Keeping heads in hotel beds

NYC hotels suffer as travelers scale back and downgrade from luxury to budget rooms

Sep.September 29, 2009 11:22 PM

Keeping heads in beds has not been easy for New York City’s hotel industry in this economy. Not only are tourists cutting back on expenses, but companies — including those that not too long ago readily put up their employees at five-star hotels — are also massively scaling back.

In this month’s Q & A, hotel experts and operators talked to The Real Deal about why the hospitality industry has fallen further here than it has nationally.

They said revenue per room, or RevPAR, is down between 20 and 30 percent and that the luxury hotel market (not surprisingly) is getting crushed hardest. That is partly because travelers are downgrading, but also because, unlike their budget counterparts, many high-end hotels are not lowering prices much.

Some hotel analysts say that while holding prices steady may be more painful now because it drives away visitors, it’s a smarter strategy in the long run because it will keep room rates up.

Meanwhile, Chelsea, the Lower East Side, Brooklyn and Long Island City were all named as areas that would struggle most to fill rooms. The reason? Many of the new hotels built in those areas were dependent on spillover from more centrally located budget hotels in Manhattan that have now lowered their rates and become more attractive.

Despite all of the depressing hotel news, European travelers seem to be booking more nights here because of the steady value of the euro and events like last month’s U.S. Open and Fashion Week. For more on all of that and on which travelers hoteliers are now relying on most, we turn to our panel of experts.

Mark Gordon principal/head, U.S. Hotel Group, Cushman & Wakefield Sonnenblick Goldman

How is the overall hotel market faring in New York amid the recession?

The New York City hotel market is experiencing short-term challenges as a result of the global economic downturn; however, we expect that performance in Midtown, Midtown East and Times Square will begin to stabilize in the fourth quarter of 2009. As the economy begins to improve, the performance of hotels in these submarkets will improve disproportionately because of the supply-demand imbalance.

How is the luxury sector faring relative to the overall market?

Room rates are down in the luxury segment, but many luxury hotel managers have chosen to maintain rate integrity [and not lower prices by too much]. As a result, these hotels have experienced dramatic decreases in occupancy. However, we believe this is a prudent operating strategy.

How is the budget sector faring compared to the overall market?

Many [budget] hotel managers have dramatically decreased rates to increase their competitiveness. While this strategy has resulted in stronger occupancy levels, we believe it’s counterproductive because it results in lower RevPAR.

Are you seeing investors line up to buy distressed hotel projects in New York?

There is unprecedented demand from global investors to acquire New York City hotels. This is predominantly due to the fact that average occupancies remain in the mid-70 percent range, which is better than most other cities in the peak periods. In the past 60 days, we have met with 10 global investors who have not previously owned hotels in New York. However, there have been very few truly distressed deals [finalized so far].

What are the latest RevPAR numbers you’ve seen for New York?

On average, RevPAR will be down in the mid-20 percent range for 2009 [compared to the year before]. To put this into perspective, in the past 30 years, RevPAR has only been down by 20 percent or more one time — so we are experiencing truly unique circumstances.

Bradley Burwell senior associate, CBRE Hotels

How is the overall hotel market faring in New York amid the recession?

The New York hotel market is faring worse than the national [market]. Nationally, RevPAR is down about 18 percent, while in New York it’s down over 30 percent. Interestingly, the top 25 national markets are actually performing worse than the nation as a whole in general.

Which sector of the hotel market, business travelers or tourists, is holding most steady?

Tourists are probably the most resilient. [They] are seeing great deals to come to New York. Not only are hotel rates way down, but the cost of travel is much lower than it was in the last three years.

How are room rates faring in the luxury and budget sectors in New York?

The most interesting trend in New York hotels is the way the different [sectors] or chain scales — luxury, upper-upscale, upscale, midscale and economy — are performing. All chain scales are losing about the same 30 percent RevPAR. However, luxury hotels’ RevPAR is falling 90 percent due to [declining] occupancy, while the bottom of the chain scale, economy and midscale hotels, are losing 90 percent of their RevPAR due to slashing rates. So we see the lower-end hotels keeping 90 percent occupancy and giving great deals to get there, while the luxury hotels are keeping their rates above $600 per night, but are running 50 percent occupancy.

What are the biggest challenges in the hotel development market today?

Raising debt capital for hotel development is nearly impossible.

What do you expect for the hotel market here in the coming year? Are we going to see hotels shutter?

No hotels will shutter. Hotel performance may be way down, but the ramp-up [in room rates] over the last five years was spectacular and hotels continue to make cash flow after debt service.

Which of the new hotels do you expect to struggle most — either by area or type of hotel?

