Hitting the hotel sweet spot

Will an oversupply of rooms and competition from Airbnb create profitability problems for hospitality players?

Jun.June 01, 2014 07:00 AM
From left:

From left: Bradley Burwell, Nick Papas, Gilda Perez-Alvarado and Geoffrey Mills

The New York City hospitality industry has been in the spotlight lately — and not just for the fancy new hotels going up all over Manhattan. It has, of course, also been locked in something of a war with the apartment-sharing website Airbnb, which New York State Attorney General Eric Schneiderman has been investigating for failing to comply with several local laws.

In this month’s Q&A, The Real Deal talked to hoteliers, analysts and a source from Airbnb about how the website is really impacting the industry and about how the hospitality sector is performing on the whole.

Some expressed concerns about a saturation of hotels in Midtown, an oversupply of hotel rooms in general and about the possibility of room rate reductions.

But while New York City’s hotel industry dipped slightly in the early part of 2014, the numbers show the sector — which took a severe, albeit short-term, hit in the wake of the recession — is still performing relatively well.

Not only is tourism at an all-time high, with a total of 54.3 million visitors in 2013, occupancy is “finally starting to stabilize back to peak levels,” said Gilda Perez-Alvarado of Jones Lang LaSalle Hotels.

In addition, industry players say they expect several high-profile luxury hotels such as the Park Hyatt at One57, the Baccarat and 5 Beekman to drive luxury hotel demand even higher in New York City, which they say has a shortage of luxury rooms compared to other international cities like London and Paris.

Sources agreed that Airbnb was most significantly impacting the lower end of the market.

Sean Hennessey, the CEO of Lodging Advisors, estimated that Airbnb is reaching 4-to-5 percent of New York City’s tourist trade. “But the number is growing,” he said.

A spokesperson for Airbnb said the overwhelming majority of the website’s listings are outside of Midtown Manhattan, where over half of the city’s hotel rooms are located.

For more on the foreign capital flowing into the city, what to expect with room rates and which other projects are being eyed as possible industry game-changers, we turn to our panel of experts.

Bradley Burwell
vice president, CBRE Group

The hotel industry has gotten a lot of attention lately because of its battle with Airbnb. What is the state of the hotel industry in NYC? How does activity compare to the recent past?

Airbnb is the topic du jour in the hotel industry. To tell you the truth, the numbers [showing a slightly weaker market] are a bit skewed [because] there has been a good amount of hotel rooms added to the market. I think that most experts would agree that [the numbers are] a result of the lodgings industry, and not as much of an impact by Airbnb … Within New York City, a quarter of people coming in are group-related. Of the other 75 percent, it’s about 60-40 between corporate and leisure tourism. Airbnb only appeals to that leisure-oriented guest. And that guest is constantly squeezed by the improving economy. The people who are typically pushed out to Brooklyn and Long Island City, even New Jersey, I assume that a lot of the Airbnb supply is absorbing that kind of demand.

Revenue per available room, or RevPar, rebounded strongly in the wake of the downturn. What are you seeing on the RevPar front in New York City now?

As of March, in New York City as a whole, RevPar was down 2.1 percent from last year. This is a result of the new supply. The new supply not only adds rooms, but it also comes in at a lower rate. In Manhattan, RevPar for the city increased 4 percent. As you’d expect, luxury had the greatest rate increase, at 4.6 percent, but it didn’t change in occupancy. I think that it really is indicative of the amount of demand there is for New York … 5 million additional visitors a year takes up another 15,000 to 18,000 hotel rooms, so that new supply is absorbed pretty quickly.

What trend in the NYC hotel industry concerns you most right now?

One concern I would say is going to be in the long term — accessibility into the city. Our airports only have so much capacity; our subways only have so much capacity; our rail and our highways only have so much capacity. I have not seen an analysis on this, but I would be curious to know, at what point do we tap out? At what point, from an infrastructure perspective, can the city not handle it anymore?

