NYC hotels: Hot commodities or distressed investments?

Manhattan’s hotel market, hammered by the pandemic, now has a new unruly guest to worry about: interest rates.

Despite signs of recovery at the hotels that survived after Covid shut their doors three years ago, high interest rates and rising costs of capital are keeping dealmakers on the sidelines, hesitant to jump into a market with so much uncertainty.

”I think the overall climate today in investment, especially in real estate, is just a general risk-off mentality among investors,” said Jeff Davis, head of JLL’s hotel investment sales team.

New York City saw $2.05 billion in hotel deal volume last year, its highest since the pandemic began, according to JLL Research, but still far below pre-pandemic levels of $2.69 billion in 2018 and $2.59 billion in 2019.

Much of that involves potential sellers’ discomfort with how investors are valuing their hotels and unwillingness to budge until they get what they believe is fair market value, according to Davis.

“If hotel owners don’t have to sell, they’re not going to sell,” Davis said. “They’re not going to sell into a market where the buyers are uncertain on the sidelines; they’re not going begging for people to purchase hotels in this environment.”

This lack of investment activity persists despite strong numbers for Manhattan’s hotels in recent months.

Revenue per available room rose 54 percent year-over-year in the fourth quarter, pushing past pre-pandemic levels for the first time in the second half of last year as daily room rates increased and both tourism and business travel picked up, according to PwC’s Manhattan lodging index. The trend was consistent across both large chain and boutique hotels, as well as full- and limited-service properties.

“Buyers should be flooding in to buy these hotels because there’s a real substance of recovery like we probably haven’t seen in a long time in New York City, and that trajectory is going to be for the next five years from a fundamentals perspective,” Davis said.

Big tickets and bargains

Those in the limited pool of investors buying into Manhattan’s hotel sector at the moment tend to either have a strategic need for the property or enough available capital to push through economic headwinds. 

One example of the former was hotelier Jeff Klein’s purchase of the West Village’s Jane Hotel for $62 million in December.

Klein had eyed the 208-key hotel, which last sold in 2008 for $27 million, since early in the pandemic as a possible expansion for his San Vicente Bungalows, a hybrid hotel and private club in West Hollywood where laptops are discouraged, photography is banned and new members must be nominated by existing ones. He plans to similarly turn the Jane’s public spaces private into a members-only restaurant and outdoor lounge.

“I think hotels that offer a unique and special experience will always fare the best, even in a down market,” Klein said.

Some hotel owners are coming to grips with the notion that reopening their properties is not a worthwhile investment, creating bargains for those willing to gamble on the market’s future. 

In January 2022, Hawkins Way Capital and Värde Partners scooped up the former DoubleTree in Midtown from RLJ Lodging Trust for $146 million, less than half the $330 million it sold for back in 2010. One year later, Hawkins Way and Värde nabbed the still-shuttered 655-key Marriott East Side hotel in Midtown from German investment firm Deka Immobilien for $153 million, more than $100 million less than what Deka paid for it in 2015.

“These REITs and larger companies and lenders are finally capitulating and realizing that there’s no light at the end of the tunnel, so they’re able to sell these at a significant discount,” Marcus & Millichap’s Nelson Lee said.

Pound for pound, smaller boutique hotels, particularly those in Lower Manhattan, are commanding much stronger prices. South Korean operator Sono Hospitality Group paid more than $900,000 a room in January for the 66-key Mr. C Seaport hotel in January, while Standard International paid a post-Covid record $1.1 million per key for the 97-room Sixty Soho in February.

“The lifestyle brands and the smaller boutique hotels tend to do better in this specific environment because they’re not catered so much towards corporate travel,” Lee said. “The big boxes … have so many keys they have to sell that it’s a challenging market without that type of clientele. You can work from your hotel room, and [guests] would rather be in a lifestyle hotel than a big box.”

Late checkout

Davis expects hotel market dealmaking to pick back up in the third quarter — if the economic environment stabilizes somewhat.

“Capital doesn’t earn any money just sitting in someone’s pocket on the sidelines,” he said. “The patience of the institutional investor, the willingness to just sit there and not deploy capital, I think it wanes thin.”

What could kick-start the hotel market may well be those rising interest rates. CMBS loans tied to hospitality properties had a nearly 4.5 percent delinquency rate nationwide as of February, the highest among commercial real estate asset classes, according to Trepp. 

About $23 billion in hotel CMBS loans scheduled to mature prior to this year were still outstanding as of December, according to CoStar, with roughly 79 percent of them having been extended to 2023. Most of the loans that were extended to this year were due earlier in the pandemic and are still being worked out.

“I think the lenders are going to be under pressure … and they’re not going to be able to kick the can down the road for five to 10 years,” Marcus & Millichap’s Eric Anton said. “I think we will see a lot of forced sales, deeds in lieu of foreclosures that end up in the sale of a note or a bank kicking out the equity.”

Though vultures may be circling, Davis does not predict a feast.

“If you’re waiting to buy hotels, just distressed opportunities in New York, I don’t think that shoe drops, not for Manhattan,” he said. 

“You’ll see pockets of some owners here or there that may be forced to move quicker than they might have wanted to on sales. But I don’t think it’s this wave of distress in New York City.”