I expect hotels in Chelsea and on the Lower East Side to struggle. These markets were developed primarily because of speculation that they would continue to burgeon at a fast pace and due to compression from other high-demand markets like Times Square, Sixth Avenue and Downtown. The recession has slowed down economic growth in these markets far below the original underwriting and visitors are moving back to the convenient markets, which are now charging lower rates. All of the [outer] boroughs will also suffer, solely due to the lack of compression from Manhattan. A majority of visitors stayed in these markets due to cheap rates, which they can now get in Manhattan.

We’ve heard about some recent hotel trades, like Sam Chang’s sale of three hotels on 39th Street to Hersha Hospitality. Are hotels still trading in New York?

Yes. There is much speculation that several hotels will trade in the next 30 to 60 days. But in general, the bid-ask delta is still 20 to 30 percent, deals are still very challenging to get capitalized and there is very little product available in the city.

John Fox senior vice president, PKF Consulting

How is the overall hotel market faring in New York amid the recession?

There are really two answers to that. One is that room rates have dropped substantially. Through the end of July, in Manhattan they are approximately $75 less than at the same time last year. Two is that since the end of the first quarter of 2009 we have gradually come back in terms of occupancy to levels approximating where we were last year, although still a little below.

What are you seeing as far as business travelers, tourists and foreign travelers for New York hotels?

We have lost a lot of commercial and business travelers, but we have somewhat made up for those with the influx of tourist traffic, although at a much lower room rate. International has held up reasonably well. It’s down, but not as much as domestic.

Some have said they expect transactions for distressed hotel development projects to escalate through early 2010. What are you expecting?

I would concur with that expectation. We have not seen anything actually as of yet, but there is a sense that there will be either foreclosures or some form of distressed adjustment coming later in the fall and into next year.

What do you expect to happen in the New York hotel market in the coming year? Are we going to see hotels shutter?

If anything gets shuttered, it will only be something at the very bottom of the market. Traditionally what happens in the hotel market is you end up trading down, so something that was a better hotel becomes a less good hotel.

Which of the new hotels do you expect to struggle most — either by location or type of hotel?

Probably the area that saw the biggest influx of new hotel rooms — lower Midtown West, south of 42nd Street to 14th Street, and west of Fifth or Sixth avenues — that overall swath of Chelsea and lower Midtown. Several thousand new rooms have come in or are yet to come [in that area].

How do you expect the new hotels in Brooklyn to do?

Brooklyn for a long time had no hotels; there was just the Marriott. Any [hotel] that is not already open is probably going to struggle for a while. I think what was anticipated for a lot of those hotels was overflow from Manhattan. That overflow has contracted.

Jeffrey Davis executive vice president, Jones Lang LaSalle Hotels

What kind of activity are you expecting in terms of transactions for distressed hotel development projects in the coming months?

There is more stress than there is distress. There just isn’t any product out there, from a distressed point of view. There is a lot of stress on hotel owners and operators, but we don’t see these buying opportunities in New York now and we may not. Everybody is looking to buy, and they are looking for the deal of the century.

Specifically, who is looking to buy?

Everybody and anybody that’s looking to make a huge play in the real estate market. The biggest opportunities will be in the hotel sector, given how quickly the hotel sector rebounds relative to discretionary [income]. The movers and shakers will be the funds; there are several new funds. People are raising money now to capitalize on what they think is going to be the opportunity out there.

Which of the new hotels do you expect to struggle most?

Unbranded independent hotels in non-major corridors — the Lower East Side, Financial District, Brooklyn and the outer boroughs.

We’ve heard about some recent hotel trades, like Sam Chang’s sale of three hotels on 39th Street to Hersha Hospitality. Are hotels still trading in New York?

Most of the hotels that have recently traded were hangover deals from 2008, like the Best Western, the Hilton Garden on 35th Street, the Fairfield Inn. All those deals were started in 2008 and closed in 2009. There really haven’t been any new transactions in 2009. Sam Chang is an exception. He’s been able to negotiate to make things happen.

Michael Sullivan director of hospitality, Gemini Real Estate Advisors

What are you seeing as far as business travelers at New York hotels?

We’re seeing that corporate travel is down and has also changed. Some of that actually benefits us because a lot of our hotels are select service. We’re seeing more corporate customers trading down. The guy who used to stay at the Ritz is at the Marriott. The Marriott customer has gone down to select service, and so forth. We’re also seeing a lot more companies that have travel caps or more closely scrutinize expenses. So instead of coming Monday night for a Tuesday meeting, the customer comes Tuesday morning.

How are room rates faring in the luxury segment?

Everyone has been affected, but they are the ones that have been hurt the most. Customers are trading down. There is also a stigma for certain segments of travelers who don’t want to be seen in luxury hotels. I know anecdotally, from talking to friends that are involved in some of the resorts and luxury hotels, of customers who have prepaid events canceling. They say, ‘I know I can’t get my money back, but it does not look good for me to be seen there.’

