When Dubai-based Istithmar bought the W Hotel in Union Square for more than $1 million per room, the Gulf conglomerate crossed a major threshold for New York hotel sales.
The $285 million October deal for the 270-room W was the first time the $1 million-per-unit threshold had been passed in a property not slated for conversion, according to brokers.
But that hasn’t been the only big hotel buy lately. The investment sales market for hotels remains hot, since top properties still command high room rates amid low vacancy levels.
The Real Deal last month obtained data on the top 25 hotel sales in Manhattan since the beginning of 2004. The data shows steady price increases in big hotel buys (see chart).
Ten of the top 25 priciest deals took place in 2004, six took place last year, and nine took place through October, putting 2006 on pace to meet or beat 2004. More than 11 hotels have changed hands for $200 million or more.
Prices for this year’s top deals ranged from $454,800 to $1 million per room.
With occupancy rates expected to remain between 80 and 90 percent in top hotels, most investors are purchasing the hotels and keeping them in business for their high income streams rather than taking profits by converting the properties to condos.
That’s an emerging development, said Dan Fasulo, director of market analysis at Real Capital Analytics. Before, hotel buys were more likely to be converted to office or residential space as the only way to make a return on the investment. But buyers like Istithmar are more likely to keep running the hotels or have them managed by major hotel operators.
Nine of the 25 biggest buys since 2004 have been redeveloped or converted to condos, more than a third of all properties sold. But only one of those was in 2006, when the Mark Hotel on East 77th Street was purchased in January by developers Izak Senbahar and Simon Elias, who plan to convert it to a residential condo and a condo-hotel project.
Fasulo said the significant increase in land prices also affected the hotel market and allows buyers to compete with condominium developers.
Fasulo said the former Tommy Hilfiger office building at 485 Fifth Avenue, which was headed for a 50 percent condo conversion, will stay a full hotel after Hyatt had a higher bid accepted.
“That’s a major change from a few years ago, when residential dominated the market,” said Fasulo. “Nothing surprises me anymore.”
Bjorn Hanson, the head of PricewaterhouseCoopers’ hospitality division, said recent room rate increases are the biggest force behind the surge in hotel investment.
For the past two years, hotel rates have risen significantly, helping the industry bounce back after three years of post-Sept. 11 economic downturn. In 2006, hotel rates increased 15 percent, higher than analysts expected. “Rates won’t continue to increase by 15 percent,” said Hanson. “But they will continue to rise.”
Through the end of summer, the year-to-date average Manhattan room rate was $241 a night, up from $217 the year before, according to hotel advisory firm PKF Consulting.
Hanson said hotels will continue to be able to charge higher rates because of high volumes of conventions, corporate travelers and international visitors.
Convention travelers are currently paying low rates that were arranged with hotels three years ago. Hanson said hotels now plan to catch up to the market when negotiating convention rates.
The same goes with corporate rates, since hotels can demand higher prices from business travelers. International travelers also tend to pay higher rates because they’re less likely to qualify for or have access to discount rates.
Hanson said there’s also a strategic reason for investing in the city’s hotel market: “International and domestic brand hotels recognize the importance of a having a New York presence.”
High occupancy levels are also helping pricing power for hotel sales. The occupancy rate for New York this year is 84.5 percent, according to Hanson, compared to the national 64 percent occupancy rate. From 2001 to 2004, average occupancy rates hovered around 74 to 75 percent.
Fasulo also said there are no signs of a slowdown in the hotel market, and he noted that there are a lot more hotel buys in the works. “The only thing that could curb this,” said Fasulo, “is a major economic downturn or some other external event.”