone from 5 percent of the securitized debt market — where investors buy shares of real estate loans — to 16 percent in recent years. That has flooded the market with capital and is fueling the upgrading trend.

“Everyone wants a piece of real estate, however they can get it,” Gershoni says. “Capital sources have become a lot more aggressive.”

Gershoni says he expects profits from airport hotels to rise significantly in the coming years, since many operators signed low-paying, long-terms deals to house airline personnel during the post-Sept. 11 slump. Many of those deals are now expiring, allowing operators to raise room rates substantially.

For now, those looking to open full-service hotels in New York City’s airport markets have been able to buy existing properties and upgrade them.

In July, Hilton Hotels Corp. announced the opening of the Doubletree Hotel JFK Airport after purchasing a Radisson off the Van Wyck Expressway and Belt Parkway. Hilton spent $10 million to upgrade and rename the 386-room hotel. In September, the owners of the 217-room Ramada Plaza near LaGuardia secured a $22 million securities loan to upgrade the property into a Holiday Inn. And in January, RLJ Lodging Fund II LP purchased the 438-room LaGuardia Marriott from LaSalle Hotel Properties for $68 million, and announced plans to invest $11.5 million to renovate and upgrade it.

Though some analysts were surprised by the price tag, which they said seemed low for the LaGuardia Marriott property, Tom Baltimore, president of RLJ Development, said the owners were eager to sell it after another deal fell through at the last minute, forcing them to find another buyer quickly or lose 1031 tax benefits. “Over time we expect to see rising rates in some of the outer boroughs and we think LaGuardia will benefit,” Baltimore said.

Hotel developers and investors who aren’t able to start up in Manhattan because it is too pricey are heading to the airports instead. “We’ve been trying to get into New York for some time,” says Baltimore, whose company owns 116 hotels in 38 cities but has only one other airport property, at Chicago’s O’Hare International Airport. “It’s a good time to be investing anywhere in New York right now. But we’re not seeing many new hotels in New York. We’re opportunistic, so if we see something we’ll pounce.”

Fox says the greatest potential for long-term growth around an airport might not be found at LaGuardia, JFK or Newark, but at the lesser-known Stewart Airport in Newburgh, New York. The state recently handed the property over to the Port Authority to run, and it is designated to become the area’s fourth major airport.

Jet Blue recently announced it will begin flying out of Stewart Airport, and other carriers may eventually follow. The airport is now served by five airlines and passenger traffic is reportedly expected to triple this year to about 900,000. While the area around Stewart Airport has some hotel development, most of it has not been built to capitalize on the airport, Fox says. Currently there are 11 hotels with 887 rooms within three miles of the airport.


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