Are you seeing investors line up to buy distressed hotel projects in New York?

A lot of private equity groups are certainly lining up. Large hotel owners and hotel operating companies are saying they are looking to buy. The challenge right now is because with a lack of debt, anyone who is buying is effectively looking at probably trying to buy all-cash. That drives down the returns.

What are you seeing in terms of room occupancy?

We are feeling that the occupancy is getting a lot better. The first quarter was miserable, the second quarter got a little bit better, [though] there was a little hiccup with the swine flu scare. In the summer you usually get decent occupancy with low rates, but we actually surpassed our expectations. The numbers for August were fantastic. There were plenty of travelers coming to the city. They are very price-sensitive; you are seeing rate declines of 20 to 30 percent from last year. That can be painful when you see the impact on your profits. [Last month], we had the U.S. Open and Fashion Week. Seems like everywhere I looked everyone was sold out and getting a high rate, not as high as a year ago, but you would be hard-pressed to find a room in Manhattan for under $300. A year ago at this time they were $400.

Sean Hennessey CEO, Lodging Advisors

What trends are you seeing as far as business travelers, tourists and foreign travelers staying at New York hotels?

Corporate travel has declined, and hotels have wooed leisure travelers to fill the gap. Foreign travel began weakening last fall as a result of exchange-rate trends. As concerns over financial stability have moderated, the dollar has weakened, which should help boost foreign travel.

How are room rates faring in the luxury and budget segments?

Room rates are down all over, and luxury hotels generally feel the most pressure. Their rates have the farthest to fall and luxury travel has gotten to be something of a stigma. However, many of the hotels are offering “stay X nights and get one night free” as a way of offering value while still not explicitly reducing room rates. Budget room rates are down, although not as much as luxury.

What are you expecting as far as transactions of distressed hotel development projects?

We may well see some more activity. There has been little investment activity to date as investors and their lenders have waited to see how prolonged and how deep the downturn might be. But I don’t think you’ll see widespread liquidation sales. Most New York hotels are owned by entities with substantial staying power.

What do you expect to happen in the hotel market here in the coming year? Are we going to see hotels shutter?

You will not see hotels shutter — there are too many operational issues involved. For many hotels, the worst has passed in terms of falling occupancies and rapidly declining room rates. There is still some more pain, to be sure, but it should not be as bad as the early months of 2009 unless there is a shock-to-the-system type of event.

Henry Kallan president/owner, HK Hotels

How is the overall hotel market faring here amid the recession?

Our HKHotels — the Library, Casablanca, Hotel Elysee and Hotel Giraffe — have been able to maintain almost all our occupancy. This summer, all our properties had occupancies in the high 80s to low 90s, but last year the occupancy was more like 97 percent, so even 92 percent, which is a lot to be grateful for, is still a dip. The rate is not what it was because people are waiting so long to book. When you have 75 percent occupancy already on the books three months in advance, you know you can ask for a comfortable rate, but if you have it just two weeks in advance, you need to make sure you have plenty of attractive offers to ensure those rooms will sell.

What are you seeing from business travelers, tourists and foreign travelers?

The European market seems to have held relatively more steady, since despite ups and downs, the euro seems to be maintaining its value. The biggest growth area has been the Australian tourist market and the biggest trend we have observed is the willingness and desire to prepay, nonrefundable, for future bookings in order to get a superior rate.

Alan Miller principal, Eastern Consolidated

How is the overall hotel market faring here amid the recession?

Occupancy has been okay, but average daily rates have suffered. My friend couldn’t get a room because of the MTV awards, the U.S. Open and Fashion Week. Last year, 2008, had the highest average daily rates and occupancy in recorded history.

How are room rates faring in the budget sector compared to the overall market?

There are some budget hotels doing okay on occupancy because they were $250 a night. [But now], at the Waldorf you can get a room for $199 a night. In the last couple of years it was $400 a night. Business has been dropping; they aren’t going to send people away as often. A friend stayed at the W on 49th and Lexington during an engineers’ conference two years ago when it was $500 a night. For the same conference this past December, it was $200 a night.

Which of the new hotels do you expect to struggle most?

Every new hotel built in the last 36 months and opened up for business today will continue to struggle. There are no exceptions here. To the public, they may not see it from face value, but behind the scenes the financing is all messed up.

What are you seeing in Queens, Staten Island and the Bronx, where a number of new hotels have opened recently or are scheduled to?

In Long Island City, there are 13 new hotels. Not a pretty picture. Hotels are the first thing to get crushed as travel stops, after something like 9/11 or an economic downturn, and they’re the last thing to come back.


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