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

One is that you’re going to see a tremendous saturation of hotels throughout Midtown. There’s just been so much built that now every brand is already represented multiple times over. Every concept is a rehash of what somebody else did. I think that one challenge for new hotels is distinguishing themselves. And for old hotels, it’s not getting lost in this slew of new product. The Plaza will always be the Plaza. The St. Regis will always be the St. Regis. But there are a lot of hotels, especially between 18th and 40th streets, that are small and boutique and that aren’t particularly unique.

There are a lot of planned hotels coming online, including the Park Hyatt at One57, and the Baccarat. Which new hotels do you think are most exciting and which do you think have the potential to be game changers?

You don’t see a lot of hotels in the Plaza District, but those that do exist there have to be special. The Park Hyatt is going to be that. Would I say that it’s going to be a game changer? No. I think 5 Beekman has the opportunity to be a true game changer. It’s going to do what the Ace and the Gansevoort did. This could make that whole Nassau Street a destination in itself.

Are you seeing any new types of investors getting into the hotel game?

The big thing that everybody loves to talk about is the amount of foreign capital that continues to play a part in this market. A lot of the most prominent hotels were either sold to foreign capital or foreign capital was a participant. The obvious example is the Plaza, which was owned by a Saudi, sold to an Israeli, who sold it to an Indian. If that’s not global cooperation, I don’t know what is. I think there’s foreign capital now in the smaller, less iconic hotels. In the Middle East, for example, there are a lot of people worth $100 million [that can invest] — not just billionaires. And we’re seeing this burgeoning group of the truly affluent in China, who are not going after the $50 million investments, they’re going after the $20 million ones.

Ira Drukier
co-founder/owner, BD Hotels

What impact is Airbnb having on the hotel industry in the five boroughs?

It simply adds to the number of available rooms. Like any competitive marketplace, more availability tends to lower the returns.

Do you think there’s room for hotels and apartment sharing websites like Airbnb in NYC?

Airbnb provides a service at the lower end of the market. … However, there are regular hotels that provide rooms at those prices as well. Since I haven’t used Airbnb, and I have no real basis of comparison, I can only assume that guests believe they are getting ‘more for their money’ from these rentals. There is, however, a real problem with Airbnb. Firstly, it presently is not legal to rent an apartment for daily use without the owner in occupancy. … Secondly, residential apartments have much less life safety provisions than hotels do. … And lastly is the issue of New York City taxes. New York City is missing out on all the Airbnb unreported income in the buildings that are being used for hotel guests.

The hotel construction boom is expected to bring roughly 11,000 new hotel rooms to the city over the next three years. Are you concerned about an oversupply?

It’s easy to do the math. If we have the same number of visitors, it will reduce the RevPar. So on average, these rooms will lower rates and occupancies. However, it will be the older, more generic hotels that suffer the most.

What’s the most surprising trend in the NYC hotel industry?

Everyone who owns a piece of land not zoned for residential use thinks they can develop a hotel. They aren’t all right.

Gilda Perez-Alvarado
executive vice president, Jones Lang LaSalle Hotels

We wrote a few months ago that hotel occupancy was at 87 percent. Where is it now and how much has this number varied compared to the last few years and during the boom?

Occupancy is finally back to peak levels, reaching nearly 85 percent in 2013, compared with 84 percent in 2007. April occupancy was down 1.5 percent from last year to 79 percent, which was off-set by a 1.5 percent increase in [Average Daily Rates or ADR.] Occupancy was challenged during the first quarter of the year compared to the same time period in 2013 due to the lack of the Sandy-effect, which brought extended stay-business, a very tough winter season and also potentially the amount of supply that entered the market.

Which sectors of the NYC hotel industry are doing best?

In general, all sectors are doing relatively well. [Still], while all of the new supply has been absorbed, as evidenced by the growth in occupancy, [room rate] growth has not been in the double-digit range. It is also important to note that most of the new supply that has entered the market is in the branded budget/select service space — which explains why overall rate growth has remained somewhat muted. With the recovery of the group and corporate segment, we will start to see significant ADR growth in the mid-range and full-service sector. … On the luxury side, we are very bullish about the opening of the Park Hyatt and the Baccarat. We expect these two hotels will have a positive impact on ADR and induce further luxury demand into the market. When compared to cities like London, Paris and Singapore, New York is the most under-supplied market in terms of luxury product.

