The quick recovery of New York City’s lodging industry sets the stage for a major hotel operator to push into the ripening and inventory-starved market.
After taking a pounding in the wake of the terror attacks of September 11, 2001, the city’s hotel industry has rebounded vigorously, to the point where average midweek occupancy rates are at or above 80 percent. That’s led observers to wonder which hotel operator will come in and grapple for market share, despite the high capital costs and risks associated with large-scale construction here. Starwood Hotels and Resorts, which owns the Essex House, the St. Regis and several other upscale hotels in the city, is touted as one of the most likely candidates for expansion among the city’s eight major hotel operators.
“Although I do not see any new brands originating in New York City, various brands have the opportunity to expand their presence in the city,” said Jose C. Alvarez, senior vice president of Capital Markets at Trammell Crow Company and head of the company’s newly formed hospitality division. “Overall, New York City’s extraordinary growth and strong lodging fundamentals make it a prime target for most brands to add hotel rooms.”
New York’s hotel sector saw significant growth in the past two years. For instance, occupancy for the first quarter of 2005 saw a 4.5 point increase to the highest first-quarter level since 1995, according to numbers from PricewaterhouseCoopers LLC.
The average daily room rate increased by 9.7 percent in the greatest quarterly increase since 1998. And growth in the average daily rate and occupancy generated a 16.3 percent increase in revenue per available room over the first quarter of 2004.
“The recovery over the last two years has been quite extraordinary,” said Ross Woods, director of PricewaterhouseCoopers LLP Hospitality & Leisure Practice. New York City’s lodging market, especially Manhattan, tends to be resilient since the large hotel companies own many of their hotels here versus simply licensing their names.
“Manhattan is a must-have city,” Woods said. “They have to be here, so I think that probably provides some stability in terms of ownership in the marketplace, particularly for the larger box hotels.”
At the same time, New York is seeing a net loss of hotel rooms because of conversions to condominiums. The overall supply of rooms would remain in equilibrium with the addition of about 1,000 hotel rooms annually, Woods said, but 2004 totals show a net loss of 850 hotel rooms.
“Investors have realized that hotels are a strong addition to their real estate portfolios and more funds, institutions and private investors are attempting to enter the hotel industry than ever before,” Alvarez said.
Recently, the buzz around Starwood grew louder when basketball celebrity Magic Johnson and Canyon-Johnson Urban Funds purchased Brooklyn’s Williamsburg Savings Bank building for a condominium conversion about the same time the fund declared publicly that it would work to develop hip limited-service hotels, temporarily called Project XYZ, in urban areas.
Starwood said it is largely targeting secondary and tertiary markets for its XYZ boutique hotels so its arrival in New York City is by no means assured.
Alvarez said he anticipates the boutique hotel chains that have become so successful in urban areas to spread to other markets.
“The expansion of boutique-like hotels to secondary and tertiary markets will be the next major trend in the hotel industry,” he said. “Within 10 years, two to four additional major boutique brands will be prevalent throughout the country.”
Boutique hotels are still competing to enter the New York City market, however. Art Adler, a managing director of Jones Lang LaSalle, which has a big hotel division, said Kimpton Hotels & Restaurants, a boutique hotel company based in San Francisco, is the latest company to enter the market with the 205-room 70 Park Avenue.
InterContinental Hotels & Resorts is actively seeking a place for its new upscale boutique brand Hotel Indigo, he said.
“There are brands that have started elsewhere, but need to be in New York,” Adler said. “Kimpton is one. And there are offshore brands that want to be in New York.”
Woods agreed, pointing out that Taj Hotels Resorts and Palaces recently replaced the Four Seasons as the lessee of The Pierre, and more penetration by European hotel companies into New York is likely.
“You’ll probably see other European groups that are amassing brands in the country looking at Manhattan as viable city for entering into the marketplace,” he said.
New York is full of independently-owned hotels to suit everyone’s taste, he said, such as the Chambers Hotel, Muse Hotel, Library Hotel, Bryant Park Hotel, Soho and Tribeca Grand Hotels.
Even if no new hotel brands appear here, Alvarez said various existing hotel brands may soon expand their presence in the city. “For example, Hyatt only has one hotel in the city unlike its counterparts, Marriott and Westin, which have many hotels,” he said.
Recently, limited-service brand hotels such as Hampton Inn, owned by Hilton Hotels Corporation, and Holiday Inn Express, owned by Inter-Continental, have extended their presence in the New York market, Alvarez said. The recently rezoned Hudson Yards area has been targeted as a location for smaller, discount hotels.
But New York City’s lodging industry hasn’t completely recovered from the terrorist attacks of 2001, Woods said. Though the Manhattan hotel market has begun to thrive, the boroughs have not, despite the optimism displayed by the expansion of downtown Brooklyn’s Marriott by about 280 rooms and development of boutique hotel The Smith nearby.
“During the boom period of 1999 to 2000, you just couldn’t get a hotel room in Manhattan,” Woods said. “So a lot of people were staying in the outer boroughs, Connecticut, Westchester and New Jersey. Despite significant growth rates, we haven’t seen this spillover effect taking place.”