Can NYC’s aging hotel boom find new life?

Albany throws hoteliers a bone, retailers check in, and micro units</br> catch fire

From left: Allen Gross, Mitchell Hochberg and Jan Freitag
From left: Allen Gross, Mitchell Hochberg and Jan Freitag

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. With 16,461 rooms under construction, per industry tracker STR, room rates could soon come under pressure, and some projects could get shelved. But in the longer term, as the city’s population heads toward 9 million, the adage “if you build it, they will come” should hold true, said Jan Freitag, STR’s senior vice president of lodging insight. Meanwhile, 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 more on developments in the market and on the latest shifts in the hospitality business model, we turn to the experts.

Peter Schottenfels
Spokesperson, Airbnb

What is your response to the new legislation, and where does Airbnb go from here?

The bill signed by the governor puts an additional fine on an existing law that restricts short-term rentals in certain types of buildings. Our issue has always been that the current law fails to distinguish between everyday New Yorkers who occasionally share their own home and commercial operators who manage illegal hotels. We oppose illegal hotels on our platform — which is why we’ve removed over 3,000 listings in one year — but will continue to work with the tens of thousands of hosts in the state to push for reforms that allow New Yorkers to earn a little extra money, turning their greatest expense into an asset.

Last month, we released a series of policy recommendations titled “Sharing For A Stronger New York.” We hope to use these recommendations as the framework to pass legislation that allows responsible home sharing in New York City. The policies include a one-host, one-home provision, and a provision to allow us to collect and remit taxes on our hosts’ behalf, which could net the city and state over $90 million in tax revenue. We also propose day-one registration with an enforcement agency, and safety measures such as minimum insurance requirements and a hotline for neighbors.

Airbnb is a community of 46,000 hosts in New York state. Our priority is to remedy a law that is the result of an Albany backroom deal that unfairly targets those hosts. We plan to push for a comprehensive solution to home sharing that makes sense for hosts, lawmakers, communities and real estate.

In mid-October, LaSalle Hotel Properties CEO Michael Barnello told investors the law would be “a big [shot] in the arm for the [hotel] business, certainly in terms of the pricing.” Do you think he is right?

LaSalle and the hotel industry have tried to backpedal from his frank statement, but the fact is this law was created by and for the hotel industry. The industry used its long-standing connections to Albany politicians to make a last-minute deal that resulted in the passage of this law. This law is nothing more than the hotel industry protecting their ability to price-gouge consumers.

Allen Gross
Chairman and chief executive, GFI Capital Resources Group

Despite a full-court press by Airbnb, Gov. Andrew Cuomo signed a law in October that will impose stiff fines on those who advertise rentals for less than 30 days in multi-unit buildings. As a hotel developer, do you see this as a big boost for the operators?

No. Demand and seasonality is what affects pricing. The new law might help occupancy a little, but with so much product coming online, Airbnb is not the only driving force.

According to STR, New York City will see a 15 percent increase in the number of rooms if all hotel projects come to fruition. Are we at the tail end of a decade-long boom?

Two things are affecting the market, the strong dollar and supply. Europeans are wondering, should I go to America, the Caribbean or South America, or stay in Europe? They go where they can get the best bang for their buck. But on the other hand, many, many more people are coming to New York City compared to 10 years ago. I don’t think this is the end of the boom; it’s the beginning. On the other hand, I think some of the proposed hotels are never going to get built.

Through September, NYC hotel occupancy stood at  85.1 percent, up slightly from a year ago. Where do you think occupancy is heading in 2017?

Eighty-five is a big number. At the end of the day, it’s about how you manage your room rate. That’s the key to being successful. I would rather be 90 percent occupied at a higher rate than 100 percent occupied at a lower rate.

According to the state Comptroller, the number of hotels in Brooklyn has tripled since 2006, while in Queens it has doubled. What is behind these sharp rises?

In the outer boroughs, there weren’t enough hotels to begin with. It was ridiculous. They were so badly needed that they will be absorbed. We are building a hotel in Downtown Brooklyn, a borough where a lot of new stuff is happening all over. It’s like having four or five restaurants open near each other — it creates a neighborhood. That makes us happy.

Some NYC hotel developers are going micro with their room sizes in an effort to maximize profits. Does this trend have legs?

Everyone is doing those micro youth hostels. People ask me, why don’t I do it? I’m worried about what happens when rates go down. If I’m charging $59 a day for a bed, how can I go lower? To $29? How do I make money? That model only works when rates are high.