What trend in the NYC hotel industry concerns you most right now?

Rising labor costs and their implication on service and product offering.

Sean Hennessey
CEO, Lodging Advisors

What impact is Airbnb having on the hotel industry in the five boroughs?

My estimates indicate Airbnb is capturing about 4-to-5 percent of New York’s tourist trade, both in terms of demand and revenues. But the number is growing. My count of Airbnb listings during the first quarter of this year indicated annualized growth of more than 20 percent.

What is going on with hotel occupancy in NYC?

Occupancy is at or near an all-time high. For many years, hotel occupancy levels in New York have been hampered more by capacity constraints than by any other factor. Finding guests who want to visit New York is one problem we don’t have.

If occupancy is that high, then will Airbnb and other apartment-sharing websites really hurt the industry?

While hotels have plenty of customers, room rates are still $22 below where they were in the fall of 2008. There are many reasons for this, but certainly the introduction of competition like Airbnb is a factor. The impact on hotels is more pronounced than it might initially appear. Because New York hotels face high operating costs, traditional hotels are much less profitable than they once were. Traditional full-service hotels saw their operating profit margin decline from 30 percent in 2007 to 13 percent in 2012. This decline has forced many hoteliers to make do with fewer employees and amenities, damping the beneficial effect the recovery would otherwise have exhibited.

The hotel construction boom is expected to bring roughly 11,000 new hotel rooms to the city over the next three years. Are you concerned about an oversupply?

My primary concern is that new supply will force hotels to compete by lowering prices. This will dampen not only profitability at the hotels, but also the economic impact that is generated by a successful business operation. Every hotel should have a plan to differentiate itself from competitors with service, style, image, design or some such combination. Rampant discounting will lead to ruinous competition.

Are you seeing any new kinds of investors getting into the hotel game?

We are seeing interest from Chinese investors who are in the early stages of building their knowledge base of the local hotel real estate market. I anticipate that the Chinese will make several blockbuster deals over the next few years.

Geoffrey Mills
board chairman, Hotel Association of New York City

What impact is Airbnb having on the NYC hotel industry in the five boroughs?

New York City is just now awakening to its own problems with Airbnb. Roughly 44,000 of Airbnb’s listings are in New York City. A recent analysis of Airbnb listings in New York City by the New York State Office of the Attorney General found that roughly two thirds of NYC-based listings on Airbnb are illegal pursuant to the state’s laws governing short-term rental of permanent residences. … With rising rents, growing concerns about safety, and loss of tax revenue, illegal hotels are causing serious problems for NYC neighborhoods.

Do you think there’s room for both hotels and apartment-sharing websites like Airbnb?

Yes, as long as they comply with the law and are regulated for compliance to similar health, fire and ADA regulations like hotels. There’s always room for competition.

Nick Papas
spokesperson, Airbnb

Do you think there’s room for hotels and apartment-sharing websites like Airbnb to coexist?

Since Airbnb got started in 2008, hotels have continued to thrive in New York and around the world. We strongly believe that Airbnb makes it possible for more people to travel and we know that cities like New York are more than big enough for a vibrant hotel industry and companies like Airbnb. While over half of the hotel rooms in New York City are located in Midtown Manhattan, 87 percent of Airbnb’s listings are outside of that district. Many of our hosts are in neighborhoods where people want to stay, but where operating a big hotel just isn’t feasible.

City and state officials, along with some in the hotel industry, have cited concerns about Airbnb following current laws and regulations. How do you strike the balance between abiding by these rules, while still pushing for innovation?

Airbnb and the sharing economy are new, but we know that everyone can appreciate the enormous economic and social benefits that sharing platforms can provide. In New York, a study found that Airbnb generated $632 million in economic activity in one year alone. We are absolutely committed to working on solutions that protect the public interest and embrace these kinds of innovative ideas.

Which geographic areas of the city are you seeing the most Airbnb rentals in?

In one year, Airbnb generated $104 million in economic activity outside of Manhattan: 16,200 guests used Airbnb to stay in Queens and local businesses in the Bronx earned $1.6 million.

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