Furniture retailers Restoration Hardware and West Elm are launching their own hotels and are giving guests the option of buying their room’s furnishings online. Meanwhile, gym operator Equinox Holdings will open its first hotel in 2019. What do you think about this convergence of sectors?

Maybe Tesla should do it too. I was asked by Equinox if I would I be interested, but it’s not something I wanted to do. It’s a gimmick. We have gyms in all our hotels, but it’s the quietest place in the hotel. I want my hotels to transcend time. If everyone is eating kale, I’m not going to serve only kale all the time. It’s a fad. Restoration Hardware, it’s nice, but maybe they should do a showroom in a hotel. But a chain? I don’t see it.

Jan Freitag
Senior vice president of lodging insight, STR

Do you think the new short-term rental law in New York City will significantly erode listings on Airbnb and hand hotels more pricing power? 

I don’t know if Airbnb supply or lack of it will do anything to pricing. There is a limit to what guests are willing to pay. Airbnb makes the argument that it is growing the pie, that it is offering services to those who wouldn’t be able to afford a hotel room. The truth is probably somewhere in the middle. Airbnb provides a service for couch surfers. But if I’m a business traveler, I need to be in Manhattan, around the corner from my meeting locations.

Where do you see new hotels being added in coming years?

Look at where land prices are cheap; that is where hotels are going. Manhattan is getting very expensive, so people are looking across the bridges. The Queens and Brooklyn numbers speak for themselves. That’s where people want to stay on their leisure trips. In response, hosts of Airbnb are saying, let me offer them my extra bedroom.

Are we at the tail end of a decade-long boom?

New York City is always attractive and always will be attractive to [hotel] developers. So, although I hear that hotel construction financing is a little harder to come by, I don’t think we’re going to run into a wall. It will be a soft landing. The industry is self-regulating. When occupancies edge down, hotel developers will look elsewhere, nationally. The money is very fluid.

According to STR, through September, NYC occupancy was up slightly from a year ago. Where do you see occupancy rates heading in 2017?

Supply growth has continued unabated, but so far demand has kept pace. Will that continue going forward? That’s the billion-dollar question. Most likely, occupancy will soften and hoteliers will adjust prices.

What are some of the most surprising trends in the NYC hotel market?

Lack of pricing power given that occupancies are so strong. Nationally, it’s a very different story.

Some NYC hotel developers are going to micro units. Does the trend have legs?

New York City hoteliers and guests both understand that the action is outside the room, a little like it is in Las Vegas. You try to give people a nice bed and a nice shower, but people want to be in the lobby, in the restaurant. The millennial traveler is used to smaller spaces, smaller apartments, tiny houses. But I doubt this will be a trend that changes the industry. It’s a special niche.

Mitchell Hochberg
President, Lightstone Group

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As a hotel developer, do you think the newly enacted law penalizing short-term apartment rentals in New York City represents a significant blow to Airbnb?

We think the new law is a knockout blow to Airbnb. They’re going to need to seriously recalibrate their approach in New York.

Do you think the law will be a boost in the arm in terms of hotel pricing?

While it may help slightly, we never thought that Airbnb had a significant impact, and that’s supported by the data. Using Airbnb numbers provided to the New York Attorney General’s Office, Goldman Sachs estimates only 30 percent of the occupied-room nights are actually hotel equivalents. According to a recent Smith Travel Research report, overall, there was no obvious smoking gun suggesting that hotels were being severely impacted by the growth of Airbnb.

Is there enough demand to meet the upcoming supply?

It makes sense that New York is in the midst of a huge hotel supply increase — it is a prime market, but it still has significant unmet demand. London has 31.5 million visitors annually, and 139,000 hotel rooms as of 2015. New York, on the other hand, receives 58.3 million visitors annually — a number expected to grow to 67 million by the end of 2021 — and yet it has only 107,000 hotel rooms. There’s plenty of room to grow.

What do you expect the biggest challenges will be in the coming year for the NYC hospitality sector?

Adjusting to the decrease of foreign travelers in 2016 due to the impact of the strong dollar.

Your firm is developing micro hotels. Can you talk about the logic behind that strategy?

Today’s traveler is focused more on location and their overall experience than on the size of their room and unnecessary amenities and services. Providing our customers with a smartly designed, albeit small, room that’s technologically advanced in a great location with energized social spaces is much more appealing. Travelers know they don’t need a banquet hall, spa or bellhop when they can have exceptional value in a modern, bold space. Moxy delivers that.

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.